10-K405/A 1 d10k405a.txt FORM 10-K405/A -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-K/A AMENDMENT NO.2 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 000-23767 -------------- SYMPHONIX DEVICES, INC. (Exact name of Registrant as specified in its charter) Delaware 77-0376250 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 2331 Zanker Road, San Jose, California 95131-1109 (address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 232-0710 --------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act:
Name of exchange Title of class on which registered -------------- ------------------- Common Stock, $.001 par value NASDAQ
--------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 16, 2001 was approximately $33,500,000 based upon the last sales price reported for such date on the NASDAQ National Market System. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the registrant, have been excluded in that such persons may be deemed to be affiliates. This determination is not necessarily conclusive. At March 16, 2001, registrant had outstanding 21,026,836 shares of Common Stock. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- This Amendment No. 2 on Form 10-K/A amends and restates certain disclosure contained in the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, which was filed with the Securities and Exchange Commission on March 30, 2001 and amended on September 26, 2001. Specifically, this filing amends and restates Items 7, 7A, 8, and 13 of Part II of the Annual Report on Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations which express that the company "believes", "anticipates" or "plans to" as well as other statements which are not historical fact, are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual events or results may differ materially as a result of the risks and uncertainties described herein and elsewhere including, in particular, those factors described under "Business" and "Additional Factors That Might Affect Future Results." Symphonix has developed a family of proprietary implantable Soundbridges for the management of mild to severe hearing impairment. The Company's family of Vibrant Soundbridges is based on its patented core FMT technology. Late in 2000, the Company received approval from the Food and Drug Administration ("FDA") to commercially market the product in the United States. Subsequent to FDA approval, the product was successfully launched to the otology community. Otologists are ear surgeons within the ear, nose and throat ("ENT") group of doctors. The Company is working with more than 35 otologists to establish implanting centers across the United States. The Company has established a United States sales and marketing organization which, as of December 31, 2000, is comprised of eighteen (18) sales, marketing and clinical support personnel. Going forward, while the Company will continue to increase the number of otologists it works with, the Company plans to initiate marketing efforts focused on audiologists--the health professionals who assess hearing problems and recommend hearing devices--and directly to those suffering hearing loss. The Company received the authorization to affix the CE Mark to the first generation Vibrant Soundbridge and the second generation Vibrant P Soundbridge in March 1998. Authorization to affix the CE Mark to the Vibrant HF Soundbridge and the Vibrant D Soundbridge was received in July 1998 and in May 1999, respectively. The Company began selling activities for the Vibrant P Soundbridge and for the Vibrant D Soundbridge in the European Union in March 1998 and in June 1999, respectively. In August 2000, the Company received FDA approval for its premarket approval application (PMA) for the Vibrant P and Vibrant D Soundbridges. In October 2000, Symphonix received its device license for the Vibrant Soundbridge from Health Canada. In December 1999, the Company established a distribution partnership with Siemens Audiologische Technik GmbH ("Siemens") covering most of the markets in Europe. As of January 1, 2001, Siemens was granted full distributorship of the European market. The Company believes this partnership will significantly enhance its presence, especially within the audiology community. The Company's initial selling efforts in Europe have been targeted primarily at those ENT surgeons specializing in otology. The Company intends to continue to market its products to these specialists; however, with the Siemens agreement, it also plans to focus on referring physicians, audiologists, the general population of ENT physicians and potential patients in an attempt to increase the patient flow to the otology centers. There can be no assurance that the Company will be successful in its efforts to increase the number of patients who become candidates for the Company's Soundbridge or in obtaining reimbursement for its products. On August 31, 2000, the FDA approved the Vibrant Soundbridge for commercial distribution in the United States for adults with a moderate to severe hearing loss. The Company has recently completed a clinical trial for adults with a mild hearing loss. The Company plans on a submission of this PMA supplement to occur in the first quarter 2001. Symphonix has a limited operating history. Through December 31, 2000 the Company had not generated significant revenue from product sales. The Company expects to incur substantial losses through at least 2001. 2 To date, the Company's principal sources of funding have been net proceeds from its initial public offering completed in February 1998, private equity financings including investments by Siemens, an equipment lease financing and bank borrowings. Results of Operations Revenues. Revenues of $1,247,000, $331,000 and $597,000 were recorded in the years ended December 31, 2000, 1999 and 1998, respectively, for sales of the Vibrant Soundbridge in North America, Europe and Latin America. The increase in revenues for the year ended December 31, 2000 compared to the same periods in 1999 and 1998 is due to increased unit sales in Europe resulting from increased investments in sales and marketing activities. Included in revenue for 2000 is $366,000, representing the amortization of $1,885,000 which was the difference between the purchase price and the fair market value of the Company's Common Stock purchased by Siemens in accordance with a marketing and distribution agreement. The deferred revenue is being amortized over the five year life of the agreement. Cost of goods sold. Costs of goods sold were $3.1 million, $4.1 million and $1.7 million in the years ended December 31, 2000, 1999 and 1998, respectively, and represents the direct cost of the products sold as well as warranty provisions and production variances. Warranty expense is computed based on the number of audio processor units outstanding. In 1999, when these units began shipping, the Company reserved approximately 65% of the units outstanding. In 2000, the Company reserved approximately 58% of units outstanding. The decrease in percentage reserved is due to fewer units believed to be at risk of failure, and given the fact that the Company reduced its clinical trial and channel development efforts in 2000 and 2001. Research and Development Expenses. Research and development expenses were $7.1 million, $7.9 million, and $8.3 million in the years ended December 31, 2000, 1999, and 1998, respectively. Research and development expenses consist primarily of personnel costs, professional services, materials, supplies and equipment in support of product development, clinical trials, regulatory submissions and the preparation and filing of patent applications. Research and development expenses decreased from 1999 to 2000 in part due to the PMA approval from the FDA. The Company expects its research and development expenses to increase in 2001, primarily due to the development of the Vibrant TI Soundbridge, a totally implantable version of the Company's product. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $8.7 million, $5.8 million, and $5.6 million in the years ended December 31, 2000, 1999, and 1998, respectively. Selling, general and administrative expenses consist primarily of personnel, marketing, legal and consulting costs. Expenses increased from 1999 to 2000 due to the development of the U.S. marketing and selling organization in conjunction with the U.S. product launch. The Company expects its selling, general and administrative expenses to increase in 2001, primarily due to initiating marketing programs to promote awareness of the product to audiologists, a key referral source, and to those suffering from hearing loss. In November 2000, the Company approved plans to restructure its operations in order to accelerate the marketing and distribution agreement with Siemens. In connection with these plans, the Company will reduce its European headcount and consolidate facilities and operations to improve efficiency. Most of the sales and clinical force has accepted positions with Siemens. The following analysis sets forth the significant components of the restructuring expense charge which is included in selling, general, and administrative expenses. No charges have been made against this reserve at December 31, 2000:
Year Ended December 31, 2000 ---------------------------------------- Accrual Balance at Restructuring Cash Dec. 31, 2000 Expense Payments (in millions) ------------- -------- ------------- Severance and benefits............. $262 $ -- $262 Facility charges................... 111 -- 111 Other.............................. 136 -- 136 ---- ---- ---- $509 $ -- $509 ==== ==== ====
Severance and benefits represent the reduction of ten sales and marketing employees. Write-off of assets consisted primarily of computer equipment, furniture, and fixtures. These assets were written off because they were excess and could not be used in any other Symphonix facility since the cost of moving the assets would be greater than the net book value of the assets. Facility charges include early termination costs associated with the closing of the international sales office. Cash payments relating to these accruals are expected to be paid in the first half of 2001. Deferred compensation of $2.3 million was recorded in 1997, representing the difference between the exercise prices of certain options granted and the deemed fair value of the Company's common stock on the grant dates. Deferred compensation expense of $295,000, $517,000, and $556,000 attributed to such options was amortized during the years ended December 31, 2000, 1999, and 1998, respectively. During 2000 and 1999, the Company reversed $411,000 and $260,000, respectively, of unrecognized deferred compensation relating to employees that have terminated employment with the Company. The remaining deferred compensation will be amortized over the vesting period of the options (generally four years). Interest Income, net. Interest income, net was $463,000, $763,000, and $1.4 million in the years ended December 31, 2000, 1999, and 1998, respectively. The decreases from 1998 to 1999 and from 1999 to 2000 were due to the overall lower cash balance during the periods. Income Taxes. To date, the Company has not incurred any U.S. income tax obligations. At December 31, 2000, the Company had net operating loss carryforwards of approximately $58.0 million for federal and $28.4 million for state income tax purposes, which will expire at various dates through 2020 and 2010, respectively, if not utilized. The principal differences between losses for financial and tax reporting purposes are the result of the capitalization of research and development and start-up expenses for tax purposes. United States and state tax laws contain provisions that may limit the net operating loss carryforwards that can be used in any given year, should certain changes in the beneficial ownership of the Company's outstanding common stock occur. Such events could limit the future utilization of the Company's net operating loss carryforwards. 3 Liquidity and Capital Resources Since its inception, the Company has funded its operations and its capital expenditures from proceeds of its initial public offering completed in February 1998 totaling $28.4 million, net of issuance costs, from the private sale of equity securities totaling $62.5 million, from an equipment lease financing totaling $1.3 million and from bank borrowings totaling $2.0 million, net. Included in the $62.5 million private sale of equity securities was $5.0 million to Siemens and $26.0 million in a private placement in 2000. At December 31, 2000, the Company had $26.1 million in working capital, and its primary source of liquidity was $29.5 million in cash and cash equivalents and short- and long-term investments. Capital expenditures, related primarily to the Company's research and development and manufacturing activities, were $608,000, $220,000, and $1.6 million in the years ended December 31, 2000, 1999, and 1998 respectively. The increased capital expenditures in 2000 from 1999 relate primarily to the purchase of test/production equipment. The expenditures in 1998 relate primarily to the Company's new facility. At December 31, 2000, the Company did not have any material commitments for capital expenditures. In October 1997, the Company entered into a lease agreement for a new facility for a five year term commencing January 1998. During the quarter ended March 31, 1998 the Company relocated its research and development and administrative functions to the new facility. The Company completed the relocation of its manufacturing activities to the new facility in April 1998. Through December 31, 2000, the Company has made approximately $2.5 million in capital expenditures, primarily attributable to leasehold improvements and furniture and fixtures related to the new facility. The Company has a loan agreement with a bank providing for borrowings of up to $2.0 million and for the issuance of letters of credit up to $250,000. At December 31, 2000, the Company had borrowings of $1.5 million and an outstanding letter of credit in the amount of $146,708 under the loan agreement. Borrowings under the loan agreement are repayable over four years commencing in January 2000. Symphonix used $15.8 million in cash for operations in 2000, which was an increase compared to 1999. The primary use of cash was to fund operating losses and increase inventories. The increase in inventories in 2000 compared to 1999 is due primarily to planned inventory built to accommodate increased sales in 2000 and anticipated increased sales in future periods. The Company will expend substantial funds in the future for research and development, preclinical and clinical testing, capital expenditures and the manufacturing, marketing and sale of its products. The timing and amount of spending of such capital resources cannot be accurately predicted and will depend on several factors, including: the availability of third party reimbursement, the progress of the Company's research and development efforts and preclinical and clinical activities, competing technological and market developments, the time and costs of obtaining regulatory approvals, the time and costs involved in filing, prosecuting and enforcing patent claims, the progress and cost of commercialization of products currently under development, market acceptance and demand for the Company's products in the United States and internationally and other factors not within the Company's control. While the Company believes that its existing capital will be sufficient to fund its operations and its capital investments through 2001, the Company may require additional financing beyond that time and there can be no assurance that financing will be available. In addition, there can be no assurance that such additional financing will be available on a timely basis on terms acceptable to the Company, or at all, or that such financing will not be dilutive to stockholders. If adequate funds are not available, the Company could be required to delay development or commercialization of certain of its products, license to third parties the rights to commercialize certain products or technologies that the Company would otherwise seek to commercialize for itself, or reduce the marketing, customer support or other resources devoted to certain of its products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. 4 ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOWS, AND WE MAY NEVER BE PROFITABLE. We have incurred losses every year since we began operations in 1994. At December 31, 2000, we had an accumulated deficit of $66 million. This deficit resulted primarily from expenses we incurred from dedicating substantially all of our resources to research and development, clinical trials, establishment of a European sales and marketing organization and the initiation of sales and marketing activities in Europe. Even though Vibrant P and Vibrant D Soundbridges became available for sale in the European Union in 1998 and in the United States and Canada in 2000, we have not generated significant revenues from product sales to date. We may never realize significant product revenues. Even if we do achieve significant product revenues, we may never be profitable. We expect our operating losses to continue at least through the year 2001 as we continue to, among other things: . attempt to establish sales and marketing capabilities; . expand research and development activities; . conduct clinical trials in support of regulatory approvals; and . establish commercial-scale manufacturing capabilities. IF OUR SOUNDBRIDGE PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, OUR BUSINESS MAY FAIL. We have sold the semi-implantable Vibrant Soundbridge in Europe since 1998 and in the United States since 2000 and have sold only 272 units. This product has not yet achieved market acceptance and may never achieve market acceptance. Market acceptance of our current and future Soundbridge products will depend upon their acceptance by the medical community and patients as safe, effective, and cost-effective compared to other devices. Our Soundbridge products may not be preferable alternatives to existing or future products, some of which, such as the acoustic hearing aid, do not require surgery. Patient acceptance of our Soundbridge products will depend in part upon physician, audiologist and surgeon recommendations as well as other factors, including the effectiveness, safety, reliability and invasiveness of the procedure as compared to established approaches. Prior to undergoing surgery for the implantation of our Soundbridge, a patient may speak with a number of medical professionals, including the patient's primary care physician, an audiologist, an ear, nose and throat specialist, as well as surgeons who specialize in ear surgery. The failure by any of these medical professionals to favorably recommend our products and the surgery required to implant the Soundbridge could limit the number of potential patients who are introduced to an ear surgeon as candidates for our Soundbridge products. If our Soundbridge products do not achieve market acceptance, our business may fail. IF WE FAIL TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE OUR NEXT GENERATION OF VIBRANT SOUNDBRIDGE PRODUCTS, WE MAY NOT ACHIEVE PROFITABILITY. Although we have offered the semi-implantable Vibrant Soundbridge for sale in Europe since 1998, we have not realized significant sales revenues to date. Our success depends on our ability to successfully commercialize an improved semi-implantable Soundbridge as well as a totally implantable Soundbridge. Our Vibrant HF and totally-implantable Soundbridge, currently under development, will require additional development, clinical trials and regulatory approval prior to commercialization. Successful completion of clinical trials for the Vibrant HF and totally-implantable Soundbridge products may never occur. Completion of clinical trials my be delayed by many factors, including research and development difficulties, slower than anticipated patient enrollment or adverse events occurring during clinical trials. Any delays in our clinical trials or any failure to obtain regulatory approval for these next generation Soundbridge products would impair our ability to achieve profitability. WE MAY NOT BE ABLE TO SECURE ADDITIONAL FUNDING TO SUPPORT OUR SUBSTANTIAL FUTURE CAPITAL REQUIREMENTS. We will expend substantial funds in the future for research and development, preclinical and clinical testing, capital expenditures and the manufacturing, marketing and sale of our products. The timing and amount of 5 spending of such capital resources cannot be accurately predicted and will depend upon several factors not within our control, including: . market acceptance and demand for our products in the United States and internationally; . the progress of our research and development efforts and preclinical and clinical activities; . competing technological and market developments; . the time and costs involved in obtaining regulatory approvals; . the time and costs involved in filing, prosecuting and enforcing patent claims; and . the progress and cost of commercialization of products currently under development. We believe that the net proceeds of approximately $31.0 million from the recent private placement of securities to Siemens Audiologische Technik GmbH and other investors, together with our previously existing capital resources and projected interest income, will be sufficient to fund our operations and capital investments through 2001. However, we may require additional financing after that time. Such additional financing, if required, may not be available on a timely basis on terms acceptable to us, or at all. If adequate funds are not available, we could be required to delay development or commercialization of some of our products, to license to third parties the rights to commercialize some products or technologies that we would otherwise seek to commercialize for ourselves, or to reduce the marketing, customer support or other resources devoted to some of our products, any of which could have a material adverse effect on our business, financial condition and results of operations. IF WE DO NOT RECEIVE AND MAINTAIN REGULATORY APPROVALS FOR NEW PRODUCTS, WE WILL NOT BE ABLE TO MANUFACTURE OR MARKET NEW PRODUCTS. Approval from the FDA is necessary to manufacture and market medical devices in the United States. Other countries have similar requirements. Since we have not realized significant revenues from sales of our current products, we must receive and maintain regulatory approval for new products or our business will fail. The process that medical devices must undergo to receive necessary approval is extensive, time-consuming and costly, and there is no guarantee that regulatory authorities will approve any of our product candidates. FDA approval can be delayed, limited or not granted for many reasons, including: . a product candidate may not be safe or effective; . even if we believe data from preclinical testing and clinical trials should justify approval, FDA officials may disagree; . the FDA might not approve our manufacturing processes or facilities or the processes or facilities of our contract manufacturers or raw material suppliers; . the FDA may change its approval policies or adopt new regulation; and . the FDA may approve a product candidate for indications that are narrow, which may limit our sales and marketing activities. The process of obtaining approvals in foreign countries is subject to delay and failure for the same reasons. WE FACE INTENSE COMPETITION IN OUR CURRENT AND POTENTIAL MARKETS AND IF WE CANNOT DEMONSTRATE THE SUPERIORITY OF OUR PRODUCTS, WE MAY FAIL TO ACHIEVE PROFITABILITY. The medical device industry and the acoustic hearing aid market are subject to intense competition in the United States and abroad. We believe our products will compete primarily with hearing aids. Principal manufacturers of acoustic hearing aids include Siemens Hearing Instruments, Inc., Starkey Laboratories, Inc., Dahlberg, Inc., GN ReSound, Inc., Oticon, Inc., Widex Hearing Aid Co., Inc., Sonic Innovations, Inc. and Phonak, Inc. Our products may not be as reliable or effective as established hearing aid products. If our products are not 6 perceived as high quality, reliable and effective alternatives to conventional hearing aids, we may not successfully compete with established hearing aid products. Our competitors may also develop technologies and products in the future that are more reliable and effective and less expensive than those being developed by us or that do not require surgery. Several university research groups and development-stage companies have active research or development programs related to direct drive devices for sensorineural hearing loss. One such company, IMPLEX AG Hearing Technology, was authorized by its European reviewing body on November 15, 1999 to affix the CE Mark on its totally integrated cochlear amplifier. IMPLEX has reported its intent to pursue a clinical investigation in the United States to support FDA regulatory requirements. Otologics, LLC is developing a semi-implantable direct drive device for sensorineural hearing loss called the middle ear transducer. This device has begun the FDA regulatory process and initiated multicenter clinical trials. The Company believes St. Croix has begun clinical trials in Europe and has recently received an IDE approval to begin clinical studies on its fully implantable pizo electric device for sensorineural hearing loss. Soundtec, Inc. is doing clinical trials in the United States on a hybrid implantable/ear canal based hearing aid. In addition, some large medical device companies, some of which are currently marketing implantable medical devices, may develop programs in hearing management. Many of these companies have substantially greater financial, technical, manufacturing, marketing and other resources than we have. If we fail to compete effectively with any or all of these companies and products, we will not achieve profitability. OUR LACK OF SALES, MARKETING AND DISTRIBUTION EXPERIENCE COULD DELAY AND INCREASE THE COSTS OF INTRODUCING OUR SOUNDBRIDGE PRODUCTS INTO THOSE MARKETS WHERE WE HAVE RECEIVED REGULATORY APPROVALS. In the United States, a direct sales force is concentrating our product marketing efforts on approximately 400 specialists in ear surgery and a targeted group of professional audiologists. In Europe, our sales and marketing effort is conducted through a distribution partnership with Siemens. In other international markets, including Japan, we intend to establish either a network of distributors or a strategic partner. We may fail to build a direct sales force or marketing organization that is cost effective or successful in one or more countries. In addition, we have entered into distribution agreements with only a limited number of international distributors. There can be no assurance that we will be able to enter into similar agreements with other qualified distributors on a timely basis on terms acceptable to us, or at all, or that such distributors will develop adequate resources to selling our products. If we fail to establish an adequate direct sales force domestically and in select international markets, and to enter into successful distribution relationships, we will have difficulty selling our products and our business may fail. SINCE THIRD-PARTY REIMBURSEMENT IS NOT CURRENTLY AVAILABLE FOR PROCEDURES USING OUR SOUNDBRIDGE PRODUCTS, OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE. In the United States and abroad, patients generally rely on third-party payors, principally Medicare, Medicaid, private health insurance plans, health maintenance organizations and other sources of reimbursement, to pay health care expenses, including reimbursement of all or part of the cost of the procedure in which our medical device is being used. These third-party payors are increasingly attempting to limit both the coverage and the level of reimbursement of procedures involving new devices. Currently, no third party- payors will pay for procedures using our products, and patients must bear the total cost of the procedures themselves. If third-party payors do not establish adequate levels of reimbursement for procedures using our products, we may not achieve market acceptance. WE HAVE LIMITED MANUFACTURING EXPERIENCE, AND MAY BE UNABLE TO EXPAND OUR MANUFACTURING CAPABILITIES SUFFICIENTLY, WHICH COULD LIMIT OUR ABILITY TO DEVELOP AND DELIVER SUFFICIENT QUANTITIES OF PRODUCTS IN A TIMELY MANNER. We currently manufacture our products in small quantities for laboratory testing, for clinical trials and for limited commercial sales. The manufacture of our Soundbridge products is a complex operation involving a number of separate processes, components and assemblies. We have no experience manufacturing our products 7 in the volumes or with the yields that will be necessary for us to achieve significant commercial sales, and there can be no assurance that we can establish high volume manufacturing capacity or, if established, that we will be able to manufacture our products in high volumes with commercially acceptable yields. We will need to expend significant capital resources and develop manufacturing expertise to establish commercial-scale manufacturing capabilities. Our inability to successfully manufacture or commercialize our Soundbridge products in a timely manner may harm our competitive position and market success. IF SIEMENS DOES NOT PERFORM ITS DUTIES UNDER OUR AGREEMENTS, OUR ABILITY TO COMMERCIALIZE OUR PRODUCTS MAY BE IMPAIRED. We have entered into a collaboration with Siemens Audiologische Technik GmbH. As a result of our agreements, we depend on Siemens to market and distribute our products in Europe. We also depend on Siemens to provide integrated circuits and software for use in our Soundbridge products. Any breach or termination by Siemens of our agreements could delay or stop the international commercialization of our products. WE RELY ON SEVERAL SOLE SOURCE OR LIMITED SOURCE SUPPLIERS, AND OUR PRODUCTION WILL BE SERIOUSLY HARMED IF THESE SUPPLIERS ARE NOT ABLE TO MEET OUR DEMAND AND ALTERNATIVE SOURCES ARE NOT AVAILABLE. A number of components and sub-assemblies, such as silicone, signal processing electronics implant packaging, as well as sterilization services are provided by single source suppliers. Furthermore, the key analog and digital signal processing microcircuits of the Vibrant P, Vibrant D and Vibrant HF Soundbridges are provided by sole source suppliers. None of our suppliers is contractually obligated to continue to supply us nor are we contractually obligated to buy from a particular supplier. For some of these components and sub-assemblies, there are relatively few alternative sources of supply, and we cannot quickly establish additional or replacement suppliers for such components and sub-assemblies. In addition, additional approvals will be required form the FDA before we can significantly modify our manufacturing processes or change the supplier of a critical component. Because of the long lead time for some components and subassemblies that are currently available from a single source, a supplier's inability or failure to supply such components or subassemblies in a timely manner or our decision to change suppliers could have a material adverse effect on our business, financial condition and results of operation. IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR COMPETITORS COULD DEVELOP AND MARKET PRODUCTS WITH SIMILAR FEATURES THAT MAY REDUCE DEMAND FOR OUR PRODUCTS. Our success depends in part on our ability to protect our issued and pending patents, trade secrets and other intellectual property. The strength of this protection is uncertain. Our competitors could challenge, invalidate or circumvent our issued patents as well as any future patents. Even if upheld, our issued patents may not exclude competitors or otherwise provide competitive advantages to us. In addition, a competitor may obtain patents that will interfere with our ability to make, use or sell our products either in the United States or in international markets. There may be pending applications, which if issued, might provide proprietary rights to third parties relating to products or processes used or proposed to be used by us. We may be required to obtain licenses to patents or proprietary rights of others. Further, the laws of some foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. Litigation or regulatory proceedings, which could result in substantial cost and uncertainty to us, may also be necessary to enforce our patent or other intellectual property rights or to determine the scope and validity of other parties' proprietary rights. We may not have the financial resources to defend our patents from infringement or claims of invalidity. We also rely upon trade secrets and other unpatented proprietary technology. Our competitors may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to or disclose our proprietary technology. Our policy is to require each of our employees, consultants, 8 investigators and advisors to execute a confidentiality agreement upon commencement of an employment or consulting relationship with us. However, these agreements may not provide meaningful protection for our proprietary information in the event of unauthorized use or disclosure of such information. Title 35, Section 287 of the United States Code limits the enforcement of patents relating to the performance of surgical or medical procedures on a body. This law precludes medical practitioners and health care entities, which practice these procedures, from being sued for patent infringement. Therefore, depending upon how these limitations are interpreted by the courts, they could have a material adverse effect on our ability to enforce any of our proprietary methods or procedures deemed to be surgical or medical procedures on a body. In some countries other than the United States, patent coverage relating to the performance of surgical or medical procedures is not available. Therefore, patent coverage in such countries will be limited to the Floating Mass Transducer, the patented core direct drive technology upon which all of our Soundbridge products are based, or to narrower aspects of the Floating Mass Transducer. The medical device industry in general has been characterized by substantial litigation. Litigation regarding patent and other intellectual property rights, whether with our without merit, could be time-consuming and expensive to respond to and could distract our technical and management personnel. We may become involved in litigation to defend against claims of infringement, to enforce patents issued to us or to protect our trade secrets. If any relevant claims of third-party patents are held as infringed and not invalid in any litigation or administrative proceeding, we could be prevented from practicing the subject matter claimed in such patents, or would be required to obtain licenses from the patent owners of each such patent, or to redesign our products or processes to avoid infringement. In addition, in the event of any possible infringement, there can be no assurance that we would be successful in any attempt to redesign our products or processes to avoid such infringement or in obtaining licenses on terms acceptable to us, if at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure by us to redesign our products or processes or to obtain necessary licenses could prevent us from manufacturing and selling our products, which would have a material adverse effect on our business, financial condition and results of operations. Although we have not been involved in any litigation to date, in the future, costly and time-consuming litigation brought by us may be necessary to enforce patents issued to us, to protect our trade secrets or know-how, or to determine the enforceability, scope and validity of the proprietary rights of others. IF WE CANNOT RETAIN OR HIRE KEY PERSONNEL, OUR BUSINESS WILL SUFFER. Our future success depends in significant part upon the continued service of key scientific, technical, sales and marketing, and management personnel. Competition for such personnel is intense. There can be no assurance that we can retain our key scientific, technical, sales and marketing and managerial personnel or that we can attract, assimilate or retain other highly qualified scientific, technical, sales and marketing, and managerial personnel in the future. The loss of key personnel, especially if without advance notice, or the inability to hire or retain qualified personnel could impair our ability to commercialize our Vibrant Soundbridge products and develop future products. COMPLICATIONS MAY RESULT FROM THE USE OF OUR SOUNDBRIDGE PRODUCTS, AND INSURANCE MAY BE INSUFFICIENT OR UNAVAILABLE TO COVER POTENTIALLY SIGNIFICANT PRODUCT LIABILITY EXPENSES IF WE ARE SUED. Our business involves the inherent risk of product liability claims. We maintain limited product liability insurance at coverage levels which we believe to be commercially reasonable and adequate given our current operations. However, this insurance may not be available in the future on commercially reasonable terms, or at all. Even if it is available, it may not be adequate to cover liabilities that may arise. If we are sued for an injury caused by our products, the resulting liability could result in significant expense, which could harm our business and financial condition. 9 OUR INTERNATIONAL SALES AND OPERATION EXPOSE US TO FOREIGN CURRENCY AND POLITICAL RISKS. We desire to continue to expand our operations outside of the United States and to enter additional international markets, which will require significant management attention and financial resources and subject us further to the risks of operating internationally. These risks include: . unexpected changes in regulatory requirements; . delays resulting from difficulty in obtaining export licenses for certain technology; . tariffs and other barriers and restrictions; . the burdens of complying with a variety of foreign laws and regulations; and . difficulty in staffing and managing international operations. We are also subject to general political and economic risks in connection with our international operations, such as political instability, changes in diplomatic and trade relationships and general economic fluctuations in specific countries or markets. We cannot predict whether quotas, duties, taxes, or other charges or restrictions will be imposed by the United States, the European Union, Japan, or other countries upon the import or export of our products in the future, or what effect any such actions would have on our business, financial condition or results of operations. There can be no assurance that regulatory, geopolitical and other factors will not adversely affect our business in the future or require us to modify our current business practices. In addition, because most of our international sales, and a large portion of the associated expenses, are denominated in foreign currencies, gains and losses on the conversion to U.S. dollars of accounts receivable and accounts payable arising from international operations may contribute to fluctuations in our operating results. Further, fluctuations in currency exchange rates may negatively impact our ability to compete in terms of price against products denominated in local currencies. To date, we have not found it appropriate to hedge the risks associated with fluctuations in exchange rates. However, even if we undertake such transactions in the future, they may fail. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company considered the provisions of Financial Reporting Release No. 48 "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments". The Company had no holdings of derivative financial or commodity instruments at December 31, 2000. The Company is exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. The fair value of the Company's investment portfolio or related income would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due mainly to the short-term nature of the Company's investment portfolio. The Company's fixed rate debt obligations are subject to interest rate risk but due to the minimal amount of debt, this risk is insignificant. An increase in interest rates would not significantly affect the Company's net loss. Much of the Company's revenue and all of its capital spending is transacted in U.S. dollars. However, the Company does enter into transactions in other currencies, primarily certain European currencies. Gains and losses on the conversion to U.S. dollars of accounts receivable and accounts payable resulting from these transactions may contribute to fluctuations in our operating results. However, these transactions in other currencies were not material relative to transactions in U.S. dollars. At December 31, 2000, the Company performed sensitivity analyses to assess the potential effect of this risk and concluded that near-term changes in interest rates and foreign currency exchange rates should not materially adversely affect the Company's financial position, results of operations or cash flows. 10 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements as of December 31, 2000 and 1999 and for the each of the three years in the period ended December 31, 2000, together with the related notes and the reports of KPMG LLP and PricewaterhouseCoopers LLP, independent accountants, are included on the following pages. 11 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Symphonix Devices, Inc. We have audited the accompanying consolidated balance sheet of Symphonix Devices, Inc. and subsidiaries as of December 31, 2000 and the related consolidated statements of operations, stockholders' equity, comprehensive loss, and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we have also audited the related consolidated financial statement schedule listed in the index appearing under Item 14(a)(2) on page 59 of the accompanying Form 10-K. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and the financial statement schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Symphonix Devices, Inc. and subsidiaries at December 31, 2000 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG LLP San Francisco, California February 14, 2001 12 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Symphonix Devices, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 59, present fairly, in all material respects, the financial position of Symphonix Devices, Inc. and its subsidiaries at December 31, 1999, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 59, represent fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements and financial statement schedule of Symphonix Devices, Inc. and its subsidiaries for any period subsequent to December 31, 1999. /s/ PricewaterhouseCoopers LLP San Jose, California January 26, 2000 13 SYMPHONIX DEVICES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
December 31, ------------------ 2000 1999 -------- -------- ASSETS Current assets: Cash and cash equivalents................................ $ 29,535 $ 7,998 Short-term investments .................................. -- 6,150 Accounts receivable, net of allowance for doubtful accounts of $7 in 2000 and $55 in 1999 ................. 356 117 Inventories.............................................. 2,034 662 Prepaid expenses and other current assets ............... 634 680 -------- -------- Total current assets................................. 32,559 15,607 Property and equipment, net................................ 1,396 1,554 Long term investments...................................... -- 695 Other assets............................................... 75 78 -------- -------- Total assets......................................... $ 34,030 $ 17,934 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................................ $ 834 $ 574 Accrued compensation..................................... 1,304 1,161 Other accrued liabilities................................ 3,772 2,026 Current portion of capital lease obligation.............. -- 90 Current portion of bank borrowing........................ 500 500 -------- -------- Total current liabilities............................ 6,410 4,351 Capital lease obligation, less current portion............. -- 8 Deferred revenue........................................... 1,101 1,420 Bank borrowings, less current portion...................... 1,000 1,500 -------- -------- Total liabilities.................................... 8,511 7,279 -------- -------- Commitments Stockholders' equity: Convertible preferred stock, $.001 par value: Authorized: 5,000,000 shares Issued and outstanding: no shares in 2000 and 1999..... -- -- Common stock, $.001 par value: Authorized: 50,000,000 shares Issued and outstanding: 20,912,000 shares in 2000 and 13,443,000 shares in 1999............................. 21 13 Notes receivable from stockholders......................... (421) (1,079) Deferred compensation...................................... (34) (740) Additional paid-in capital................................. 91,885 61,346 Accumulated other comprehensive income (loss) . ........... 54 (56) Accumulated deficit........................................ (65,986) (48,829) -------- -------- Total stockholders' equity........................... 25,519 10,655 -------- -------- Total liabilities and stockholders' equity........... $ 34,030 $ 17,934 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 14 SYMPHONIX DEVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Year Ended December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- Revenues......................................... $ 1,247 $ 331 $ 597 -------- -------- -------- Costs and expenses: Costs of goods sold............................ 3,094 4,078 1,663 Research and development....................... 7,119 7,848 8,322 Selling, general and administrative............ 8,654 5,847 5,633 -------- -------- -------- Total costs and expenses..................... 18,867 17,773 15,618 -------- -------- -------- Operating loss............................... (17,620) (17,442) (15,021) Interest income.................................. 652 821 1,486 Interest expense................................. (189) (58) (111) -------- -------- -------- Net loss..................................... $(17,157) $(16,679) $(13,646) ======== ======== ======== Basic and diluted net loss per common share.. $ (1.18) $ (1.35) $ (1.24) Shares used in computing basic and diluted net loss per common share................... 14,594 12,393 10,987
The accompanying notes are an integral part of these consolidated financial statements. 15 SYMPHONIX DEVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- Cash flows from operating activities: Net loss....................................... $(17,157) $(16,679) $(13,646) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred compensation........ 295 517 556 Stock based compensation..................... 40 Depreciation and amortization................ 766 766 682 Changes in operating assets and liabilities: Accounts receivable........................ (239) 111 (228) Inventories................................ (1,372) 99 (761) Prepaid expenses and other current assets.. 46 13 240 Accounts payable........................... 260 (110) 318 Accrued compensation....................... 143 101 172 Deferred revenue........................... (319) 1,420 -- Other accrued liabilities.................. 1,746 1,275 (27) -------- -------- -------- Net cash used in operating activities.... (15,791) (12,487) (12,694) -------- -------- -------- Cash flows from investing activities: Purchases of short-term investments............ (3,656) (4,650) (37,086) Maturities of short-term and long-term investments................................... 10,550 19,248 21,704 Purchases of property and equipment............ (608) (220) (1,625) Change in other assets......................... 3 -- (2) -------- -------- -------- Net cash provided by (used in) investing activities.............................. 6,289 14,378 (17,009) -------- -------- -------- Cash flows from financing activities: Payments on capital lease obligations.......... (98) (227) (322) Payments from bank borrowings.................. (500) -- -- Proceeds from issuance of common stock, net of issuance costs................................ 31,025 3,342 28,514 Notes receivable from stockholders............. (160) (370) -- Payments received on notes receivable from stockholders.................................. 711 -- 15 -------- -------- -------- Net cash provided by financing activities.............................. 30,978 2,745 28,207 -------- -------- -------- Net increase (decrease) in cash and cash equivalents..................................... 21,476 4,636 (1,496) Effect of exchange rates on cash and cash equivalents..................................... 61 (39) (11) Cash and cash equivalents, beginning of year..... 7,998 3,401 4,908 -------- -------- -------- Cash and cash equivalents, end of year........... $ 29,535 $ 7,998 $ 3,401 ======== ======== ======== Supplemental disclosure of cash flow information and non-cash activities Cash paid for interest......................... $ 189 $ 58 $ 111 ======== ======== ======== Common stock issued in exchange for promissory note.......................................... $ -- $ 225 $ -- ======== ======== ======== Reversal of unrealized deferred compensation... $ 411 $ -- $ -- ======== ======== ======== Cancellation of notes receivable to stockholders for unvested restricted stock.... $ 107 $ -- $ -- ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 16 SYMPHONIX DEVICES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the three years ended December 31, 2000 (in thousands, except per share data)
Preferred Notes Stock Common Stock Receivable Total -------------- ------------- from Deferred Paid-In Comprehensive Accumulated Stockholders' Shares Amount Shares Amount Stockholders Compensation Capital Income (Loss) Deficit Equity ------ ------ ------ ------ ------------ ------------ ------- ------------- ----------- ------------- Balances, December 31, 1997.......... 9,195 9 2,785 3 (499) (2,073) 29,526 -- (18,504) 8,462 Common stock issued in connection with the Company's initial public offering, net of issuance costs.. 2,645 2 28,397 28,399 Conversion of preferred stock to common stock upon the closing of the Company's initial public offering........ (9,195) (9) 6,682 7 2 -- Common stock issued in connection with stock option exercises....... 65 40 40 Common stock issued pursuant to the Company's Stock Purchase Plan............ 24 75 75 Payment of promissory note ................ 15 15 Amortization of deferred compensation.... 556 556 Change in unrealized losses on short- term investments ................ (15) (15) Translation adjustments..... (11) (11) Net loss........ (13,646) (13,646) ------ --- ------ --- ------- ------ ------ ---- -------- -------- Balances, December 31, 1998.......... -- -- 12,201 12 (484) (1,517) 58,040 (26) (32,150) 23,875 Private placement, net of issuance costs........... 1,000 1 3,159 3,160 Note receivable issued to stockholder..... (370) (370) Common stock issued in connection with stock option exercises....... 62 52 52 Common stock issued pursuant to the Company's Stock Purchase Plan............ 80 130 130 Common stock issued in connection with stock option exercises for notes receivable...... 100 (225) 225 -- Deferred compensation and related amortization.... 777 (260) 517 Change in unrealized losses on investments..... 9 9 Translation adjustments..... (39) (39) Net loss........ (16,679) (16,679) ------ --- ------ --- ------- ------ ------ ---- -------- -------- Balances, December 31, 1999.......... -- -- 13,443 13 (1,079) (740) 61,346 (56) (48,829) 10,655
(continued) 17 SYMPHONIX DEVICES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued) For the three years ended December 31, 2000 (in thousands, except per share data)
Preferred Notes Stock Common Stock Receivable Total ------------- -------------- from Deferred Paid-In Comprehensive Accumulated Stockholders' Shares Amount Shares Amount Stockholders Compensation Capital Income (Loss) Deficit Equity ------ ------ ------ ------ ------------ ------------ ------- ------------- ----------- ------------- Balances, December 31, 1999......... -- -- 13,443 13 (1,079) (740) 61,346 (56) (48,829) 10,655 Note receivable issued to stockholder.... (160) (160) Payment on and forfeiture of stockholder notes receivable..... (134) 818 (107) 711 Cancellations of stock options.. 411 (411) -- Amortization of deferred compensation... 295 295 Stock based compensation... 40 40 Common stock issued in connection with warrant exercises...... 18 -- Common stock issued in connection with stock option exercises...... 77 145 145 Common stock issued pursuant to Company's stock purchase plan........... 84 158 158 Private placement, net of issuance costs.......... 7,424 8 30,714 30,722 Change in unrealized losses on investments.... 49 49 Translation adjustments.... 61 61 Net loss........ (17,157) (17,157) --- ---- ------ --- ------- ----- ------- ---- -------- -------- Balance at December 31, 2000............. -- $ -- 20,912 $21 $ (421) $ (34) $91,885 $ 54 $(65,986) $ 25,519 === ==== ====== === ======= ===== ======= ==== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 18 SYMPHONIX DEVICES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands)
Year Ended December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- Net loss........................................ $(17,157) $(16,679) $(13,646) Change in unrealized gain (loss) on short-term investments.................................... 49 9 (15) Translation adjustments......................... 61 (39) (11) -------- -------- -------- Comprehensive loss.............................. $(17,047) $(16,709) $(13,672) ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 19 SYMPHONIX DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Formation and Business of the Company: Symphonix Devices, Inc. (the "Company") was incorporated on May 17, 1994 to develop and manufacture implantable and semi-implantable hearing devices. The Company sells products in North America and Europe through its direct sales force and distributors. The Company's commercial operations commenced during 1998. The Company has sustained operating losses and expects such losses to continue at least through 2001. The Company will finance its operations primarily through its cash, cash equivalents and short-term investments, together with existing credit facilities and future revenues. There can be no assurance that the Company will not require additional funding and should this prove necessary, the Company may attempt to sell additional shares of its common or preferred stock through private placement or further public offerings. 2. Summary of Significant Accounting Policies: Basis of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Investments: All investments are classified as available-for-sale and therefore are carried at fair market value. Unrealized gains and losses on such securities are reported as a separate component of other comprehensive income (loss). Interest income is recorded using an effective interest rate, with associated premium or discount amortized to "investment income." Realized gains and losses on sales of all such securities are reported in earnings and computed using the specific identification cost method. All investments with maturity dates greater than 365 days are classified as long term. Property and Equipment: Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, which is generally three to five years. Amortization of leasehold improvements and property and equipment under capital lease obligations is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful life of the related assets, typically five years. Upon retirement or disposal of the asset, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss is reflected in Other Income. Valuation of Long-Lived Assets: In accordance with Statement of Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Company periodically evaluates the carrying value of long-lived assets for impairment, when events and circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized whenever the review demonstrates that the book value of a long-lived asset is not recoverable. Since inception through December 31, 2000, no impairment losses have been identified. Research and Development: Research and development costs are charged to operations as incurred. Legal expenses relating to patent costs are expensed as incurred. 20 Concentration of Credit Risk and Other Risks and Uncertainties: The Company's cash and cash equivalents are primarily maintained at two financial institutions in the United States. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and therefore, bear minimal risk. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts. Historically the Company has not experienced significant losses related to individual customers. At December 31, 2000, one customer accounted for approximately 65.4% of accounts receivable. At December 31, 1999, two customers accounted for approximately 30.5% and 21.7% of accounts receivable, respectively. During 2000, the Company had sales in various European countries, in addition to the U.S. Sales in France and Germany in 2000 were $240,000 and $207,000, or 19.2% and 16.6%, respectively, of total revenues. The Company's products require approvals from the FDA and international regulatory agencies prior to commercial sales. During 2000, the Company received approvals to market its Vibrant Soundbridge in the United States. There can be no assurance that the Company's products will receive additional required approvals. If the Company is denied such approvals or if such approvals are delayed, it would have a materially adverse impact on the Company. Fair Value of Financial Instruments: Carrying amounts of certain of the Company's financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair values due to their short maturities. Based on the borrowing rates currently available to the Company for loans with similar terms, the carrying values of the equipment line of credit and bank loan approximate fair values. Estimated fair values for short-term investments, which are separately disclosed elsewhere, are based on quoted market prices for the same or similar instruments. Income Taxes: The Company accounts for income taxes under the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Foreign Currency Translation: The Company's international subsidiaries use their local currency as their functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the year. Resulting translation adjustments are recorded directly to a separate component of other comprehensive gain (loss). Foreign currency transaction gains and losses are included in results of operations and have been immaterial for all periods presented. Computation of Earnings per Share: Basic earnings per share ("EPS") is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities, if dilutive. The 21 SYMPHONIX DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) following table is a reconciliation of the numerator (net loss) and the denominator (number of shares) used in the basic and diluted EPS calculations and sets forth potential shares of common stock that are not included in the diluted net loss per share calculation as their effect is anti-dilutive (in thousands):
Year Ended December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- Basic and diluted: Net loss................................... $(17,157) $(16,679) $(13,646) Weighted average common shares outstanding............................... 14,594 12,393 10,987 Net loss per common share.................. $ (1.18) $ (1.35) $ (1.24) Anti-dilutive securities: Options to purchase common stock........... 2,915 1,704 660 Common stock subject to repurchase......... 67 92 -- Warrants................................... 7 34 34 -------- -------- -------- 2,989 1,830 694 ======== ======== ========
Revenue Recognition: The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." Revenue from product sales is recognized upon shipment of product against a valid purchase order provided no significant obligations remain and collection of the receivables are deemed probable. Upon shipment, the Company provides for estimated product returns and estimated costs that may be incurred for product warranties. Included in revenue for 2000 is $366,000, representing the amortization of $1,885,000 which represents the difference between the purchase price and the fair market value of the Company's common stock purchased by Siemens in accordance with the marketing and distribution agreement. The price per share of Symphonix common stock paid by Siemens was based on the average price of the stock for 40 trading days prior to when the agreement was signed in November 1999. Because of the long period of time used to determine the purchase price, the Company measured and recorded the aforementioned $1,855,000 premium over the closing price of its common stock on the date of the agreement to purchase the stock. Since the term of the agreement is 5 years, we recorded 20% of the premium in deferred revenue (short-term liabilities) and the remaining 80% as long-term deferred revenue. We are amortizing the premium to revenue on a straight-line basis over the term of the agreement. Amounts received prior to completion of the earnings process are recorded as deferred revenue and recognized on a straight line basis over the life of the agreement. Inventories: Inventories are stated at the lower of cost or market. Cost is determined on a standard cost basis that approximates the first-in, first-out (FIFO) method. Appropriate consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating lower of cost or market. Reclassifications: Certain amounts in the prior year's financial statements have been reclassified to conform to the 2000 presentation. These reclassifications did not change previously reported net loss, total assets or stockholders' equity. Recent Accounting Pronouncement: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes methods of accounting and reporting for derivative instruments and hedging activities related to those instruments as well as other hedging activities, and is effective for all fiscal quarters for all fiscal years beginning after June 15, 2000, as amended by SFAS 137 and SFAS 138. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at 22 SYMPHONIX DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) fair value. To date, the Company has not engaged in derivative and hedging activities. The Company will implement SFAS 133 effective January 1, 2001 and does not believe it will have an impact on reported results. 3. Balance Sheet Detail: Investments: As of December 31, 2000, there were no available-for-sales securities. As of December 31, 1999, available-for-sale securities consisted of the following (in thousands):
December 31, 1999 ------------------------------ Unrealized Estimated Amortized Gain Fair Cost (losses) Value Maturity Dates --------- ---------- --------- --------------- Certificate of deposit...... $1,500 $ -- $1,500 01/2000 Commercial paper............ 4,650 -- 4,650 01/2000-02/2000 U.S. Government agencies, long term.................. 701 (6) 695 11/2001 ------ ---- ------ $6,851 $ (6) $6,845 ====== ==== ======
There were no realized gains or losses recognized on the disposal of available-for-sale securities in 2000 and 1999. Inventories: Inventories are comprised of the following (in thousands):
December 31, ----------- 2000 1999 ------ ---- Raw materials.................................................... $ 253 $211 Work-in-process.................................................. 1,097 183 Finished goods................................................... 684 268 ------ ---- $2,034 $662 ====== ====
Property and Equipment: Property and equipment include amounts for assets acquired under capital leases of $0 and $511,000 at December 31, 2000 and 1999, respectively. Accumulated amortization related to these assets amounted to $420,000 at December 31, 1999. 23 SYMPHONIX DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Property and equipment consist of the following (in thousands):
December 31, -------------- 2000 1999 ------ ------ Furniture and fixtures....................................... $ 452 $ 465 Machinery and equipment...................................... 2,735 2,156 Leasehold improvements ...................................... 1,140 1,127 Software..................................................... 214 185 ------ ------ 4,541 3,933 Less accumulated depreciation and amortization............... (3,145) (2,379) ------ ------ $1,396 $1,554 ====== ======
Accrued Liabilities: Accrued liabilities comprise (in thousands):
December 31, ------------- 2000 1999 ------ ------ Professional fees............................................. $ 679 $ 205 Clinical trials............................................... 588 711 Deferred revenue.............................................. 377 363 Warranty...................................................... 1,119 248 Restructuring (Note 9)........................................ 509 -- Other......................................................... 500 499 ------ ------ $3,772 $2,026 ====== ======
4. Bank Borrowings The Company has a Loan Agreement with a bank providing for borrowings of up to $2,000,000 and the issuance of letters of credit up to $250,000. The principal amount is being repaid over four years. Borrowings under the agreement bear interest at the bank's prime rate plus 0.75% and is secured by substantially all of the Company's assets. The Company is required to maintain certain levels of cash and stockholders' equity and to comply with certain other financial covenants. At December 31, 2000, the Company had borrowings of $1,500,000 and an outstanding letter of credit in the amount of $146,208 under the Loan Agreement. Future payments of principal under the Loan Agreement are as follows (in thousands): 2001.................................................................. $ 500 2002.................................................................. 500 2003.................................................................. 500 ------ $1,500 ======
24 SYMPHONIX DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Commitments: The Company rents its primary facilities under an operating lease that expires in December 2002. Under the terms of the lease, the Company is responsible for certain taxes, insurance and maintenance expenses. Future minimum rental payments under all operating leases as of December 31, 2000 are as follows (in thousands): 2001.................................................................. $ 635 2002.................................................................. 666 ------ $1,301 ======
Rent expense for the years ended December 31, 2000, 1999 and 1998 was $674,000, $654,000 and $750,000, respectively. 6. Stockholders' Equity: Initial Public Offering On February 17, 1998, the Company completed the sale of 2,300,000 shares of its common stock at a price of $12 per share in a firm commitment underwritten public offering. On February 27, 1998 the Company completed the sale of an additional 345,000 shares at a price of $12 per share pursuant to an exercise of an over-allotment option by the underwriters. Aggregate proceeds of these sales of common stock, net of issuance costs were $28.4 million. In connection with the initial public offering, the Company filed an Amended and Restated Certificate of Incorporation which converted the existing convertible preferred stock and changed the number of authorized shares of preferred stock to 5,000,000 shares, $0.001 par value, and increased the shares of common stock authorized to 50,000,000 shares. Re-incorporation in Delaware In January 1998, the Company reincorporated in Delaware. Under the re- incorporation, each class and series of shares of the predecessor company were exchanged for one share of identical class and series of stock of the Delaware successor company having a par value of $0.001 per share for both common stock and preferred stock. The accompanying consolidated financial statements have been adjusted retroactively to give effect to the re-incorporation. Reverse Stock Split: Share and per share data presented reflect a one-for-1.376 reverse stock split of the Company's common stock and a corresponding change in the preferred stock conversion ratios effective in February 1998. All common stock and per share amounts in these financial statements have been adjusted retroactively to give effect to the split. Private Placement: In November 1999, the Company consummated a $5,000,000 private placement of 1,000,000 shares of the Company's common stock to Siemens at a purchase price of $5.00 per share in connection with a Marketing and Distribution Agreement. In September 2000, the Company consummated a $5,000,000 private sale of 25 SYMPHONIX DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1,026,062 shares of the Company's common stock to Siemens at a purchase price of $4.87 per share in connection with a Marketing and Distribution Agreement. The number of shares and purchase price were determined by dividing $5,000,000 by the average of the closing sales prices of the Company's common stock as reported by the NASDAQ National Market for the forty (40) trading days immediately preceding the public announcement of the FDA grant of premarket approval of the Company's Vibrant P and Vibrant D Soundbridges. In conjunction with this agreement and in the event of a change in control, the Company has the right to terminate the agreement by paying a) $1.0 million or 2 times Siemen's prior 12 months revenue of the Company's products if terminated during the first or second year of the contract, b) $1.0 million or 1.5 times Siemen's revenue of the Company's products if terminated during the third year of the contract, or c) $2.0 million or 1 times Siemen's revenue of the Company's products if terminated during the fourth or fifth year of the contract. In November 2000, the Company consummated a $26 million private placement through a transaction led by Patricof & Co. Ventures, Inc. ("Patricof") and J.P. Morgan Capital, LP ("J.P. Morgan"). The shares of common stock issued in the financing were priced at $4.064 per share, which was determined as 80% of the average of the closing price of the Company's common stock for the thirty- three (33) day period ending on September 18, 2000. Accordingly, a total of 6,397,632 shares of Symphonix common stock was issued to the investors at the closing of the financing. Symphonix may be required to issue additional shares of common stock to the investors at no additional cost to the investors pursuant to a purchase price adjustment. The purchase price adjustment allows the investors, at any time during the two-year period following the closing of the financing, to calculate an adjusted per share purchase price equal to the average closing market price of the common stock as reported on the NASDAQ National Market for the thirty- three (33) consecutive trading days immediately preceding the date of the adjustment. Those investors who desire to participate in this purchase price adjustment will receive additional shares of common stock equal to the difference between the number of shares which each investor could have purchased based on the adjusted per share purchase price at the investor's original investment amount and the number of shares originally purchased. Each investor may participate in a purchase price adjustment only once during the two-year period. So long as J.P. Morgan and Patricof each hold at least 1,203,315 shares of common stock, the Company has agreed that its board of directors will nominate one individual designated by each of J.P. Morgan and Patricof to the slate of nominees recommended by the board of directors to the stockholders at each annual meeting of the stockholders. Issuance costs for the 2000 equity placements were approximately $270,000. Warrants: During 1997, the Company issued warrants in connection with obtaining its equipment lease line of credit to purchase up to 26,889 shares of common stock at $1.38 per share and up to 6,722 shares of common stock at $5.50 per share. The 26,889 shares at $1.38 were net exercised during 2000. The result of this net exercise was the issuance of 17,493 shares. The remaining warrants are exercisable until October 2004. The fair value of these warrants determined using the Black-Scholes valuation model was not material, and accordingly, no value was ascribed to them for financial reporting purposes. Deferred Compensation: The difference between the exercise price and the deemed fair market value of the Company's common stock at the date of issuance of certain stock options, totaling $2.3 million, has been recorded as deferred compensation as a component of stockholders' equity. Of this amount, $295,000, $517,000, and $556,000 has 26 SYMPHONIX DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) been recognized as expense in 2000, 1999 and 1998, respectively. During 2000 and 1999, the Company reversed $411,000 and $260,000 respectively of unrecognized deferred compensation relating to employees that have terminated employment with the Company. The remaining $34,000 will be recognized as an expense as the shares and options vest over periods of up to four years. 1997 Employee Stock Purchase Plan: The Company adopted the 1997 Employee Stock Purchase Plan (the "Purchase Plan") under which 275,000 shares of common stock were initially reserved for issuance. During 2000, an additional 200,000 shares were reserved. Eligible employees may purchase a limited number of common stock at 85% of the market value at certain plan-defined dates. During 2000, 1999 and 1998, 83,863, 79,643 and 24,459 shares, respectively, were purchased under the Purchase Plan. 1994 Stock Option Plan: The 1994 Stock Option Plan (the "1994 Plan") provides for grants of incentive stock options to employees (including officers and employee directors) and nonstatutory stock options to employees (including officers and employee directors) and consultants of the Company. The 1994 Plan is administered by a committee appointed by the Board of Directors which identifies optionees and determines the terms of options granted, including the exercise price, number of shares subject to the option and the exercisability thereof. As of December 31, 2000, there were 4,499,273 shares authorized for issuance under this Plan. The terms of options granted under the 1994 Plan generally may not exceed ten years. The term of all incentive stock options granted to an optionee who, at the time of grant, owns stock representing more than 10% of the voting power of all classes of stock of the Company or a parent or subsidiary of the Company (a "Ten Percent Stockholder"), may not exceed five years, however. Generally, options granted under the 1994 Plan vest and become exercisable starting one year after the date of grant, with 25% of the shares subject to the option becoming exercisable at that time and an additional 1/48th of such shares becoming exercisable each month thereafter. Certain holders of options granted under the 1994 Plan may exercise their unvested options prior to complete vesting of shares, subject to such holder's entering a restricted stock purchase agreement granting the Company an option to repurchase, in the event of a termination of the optionee's employment or consulting relationship, any unvested shares at a price per share equal to the original exercise price per share for the option. The exercise price of incentive stock options granted under the 1994 Plan must be at least equal to the fair market value of the shares on the date of grant. The exercise price of nonstatutory stock options granted under the 1994 Plan is determined by the Board of Directors with specific criteria. The exercise price of any incentive stock option granted to a Ten Percent Stockholder must equal at least 110% of the fair market value of the common stock on the date of grant. 27 SYMPHONIX DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Activity under the 1994 Plan is as follows (in thousands, except per share data):
Options Outstanding Shares ---------------------- Available Number of Exercise for Grant Shares Price --------- --------- ------------ Balance, December 31, 1997................. 402 567 $0.14-$ 8.81 Options granted.......................... (281) 281 $3.13-$10.50 Options exercised........................ (65) $0.14-$ 3.13 Options canceled......................... 123 (123) $0.14-$10.50 ------ ----- Balance, December 31, 1998................. 244 660 $0.14-$ 4.13 Additional options reserved.............. 1,500 Options granted.......................... (1,259) 1,259 $2.25-$ 3.88 Options exercised........................ -- (162) $0.14-$ 2.25 Options canceled......................... -- (53) $0.73-$ 3.13 ------ ----- Balance, December 31, 1999................. 485 1,704 $0.14-$ 4.13 ------ ----- Additional options reserved.............. 1,000 Options granted.......................... (1,562) 1,562 $1.88-$ 5.88 Options exercised........................ -- (77) $0.14-$ 4.13 Options canceled......................... 274 (274) $0.73-$ 5.06 ------ ----- Balance, December 31, 2000................. 197 2,915 $0.14-$ 5.88 ====== =====
The options outstanding and currently exercisable by exercise price at December 31, 2000 are as follows:
Options currently Options outstanding exercisable -------------------------------- -------------------- Weighted Average Remaining Weighted Weighted Contractual Average Average Number Life Exercise Number Exercise Exercise Price Outstanding (years) Price Exercisable Price -------------- ----------- ----------- -------- ----------- -------- $0.14..................... 70 3.89 $0.14 70 $0.14 $0.55-$0.83............... 95 5.48 $0.71 95 $0.71 $1.10-$2.20............... 743 9.54 $1.88 82 $1.93 $2.25 .................... 550 8.59 $2.25 183 $2.25 $2.56-$2.81............... 333 8.54 $2.67 205 $2.62 $3.13-$4.13............... 820 9.01 $3.61 161 $3.42 $4.66-$5.88............... 304 9.31 $4.83 14 $4.66 ----- --- 2,915 8.81 $2.76 810 $2.22 ===== ===
At December 31, 1999 and 1998, outstanding options to purchase 379,000 and 214,000 shares were exercisable at weighted average exercise prices of $1.62 and $0.73 per share, respectively. 28 SYMPHONIX DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company has adopted the disclosure only provision of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, the Company applies Accounting Principles Board's Opinion No. 25 and related Interpretations in accounting for its stock option plans. If the Company had elected, beginning in 1996, to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net loss and basic and diluted net loss per common share would have been increased to the pro forma amounts shown below (thousands except per share data):
Year Ended December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- Net loss as reported......................... $(17,157) $(16,679) $(13,646) ======== ======== ======== Net loss pro forma........................... $(18,645) $(17,152) $(13,828) ======== ======== ======== Basic and diluted net loss per common share as reported................................. $ (1.18) $ (1.35) $ (1.24) ======== ======== ======== Basic and diluted net loss per common share pro forma................................... $ (1.28) $ (1.38) $ (1.26) ======== ======== ========
The above pro forma disclosures are not likely to be representative of the effects on net income (loss) and basic and diluted net income (loss) per share in future years, because they do not take into consideration pro forma compensation expense related to grants made prior to 1996. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
2000 1999 1998 ----- ----- ---- Expected dividend yield.................................. 0.0% 0.0% 0.0% Risk-free interest rate.................................. 6.08% 5.77% 5.2% Expected volatility...................................... 121.1% 110.0% 73.0% Expected life (in years)................................. 5.0 5.0 5.0 ===== ===== ====
The weighted average fair values of employee stock options granted during 2000, 1999, and 1998 were, $2.71, $2.14, and $2.59, respectively. The weighted average estimated fair value of the Purchase Plan options issued during 2000 and 1999 was $2.39 and $1.29, respectively. The weighted average assumptions for shares issued from the employee stock purchase plan for December 31, 2000, were expected dividend yield of 0.0%, risk-free interest rate of 5.82%, expected volatility of 124.0%, and expected life of 0.5 years. The weighted average assumptions for December 31, 1999, were expected dividend yield of 0.0%, risk-free interest rate of 4.86%, expected volatility of 110.0%, and expected life of 0.5 years. 29 SYMPHONIX DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Income Taxes: The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2000 and 1999 are presented below (in thousands):
2000 1999 -------- -------- Net operating loss carryforwards......................... $ 21,378 $ 12,305 Depreciation............................................. -- (87) Plant and equipment ..................................... 229 -- Capitalized start-up costs............................... 598 1,243 Research and development credits......................... 2,023 2,481 Deferred revenue......................................... 553 566 Accrued liabilities...................................... 857 873 Capitalized research and development..................... 211 437 Other.................................................... -- 33 Valuation allowance...................................... (25,849) (17,851) -------- -------- $ -- $ -- ======== ========
30 SYMPHONIX DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's expected tax benefit (at 34%) for 2000, 1999 and 1998 differs from the actual tax benefit of $0 recognized for 2000, 1999 and 1998, respectively, due to the Company providing a 100% valuation-allowance against its net deferred tax assets. During 2000, 1999 and 1998, the valuation allowance was increased by $7,998,000, $4,592,000 and $5,395,000, respectively. Due to the uncertainties surrounding the realization of deferred tax assets, the Company has provided a full valuation allowance in all periods. At December 31, 2000, the Company has $58,007,000 of federal and $28,378,000 of state net operating loss carryforwards which expire from 2009 through 2020 and 2002 through 2010, respectively, if not utilized. The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In the event the Company has had a change in ownership, utilization of the carryforwards could be restricted. 8. Employee Benefit Plan: During 1996, the Company established a Retirement Savings and Investment Plan (the "Plan") under which employees may defer a portion of their salary up to the maximum allowed under IRS rules. The Company has the discretion to make contributions to the Plan. As of December 31, 2000, no Company contributions have been made to the Plan. 9. Restructuring Charge: In November 2000, the Company approved plans to restructure its operations in order to accelerate the marketing and distribution agreement with Siemens. In connection with these plans, the Company will reduce its European headcount and consolidate facilities and operations to improve efficiency. Most of the sales and clinical force has accepted positions with Siemens. The following analysis sets forth the significant components of the restructuring expense charge. No charges have been made against this reserve at December 31, 2000:
Year Ended December 31, 2000 ------------------------------------ Accrual Balance at Restructuring Cash Dec. 31, 2000 Expense Payments (in millions) ------------- -------- ------------- Severance and benefits................ $262 $ -- $262 Facility charges ..................... 111 -- 111 Other................................. 136 -- 136 ---- ---- ---- $509 $ -- $509 ==== ==== ====
Severance and benefits represent the reduction of 10 sales and marketing employees. Write-off of assets consisted primarily of computer equipment, furniture, and fixtures. Facility charges include early termination costs associated with the closing of the international sales office. Cash payments relating to these accruals are expected to be paid in the first half of 2001. 10. Related Party Transactions: As of December 31, 2000, Siemens Audiologische Technik GmbH, a holder of 2,026,062 shares of the Company's common stock was granted full distribution rights to the European market for a 5 year period, in connection with the acceleration of provisions within the Marketing and Distribution Agreements signed in November 1999. At year end, Siemens owed the Company $237,404 which represents 65.4% of accounts receivable. 31 SYMPHONIX DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Selected Quarterly Financial Data (Unaudited): (In thousands, except per share amounts)
Quarter Ended ---------------------------------- 03/31 06/30 09/30 12/31 ------- ------- ------- ------- 2000: Revenues .............................. $ 218 $ 195 $ 293 $ 541 Operating Loss......................... (4,377) (4,186) (4,108) (4,949) Net loss............................... (4,297) (4,111) (4,080) (4,669) Basic Earnings per share............... $( 0.32) $( 0.31) $( 0.30) $( 0.25) Basic weighted average shares outstanding........................... 13,357 13,406 13,475 14,594 1999: Revenues............................... $ 115 $ 35 $ 73 $ 108 Operating loss ........................ (4,190) (4,239) (4,412) (4,618) Net loss............................... (3,940) (4,050) (4,256) (4,433) Basic and diluted net loss per common share................................. $( 0.32) $( 0.33) $( 0.35) $( 0.35) Basic weighted average shares outstanding........................... 12,205 12,248 12,338 12,393
32 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In November 1999, Siemens Audiologische Technik GmbH purchased 1,000,000 shares of Symphonix common stock for $5 million in a first closing pursuant to a private placement consummated in connection with a marketing and distribution agreement entered into with Symphonix. Under the terms of this private placement, Siemens agreed to purchase shares of Symphonix common stock in a second closing upon satisfaction of certain terms and conditions. In September 2000, Symphonix consummated the second closing, selling to Siemens 1,026,062 shares of Symphonix common stock at a purchase price of $4.87 per share, which increased Siemens' beneficial ownership of Symphonix's then outstanding common stock from approximately 7% to 14%. The number of shares and purchase price for the second closing were determined by dividing $5,000,000 by the average of the closing sales prices of Symphonix common stock as reported by the NASDAQ National Market for the forty (40) trading days immediately preceding the public announcement of the FDA grant of premarket approval of Symphonix's Vibrant P and Vibrant D Soundbridges. As of December 31, 2000, Siemens owed Symphonix $237,404 under the marketing and distribution agreement. The nature and terms of the original and revised marketing and distribution agreements, as well as a related supply agreement, with Siemens are as follows: . Symphonix entered into the marketing and distribution agreement in February 1999 and entered into the supply agreement in June 1999. . Under the marketing and distribution agreement, Symphonix agreed to conduct collaborative marketing efforts, and Siemens has exclusive distribution rights in Europe for existing Symphonix products and any future product introductions. . The marketing and distribution agreement has a term ending on December 1, 2004 and is subject to automatic annual renewals thereafter unless terminated by either party with at least 12 months' notice. If Symphonix does not renew the marketing and distribution agreement, it is obligated to pay Siemens the equivalent of Siemens' revenues with Symphonix products in Europe during the preceding twelve months. . The marketing and distribution agreement may also be terminated at any time if Symphonix is acquired at the option of: (i) Symphonix, with three month's notice and payment to Siemens of (A) $1 million or 200% of Siemens' revenue in Europe with Symphonix products during the 12 months preceding the acquisition if the agreement is terminated before December 1, 2001, (B) $1 million or 150% of Siemens' revenue in Europe with Symphonix products during the 12 months preceding the acquisition if the agreement is terminated between December 1, 2001 and December 1, 2002, or (C) $2 million or 100% of Siemens' revenue in Europe with Symphonix products during the 12 months preceding the acquisition if the agreement is terminated between December 1, 2002 and December 1, 2004; or (ii) Siemens, if Symphonix is acquired by a manufacturer of acoustic hearing aids. . The marketing and distribution agreement may also be terminated at the option of either party in the event of a material breach that is not cured within 30 days of notice of breach, or upon the insolvency or bankruptcy of either party. . Under the terms of the supply agreement, Siemens agreed to supply integrated circuits and software for use in Symphonix's Soundbridge products. . The supply agreement has a term ending on September 30, 2004 and is subject to automatic annual renewals thereafter unless terminated by either party with at least three months' notice. The supply agreement may also be terminated at any time in the event of a material breach that is not cured within 30 days of notice of breach. On November 10, 2000, Symphonix issued an aggregate of 6,397,632 shares of its common stock to investors for a purchase price of approximately $26 million, which represented a per share price of $4.064. Pursuant to the terms of the transaction, each investor may elect to receive, once during the two-year period following the closing of the transaction and at no extra cost, additional shares of Symphonix common stock based upon the difference between the original purchase price paid by the investor and the 33-day average closing price of the common stock as of the date of such price adjustment. The investors in the transaction included three trusts of which B.J. Cassin, one of Symphonix's directors, is a trustee. Symphonix issued and sold an aggregate of 246,061 shares of its common stock to the trusts in the transaction for a purchase price of approximately $999,992. In connection with the issuance of 2,460,630 shares to each of J.P. Morgan Capital and Patricof & Co. Ventures, Symphonix agreed that its board of directors will nominate one individual designated by each of J.P. Morgan and Patricof to its board of directors, and that its board of directors and management will vote all shares for which they hold proxies or otherwise are entitled to vote in favor of these nominees. Martin Friedman, a nominee of J.P. Morgan, and Adele Oliva, a nominee of Patricof & Co., have been serving on the board of directors since the closing of the transaction. Symphonix believes that this transaction was made on terms no less favorable to Symphonix than could have been obtained from unaffiliated third parties. All future transactions, including loans, between Symphonix and its officers, directors, principal stockholders and their affiliates will be approved by a majority of the board of directors, and will continue to be on terms no less favorable to Symphonix than could be obtained from unaffiliated third parties. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of San Jose, State of California, on the 9th day of November 2001. SYMPHONIX DEVICES, INC. /s/ Kirk B. Davis By: _________________________________ Kirk B. Davis Chairman, President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this amended report has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Kirk B. Davis Chairman, President, Chief November 9, 2001 ____________________________________ Executive Officer and Kirk B. Davis Director /s/ Terence J. Griffin Vice President, Finance and November 9, 2001 ____________________________________ Chief Financial Officer Terence J. Griffin /s/ Geoffrey R. Ball* Vice President and CTO November 9, 2001 ____________________________________ Geoffrey R. Ball /s/ B. J. Cassin* Director November 9, 2001 ____________________________________ B. J. Cassin /s/ Martin Friedman* Director November 9, 2001 ____________________________________ Martin Friedman
34
Signature Title Date --------- ----- ---- /s/ Adele Oliva* Director November 9, 2001 ____________________________________ Adele Oliva /s/ Roger Radke* Director November 9, 2001 ____________________________________ Roger Radke * By: /s/ Terence J. Griffin _______________________________ Terence J. Griffin Attorney-in-fact
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