-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N6eJBVTDP2SWTxMmcZzbZDbmNvU1tfVoPCl+cAknD4I0v4O0REUufYxfKR5h3lNS CwvBvGxC/hVMuRmZ1oxQZw== 0001012870-99-000640.txt : 19990226 0001012870-99-000640.hdr.sgml : 19990226 ACCESSION NUMBER: 0001012870-99-000640 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990225 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYMPHONIX DEVICES INC CENTRAL INDEX KEY: 0000930481 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 770376250 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23767 FILM NUMBER: 99550436 BUSINESS ADDRESS: STREET 1: 2331 ZANKER ROAD CITY: SAN JOSE STATE: CA ZIP: 95131-1107 BUSINESS PHONE: 408-232-0710 MAIL ADDRESS: STREET 1: 2331 ZANKER ROAD CITY: SAN JOSE STATE: CA ZIP: 95131-1107 10-K 1 FORM 10-K FOR FISCAL YEAR ENDED 12/31/1998 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K (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, 1998 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 of (I.R.S. Employer incorporation or organization) Identification Number) 2331 ZANKER ROAD, SAN JOSE, CALIFORNIA 95131-1107 (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: Common Stock, $.001 par value (TITLE OF CLASS) ----------------- 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. / / The aggregate market value of voting stock held by non-affiliates of the registrant as of February 12, 1999 was approximately $15,546,168 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 February 12, 1999, registrant had outstanding 12,205,793 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE The information called for by Part III of this Form 10-K is incorporated by reference to the definitive proxy statement for the annual meeting of stockholders of the Company which will be filed no later than 120 days after December 31, 1998. TABLE OF CONTENTS
Page ---- PART I 1 ITEM 1. BUSINESS 2 ITEM 2. PROPERTIES 26 ITEM 3. LEGAL PROCEEDINGS 26 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26 PART II 26 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 26 ITEM 6. SELECTED FINANCIAL DATA 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 29 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS 40 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. 59 PART III 59 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 59 ITEM 11. EXECUTIVE COMPENSATION 61 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 61 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 61 PART IV 61 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 61 SIGNATURES 66
-i- PART I THIS ANNUAL REPORT ON FORM 10-K (THE "ANNUAL REPORT") CONTAINS CERTAIN FORWARD- LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, (THE "EXCHANGE ACT"), INCLUDING STATEMENTS THAT INDICATE WHAT THE COMPANY "BELIEVES", "EXPECTS" AND "ANTICIPATES" OR SIMILAR EXPRESSIONS. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE INFORMATION CONTAINED UNDER THE CAPTIONS "PART I, ITEM 1, BUSINESS," AND "PART II, ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" IN THIS ANNUAL REPORT. THE READER IS CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE OF THIS ANNUAL REPORT. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISION OF THESE FORWARD- LOOKING STATEMENTS. THE READER IS STRONGLY URGED TO READ THE INFORMATION SET FORTH UNDER THE CAPTIONS "PART I, ITEM 1, BUSINESS," AND "PART II, ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" FOR A MORE DETAILED DESCRIPTION OF THESE SIGNIFICANT RISKS AND UNCERTAINTIES. 1 ITEM 1. BUSINESS Overview Symphonix Devices, Inc. ("Symphonix" or the "Company") is a developer of proprietary semi-implantable and implantable products, or soundbridges, for the management of moderate to severe hearing impairment. In 1994, mild to severe hearing impairment affected approximately 26 million people in the United States, or 10% of the population, of whom approximately 17 million people were classified as moderately or severely hearing impaired. The Company believes that its family of Vibrant soundbridges, designed to overcome the inherent limitations of traditional hearing devices, represent a novel approach in the management of hearing impairment. The Company's initial products, the Vibrant P, Vibrant HF and Vibrant D soundbridges, are semi-implantable devices which mechanically drive the three small bones of the middle ear to overcome the user's hearing impairment. The Vibrant P soundbridge is a second generation product that is similar to the first generation Vibrant soundbridge but is designed to permit a greater degree of customization to address the specific needs of a particular user's hearing loss and expand the types of hearing loss that can be managed by the Company's products. The Vibrant HF soundbridge is designed for people with a noise-induced high frequency hearing loss and the Vibrant D soundbridge incorporates digital signal processing. In September 1996, the Company initiated clinical trials of the first generation Vibrant soundbridge in both the United States and Europe. The Company initiated clinical trials of the Vibrant P soundbridge in Europe in July 1997 and in the United States in March 1998. In November 1998, the Company initiated clinical trials of the Vibrant HF soundbridge in both Europe and the United States. The Company has received permission to affix the CE mark in the European Union to the Vibrant P and Vibrant HF soundbridges, and began selling activities for the Vibrant P soundbridge in March 1998. The Company plans to commence selling activities for the Vibrant HF soundbridge in Europe after it has gathered clinical data on a limited number of patients. As of January 31, 1999, approximately 180 patients have been implanted with the Company's soundbridges. The Hearing Impairment Market Background The human ear consists of three regions: the outer ear, the middle ear and the inner ear. The outer ear consists of the external auricle and the ear canal. The ear canal is a passageway through which sound waves reach the middle ear. The outer ear is separated from the middle ear by the tympanic membrane, commonly referred to as the eardrum. The middle ear is a chamber that contains three tiny bones, the malleus, the incus, and the stapes, that together are known as the ossicles. The ossicles form a chain from the tympanic membrane to the inner ear. The inner ear includes the cochlea, which is a fluid-filled structure that contains a large number of delicate sensory hair cells that are connected to the auditory nerve. Sound, which is a wave-like vibration of the air, enters the ear canal and is slightly amplified by the natural resonant characteristics of the ear canal. These sound waves cause vibration of the tympanic 2 membrane and are amplified and transmitted to the fluid filling the inner ear by the motion of the ossicles. The waves created in the fluid pass through the snail-shaped cochlea and stimulate the delicate sensory hair cells. These hair cells generate electrochemical signals that are detected by the auditory nerve and are then subsequently interpreted by the brain as sound. The signals that are interpreted by the brain as sound are distinguished by frequency and intensity. The frequency of sound is perceived as pitch and is measured in cycles per second, or Hertz ("Hz"). The normal human ear perceives sounds in the range of 20 to 18,000 Hz, although most components of human speech are generally in the range of 400 to 4,000 Hz. A more subtle aspect of frequency is that certain letters of the alphabet are spoken at a different frequency than others. For example, certain consonants such as "m," "n" and "g" and all vowels are spoken at relatively low frequencies while other consonants and sounds such as "t," "s," "f" and "sch" are spoken at higher frequencies. Accordingly, at a given volume, certain letters may be more audible than others. The intensity of sound is perceived as loudness and is measured in decibels ("dB"). The lowest level of intensity at which an individual perceives sound is known as the threshold of hearing. The range in decibels from a person's threshold of hearing to the level at which the person perceives sound to be uncomfortably loud is known as the dynamic range. Both the threshold of hearing and the dynamic range vary with the frequency of sound. An individual with normal hearing can comfortably hear sounds ranging in intensity from approximately 30 dB to 100 dB. [ILLUSTRATION OF EAR ANATOMY] Hearing Impairment Hearing impairment can adversely effect a person's quality of life and psychological well-being. Hearing impaired people often withdraw from discussions and other social interactions to avoid frustration and embarrassment from not being able to fully participate in and understand conversations. Difficulty in communicating effectively can lead to negative emotions and attitudes, increased stress levels and reduced self-confidence, sociability and effectiveness in the workplace. In addition, recent studies suggest that hearing impairment may be linked to physiological complications, such as heart disease. Audiologists typically classify the hearing impaired population into four categories: mild, moderate, severe and profound. In 1994, the total hearing impaired population in the United States was approximately 26 million people, of whom approximately 17 million were classified as either moderately or severely hearing impaired. While the exact causes of hearing impairment are varied and unclear, hearing impairment can be characterized according to its physiological source. There are two general categories of hearing impairment, conductive and sensorineural, although sometimes a combination of the two may arise. Conductive hearing impairment results from diseases or disorders that limit the transmission of sound through the outer and/or middle ear. Conductive hearing impairment is often treated surgically with an implanted prosthesis to replace part or all of the ossicles. The Company believes that people with a 3 conductive hearing loss represent a small portion of the total hearing impaired population. Sensorineural hearing impairment occurs in the inner ear and/or neural pathways and, the Company believes, accounts for the vast majority of hearing impairment. In patients with sensorineural hearing impairment, the external and middle ear function normally. The sound vibrations pass undisturbed through the eardrum and ossicles, and fluid waves are created in the cochlea. However, because some or many of the delicate sensory hair cells inside the cochlea have degenerated or been damaged, the inner ear cannot detect the full intensity and quality of the sound. Sensorineural hearing impairment typically occurs as a result of aging or exposure to loud noise over a protracted period of time. As people age, their level of hearing deteriorates and the dynamic range of audible frequencies is compressed, especially at the higher frequencies. While approximately 10% of the United States population is hearing impaired, based on 1994 data, this percentage increases to an average of approximately 25% for individuals over 55 years of age. The Company believes that with the growth and aging of the population, the hearing impaired population will continue to increase throughout the industrialized world. With the increasing exposure to noise in modern society, it has been observed that people may experience noise induced hearing loss from aircraft, automobiles, lawn mowers and high powered stereo equipment as well as military service and machinery within the workplace. Existing Therapies The traditional approaches to management of sensorineural hearing impairment have been the use of hearing aids and cochlear implants. Hearing aids are the most common devices used to manage mild to severe sensorineural hearing impairment. Cochlear implants have been used for the narrow segment of the sensorineural market represented by profound hearing impairment. However, both approaches have significant limitations in addressing their respective markets. Hearing Aids. The following table, based upon 1996 and 1997 articles in the Hearing Journal, illustrates the ownership of traditional hearing aids by the hearing impaired population in 1994. Approximately 18% of the hearing aid owners did not use their device.
========================================================================================================================== Type of Hearing Impaired Hearing Aid Market Hearing Population Owners Penetration of Impairment (millions) (millions) Hearing Aids - -------------------------------------------------------------------------------------------------------------------------- Mild 8.0 0.3 4% Moderate 13.2 2.9 22% Severe 3.9 2.0 51% Profound 1.1 0.4 36% ---- --- --- Total 26.2 5.6 21% ==========================================================================================================================
4 Hearing aids are acoustic drive devices that amplify sound to increase the movement of the tympanic pmembrane and thereby indirectly vibrate the ossicles in an attempt to overcome the decrease in sensitivity of the delicate sensory hair cells inside the cochlea. The first electrically enhanced hearing aid was invented about a hundred years ago and consisted of a microphone, amplifier, battery and speaker. More recently, hearing aid manufacturers have increased the sophistication of sound processing, often using digital technology, to provide features such as programmability and multi-band compression, allowing different degrees of amplification at different frequencies. Hand-held programmers have also been developed to compensate for the inability of hearing aids to adequately process sound in a variety of acoustic environments. In addition, as technology has enabled greater miniaturization, less obtrusive hearing aids have become available. Although there have been continued advancements in hearing aid device technology, for optimal performance all or part of the device must fit tightly in the ear canal, which results in significant drawbacks, including the following: Distorted sound quality. Obstructing the ear canal with either all or part of the hearing aid creates an effect known as occlusion, where outside sounds such as music are overwhelmed by internal sounds such as breathing or talking. Because the ear canal's natural resonance is significantly altered, the resulting sound can be unnatural and highly distorted. Acoustic feedback. Feedback is a high pitched squeal which results when a speaker and microphone are placed in close proximity and the sound from the speaker is loud enough to be picked up by the microphone. The problem of feedback is magnified since the volume of these devices must be turned up to not only compensate for the patient's hearing impairment but to overcome the reduction in sound caused by the blockage of the ear canal by the hearing aid. In addition, as hearing aids have been manufactured in smaller configurations, the problem of feedback has become inherently greater due to the closer proximity of the speaker to the microphone. Poor localization. Occlusion also results in the inability to differentiate the direction of sounds, as well as the inability to adequately differentiate between background noise and more important sounds, such as conversation. Social stigma. Many hearing aid users and potential users perceive a strong social stigma related to wearing a hearing aid. Discomfort. Hearing aids have been manufactured in smaller configurations in an attempt to address the perceived social stigma associated with wearing these devices. Since a tight fitting ear piece is required for optimal performance, the smaller versions of these devices must be placed deeper in the ear canal, which can cause substantial discomfort. Reliability. Hearing aids require frequent maintenance, in part due to their placement in the ear canal, where ear wax can cause problems with the speaker or dampen the sound produced by the hearing aid. Hearing aids generally have to be replaced every three or four years, either because of loss, damage or obsolescence. The need for periodic replacement increases the lifetime cost of wearing a hearing aid. Traditionally, most hearing aid users have paid for these devices directly. 5 As a result of these problems, the benefits perceived by hearing aid users are generally very low. An article in the 1996 Hearing Journal reported that only approximately 53% of all hearing aid users are satisfied. Reflecting this low level of user satisfaction, in 1996 hearing aid manufacturers experienced product return rates ranging from 14% to 26%. Despite the inherent limitations of hearing aids, in 1995, approximately 1.7 million hearing aids were sold in the United States, representing a retail market of approximately $1.2 billion. The United States market represents approximately 38% of the worldwide hearing aid market. The Company estimates that the worldwide retail market for hearing aids exceeded $3.0 billion in 1995. Cochlear Implants. Cochlear implants were originally developed for people who have a profound hearing loss and are essentially deaf. The cochlear implant is inserted into the inner ear in a highly invasive and non-reversible surgery, that destroys residual hearing. The implant electrically stimulates the auditory nerve through an electrode array that provides audible cues to the user which are not interpreted by the brain as normal sound. Users generally require intensive and extended counseling, speech therapy, and training following surgery to be able to properly interpret these cues and achieve any benefit. Best results are achieved with adults whose hearing loss develops later in life or with children. Recently, some cochlear implants have been indicated for severe hearing loss. However, cochlear implants have been controversial both because of strong resistance from portions of the deaf community and because of the irreversible nature of the surgery in which the cochlea is invaded and any residual hearing is destroyed. Accordingly, the Company does not believe that cochlear implants will achieve significant market penetration beyond their initial indication of profound hearing impairment. The Company estimates that, in 1997, the worldwide market for cochlear implants was under $100 million. The Symphonix Solution The Company is developing a family of proprietary semi-implantable and implantable products, or soundbridges, for the management of moderate to severe hearing impairment. The Company's family of Vibrant soundbridges is based on its patented core technology, the Floating Mass Transducer ("FMT"). The FMT is a tiny transducer that is designed to enhance hearing by precisely mimicking and amplifying the movements of the ossicles by converting sound into mechanical vibrations. While conventional approaches have indirectly driven the ossicles by amplifying sound to increase the vibrations of the tympanic membrane, the FMT is attached directly to the ossicles and enhances the natural movement of these vibratory structures. This in turn generates enhanced stimulation of the delicate sensory hair cells in the inner ear. The FMT receives electrical signals from an Audio Processor, which picks up sound from the environment and converts these sounds into electrical signals. The Audio Processor transmits the signals to an implant under the skin. As a result, the ear canal is not obstructed, the natural resonance of the ear is maintained and an amplified, natural sound quality is achieved. The Company's soundbridges are implanted in a two hour surgery that can be performed on an outpatient basis utilizing the techniques which are similar to those employed in routine otologic 6 procedures. Based on preclinical studies, the Company believes that the surgical procedure can be reversed without clinically meaningful damage to the patient's residual hearing. The Company believes that its family of Vibrant soundbridges offers a number of significant benefits, including: Improved sound quality and speech intelligibility. By leaving the ear canal unobstructed and the natural resonance undisturbed, a more natural sound quality is obtained over a broader range of frequencies, and the user's ability to understand speech is expected to be greater. Elimination of acoustic feedback. Since the Vibrant soundbridge mechanically drives the ossicles, it does not generate any acoustic feedback. Improved sound localization. Users are able to comprehend the acoustic sound environment, identify specific sounds and their source and differentiate sounds from background noise. Minimized social stigma. In the semi-implantable versions of the Company's soundbridges, the only external component is located behind the ear and generally hidden by the user's hair. As a result, social stigma is minimized. The totally implantable versions of the Company's soundbridges are being designed with no external components, and aesthetic considerations would be completely eliminated. Improved comfort. No part of the Vibrant soundbridge is inserted in the ear canal, resulting in increased comfort for users of the Vibrant soundbridge. Improved reliability. Since no components of the Vibrant soundbridge are in the ear canal, the reliability problems caused by wax and moisture are eliminated. Strategy The Company's objectives are to establish its family of Vibrant soundbridges as the standard of care worldwide for the management of moderate to severe hearing impairment and to establish Symphonix as the leading company in the hearing management market. The following are key elements of the Company's strategy: Demonstrate improved quality of life. The Company intends to promote the potential benefits of its products to the hearing impaired population in order to expand the market to include not only current dissatisfied hearing aid users but also former users who have abandoned hearing aids due to either previous dissatisfaction or perceived social stigma. The Company believes that achieving real patient benefit in the form of improved quality of life will be an important factor in differentiating its products from the traditional approaches to hearing management. Develop surgeon and audiologist endorsement of the Company's family of soundbridges. The Company intends to position its family of Vibrant soundbridges as technologically advanced implants that address an unmet patient need and add to the products and services that surgeons can offer. The Company's strategy is to market its soundbridges initially to those specialists in otology who are currently most active in ear surgery and, thereafter, to the general population of ENT 7 surgeons. Because the surgical procedure for implementing the Vibrant soundbridge utilizes many of the same techniques employed by surgeons trained and experienced in cochlear implant surgery, the Company believes that surgeon training will not be a significant impediment to market acceptance. An additional element of the Company's strategy is to build awareness among audiologists of the Company's soundbridges to encourage the referral of patients to surgeons. Leverage the Company's patented core technology. The Company intends to leverage its patented core FMT technology to develop new soundbridges and enhancements to its current technology. The Company intends to continue to dedicate significant resources to research and development to further develop its technology base and to expand the market it addresses through development of a family of alternate configurations of soundbridges. The Company has developed the Vibrant P soundbridge to permit a degree of customization to address the specific needs of a particular patient, and is developing the Vibrant D soundbridge to permit an even greater degree of customization along with the additional benefit of digital signal processing, and the Vibrant HF soundbridge to provide a benefit suited to those individuals who have a noise- induced hearing loss at high frequencies but relatively normal hearing at lower frequencies. Protect and enhance the Company's proprietary position. The Company intends to continue to aggressively pursue proprietary protection for its technologies and products. The Company has 7 patents issued in the United States, one patent issued internationally and 31 patents pending both in the United States and internationally covering a number of fundamental aspects of the FMT and related technologies. Products Under Development Symphonix is developing proprietary semi-implantable and implantable soundbridges, utilizing the Company's core FMT technology to manage hearing impairment. The Company believes that the Vibrant P, Vibrant HF and Vibrant D soundbridges will enable the Company to address a significant portion of the moderate to severe hearing impairment market currently not satisfied with traditional hearing aid devices. In addition, the Company is developing the Vibrant TI soundbridge which is being designed to be totally implantable with no external components. The Vibrant P, Vibrant HF and Vibrant D soundbridges utilize the same implant, with the differences in function being provided by modifications to the external Audio Processor, its software and programming unit. Utilization of a common implant will allow a user to upgrade the Audio Processor if a user's hearing changes over time. The following table sets forth the soundbridges under development by the Company and their development status: 8
================================================================================================================ SOUNDBRIDGE DESCRIPTION HEARING LOSS STATUS(1) ADDRESSED ================================================================================================================ Vibrant P Second generation semi- Moderate to Pivotal trial enrollment implantable hearing device with severe completed in the United States; programmable dual-band analog product sales in Europe signal processing. - ------------------------------------------------------------------------------------------------------------------- Vibrant HF Second generation semi-implantable Noise- Pivotal trial approved in the hearing device designed to address induced high United States and enrollment noise induced high frequency frequency under way; gathering clinical hearing loss by using modified loss data in a limited number of signal processing. patients in Europe - ------------------------------------------------------------------------------------------------------------------- Vibrant D Third generation semi-implantable Moderate to IDE supplement expected to be hearing device, with programmable severe submitted in 1999; 3-band digital signal processing. - ------------------------------------------------------------------------------------------------------------------- Vibrant XP Second generation semi-implantable Severe to Early stage of development hearing device designed to address profound more severe hearing impairment by using modified signal processing and an externally worn battery pack, coupled with a modified implant. - ------------------------------------------------------------------------------------------------------------------- Vibrant TI Designed to be totally implantable Moderate to In development with no external components. severe ===================================================================================================================
(1) Regulatory filing dates reflect the Company's plans and are subject to delay or cancellation depending upon contingencies that may arise in the development process. The Company's Vibrant P, Vibrant HF and Vibrant D soundbridges, have both external and implantable components. The external Audio Processor consists of (i) a microphone that picks up sound from the environment, (ii) sound processing circuitry that converts the sound to an electronic signal and modulates the signal to reduce potential noise interference from broad band electromagnetic fields and (iii) a small 1.5 volt battery that powers the device. The Audio Processor is placed on the skull behind the ear and is held in place by magnetic attraction to an implanted receiver, the VORP (Vibrating Ossicular Prosthesis). The Audio Processor is small enough to be concealed by the user's hair. [ILLUSTRATION OF VIBRANT SOUNDBRIDGE IN PLACE] The VORP converts the electronic signal to a mechanical vibration of the ossicles in the middle ear. The VORP consists of (i) a receiver unit that receives the electromagnetic signal through the skin from the external Audio Processor and breaks down the electrical signal to the appropriate drive signal for the FMT, (ii) a conductor link that connects the implanted receiver unit to the FMT and (iii) the FMT itself, which is attached to the incus using a titanium clip. All of these components are insulated from body chemistry using well established implantable device materials used in pacemaker and implantable defibrillator systems. 9 The FMT is a tiny transducer, smaller than a grain of rice, that comprises a floating magnet contained within a titanium housing. A coil surrounding the housing generates a small electromagnetic field based on a signal received from the VORP's receiver unit. The electromagnetic interaction of the magnet and the coil creates a mechanical vibration of the entire FMT. This vibration enhances the natural movement of the ossicles, which in turn generates enhanced stimulation of the delicate sensory hair cells in the inner ear. A critical element of the proprietary FMT design is the proximity of the magnet to the electromagnetic field that causes the magnet to vibrate. By keeping the magnet and the coil close together, the FMT maximizes electromagnetic coupling while minimizing power consumption. [LOGO OF PRODUCT ILLUSTRATION] The surgical procedure for the implantation of the Vibrant soundbridges involves techniques which are similar to those employed in other common otologic procedures. The internal receiver unit is implanted below the skin and muscle behind the ear. The conductor link connecting the receiver unit to the FMT is placed through the excavated mastoid bone. These steps are similar to those required for the surgical placement of a cochlear implant receiver. In the middle ear, the FMT is attached to the ossicles in a manner similar to the way otologists have traditionally attached ossicular prostheses for management of conductive hearing loss. Because the surgery involves surgical techniques that are familiar to ear surgeons, the Company believes that surgeon training will not be a significant impediment to market acceptance. The procedure may be performed on an outpatient basis, and generally can be performed in about two hours. Approximately eight weeks following the surgery, the Audio Processor is fitted by an audiologist with the appropriate sound processing settings. The Company's approved Investigational Device Exemption ("IDE") only permits implantation in one ear. This will generally be the ear with the poorest unaided functional hearing. Based on preclinical studies, the Company believes that the surgical procedure can be reversed without damage to the patient's residual hearing. Vibrant P soundbridge The Vibrant P soundbridge is designed to permit, through programming, a degree of customization to address the specific needs of a particular user's hearing loss, thereby permitting a broad range of types of hearing loss to be managed. At the time of fitting, the Audio Processor is connected to a hand-held programming unit which allows the audiologist to adjust separately the low and high frequencies. This permits customization to the patient's needs in either the high or low frequency band. The Company received approval to affix the CE mark to the Vibrant P soundbridge in March 1998 and commenced selling activities in the European Union at that time. The Vibrant P soundbridge has superceded the Company's first generation Vibrant soundbridge. In the United States, the Company has completed enrollment in the pivotal phase of a U.S. Food and Administration ("FDA") approved multi-center study. During the year ended December 31, 1998, the Company was selected by the FDA to participate in the new, streamlined Pre- Market Approval ("PMA") process called the modular PMA. Under the modular PMA process, modules reflecting the content requirements of a traditional PMA are submitted as they are completed, allowing them to be reviewed and approved in a sequential manner. To date, the Company has submitted four modules of its PMA for the Vibrant P soundbridge. There can be no assurance that the Company's participation in the modular PMA program will lead to the 10 timely approval of the Vibrant P soundbridge, if at all. Vibrant HF soundbridge The Vibrant HF soundbridge is being developed to provide a benefit for those individuals who have a hearing loss at high frequencies but relatively normal hearing at lower frequencies. Hearing aids usually are limited in effectiveness at higher frequencies due to acoustic feedback and internal speaker response. With the increasing exposure to noise in modern society, it has been observed that people may experience noise-induced hearing loss from aircraft, automobiles, lawn mowers and high powered stereo equipment as well as military service and machinery within the workplace. The Vibrant HF soundbridge will be configured through selective signal processing. The Company received permission to affix the CE mark to the Vibrant HF soundbridge in July 1998. The Company is gathering clinical data on the Vibrant HF soundbridge on a limited number of patients in Europe prior to initiating full-scale commercial selling activities. In the United States, the Company has received approval of an IDE supplement to include the Vibrant HF soundbridge in its existing pivotal trial of the Vibrant P soundbridge. There can be no assurance, however, that the Company will not be required to submit a separate PMA for the Vibrant HF soundbridge. Vibrant D soundbridge The Vibrant D soundbridge under development is similar to the Vibrant P soundbridge, but is designed to permit an even greater degree of customization to address the specific needs of a particular user's hearing loss, through digital signal processing. Fully automatic and independent sound processing in three separate frequency bands is provided. At the time of fitting, the Audio Processor is connected to a programming unit which allows the audiologist to adjust separately the low, mid and high frequencies. This sophisticated system will be capable of analyzing sound and automatically adjusting the soundbridge's response. The Company intends to seek approval of an IDE supplement for the Vibrant D soundbridge during 1999 and also to initiate a limited clinical trial in 1999. There can be no assurance, however, that the Company will not be required to submit a separate IDE and PMA for the Vibrant D soundbridge. Vibrant XP soundbridge The Vibrant XP soundbridge is intended to provide a benefit for those individuals who have a severe to profound hearing loss with a high level of speech recognition. Currently, there are only limited treatment options for such individuals. The Vibrant XP soundbridge will be configured to provide modified signal processing and higher output from the FMT, thereby providing additional benefit for certain people with a severe to profound hearing impairment. Generating this higher output will require an external body-worn battery pack, similar to those used for cochlear implants. However, unlike cochlear implants, the Vibrant XP soundbridge will not require penetration of the inner ear with its attendant damage to residual hearing. 11 The Company is evaluating alternative technical approaches and may conduct a feasibility study in 1999 on a limited number of patients in Europe to assess the viability of this product concept. Vibrant TI soundbridge The Company is developing versions of the Vibrant soundbridge for the management of moderate to severe hearing impairment that are totally implantable with no external components. The essential function of the FMT for these products will be the same as in the semi-implantable products. However, all the functions currently performed by the external Audio Processor are being designed to be performed by implanted components. The Company believes that the Vibrant TI soundbridge, if successfully developed, will be applicable especially for people who are particularly physically active or who are concerned about aesthetics. Three critical elements of producing the Vibrant TI soundbridge are the development of an implantable microphone that can adequately pick up sound from the external environment, the development of a transcutaneously rechargeable battery to power the device and the design of the signal processing chip set. The microphone is being developed internally by the Company and the battery is being developed under a cooperative development project with a specialized battery manufacturer. Additionally, the Company has initiated the development, using third party contractors, of the electronic chip set that will provide the signal processing electronics for the Vibrant TI soundbridge. However, there can be no assurance that such components will be successfully developed in a timely manner, if at all. Although the Company has commenced selling the Vibrant P soundbridge in the European Union, all of the Company's other products are in development, and accordingly, significant revenues from product sales will not be realized for at least several years, if ever. There can be no assurance that any of the Company's product development efforts will be successfully completed, that any of the Company's products will be proven to be safe and effective, that regulatory approvals will be obtained or labeling claims will be as broad as sought, that the Company's products will be capable of being produced in commercial quantities with acceptable yields at reasonable costs, or that any products, if introduced, will achieve market acceptance. Clinical Trial Activities United States On February 23, 1996, the Company received approval of an IDE for the Vibrant soundbridge from the FDA. The Vibrant was the Company's first generation semi- implantable hearing device. The Company completed a Phase I trial under the IDE and submitted the interim report to the FDA. This trial was limited to five subjects, including Geoffrey R. Ball, a founder of the Company, at two investigational sites and was intended to test the safety and provide preliminary evidence of efficacy of the device and the surgical procedures used to implant the device. Due to the limited number of subjects evaluated, no statistically valid conclusions could be made from the results reported to the FDA. 12 In the Phase I study, the Company observed the following performance characteristics: increased functional gain at higher frequencies (i.e., >2000 Hz); elimination of occlusion effect; elimination of acoustic feedback; elimination of placement loss; and reduction of maintenance issues. A self- assessment questionnaire targeted seven communicative issues (i.e., reverberation, familiar talker, reduced cues, background noise, aversion to sounds, ease of communication, and distortion of sounds). Subject responses indicated a significant improvement in six of the seven categories with the Vibrant soundbridge when compared to their current acoustic hearing aid. In November 1997, the Company filed an IDE supplement summarizing the Phase I results, finalizing the study protocol and proposed labeling claims, providing technical information regarding the Vibrant P soundbridge, the Company's second generation semi-implantable device, and requested permission to proceed to the pivotal study. In December 1997, the FDA approved the multi-center pivotal study in 55 subjects at up to 12 sites with the Vibrant P soundbridge. In November 1998 the Company received FDA approval of an IDE supplement to include the Vibrant HF soundbridge in this study. The Company has enrolled 55 subjects in the study. However, because the IDE supplement allowing the inclusion of the Vibrant HF soundbridge was approved when enrollment was almost complete, only one of the 55 subjects is to be fitted with a Vibrant HF soundbridge. To facilitate enrollment of a greater number of subjects who receive the Vibrant HF soundbridge, on December 22, 1998, the Company requested FDA approval of an IDE supplement to allow an additional 15 subjects. This IDE supplement was approved by the FDA on January 19, 1999 and the Company expects to enroll these additional subjects in 1999. Of the 55 subjects enrolled in the pivotal study, 37 have had the Audio Processor fitted and initial results evaluated and 12 subjects have completed the five-month protocol. The study focuses on five primary end-points: absence of damage to residual hearing; functional gain; elimination of occlusion; reduction of acoustic feedback; and improved benefit in relation to the hearing aid as measured by a standard self-assessment questionnaire. The data on the limited number of subjects (twelve) evaluated so far appear to be consistent with the intended claims for the Vibrant P soundbridge. As of January 31, 1999, 60 subjects have been implanted with the Vibrant P and Vibrant HF soundbridges in the Company's United States clinical trials. Europe In March 1998, the Company completed a multi-center EN 540 clinical trial in Europe at seven institutions. Clinical sites were located in Germany, Italy, the Netherlands, the United Kingdom, Switzerland and France. The EN 540 protocol investigated the safety and performance of the Vibrant soundbridge and the Vibrant P soundbridge. In the EN 540 trial, 47 subjects were implanted with the Company's soundbridges, 19 with the first generation Vibrant soundbridge and 28 with the second generation Vibrant P soundbridge. With the Vibrant soundbridge, performance was only evaluated for functional gain and the results were comparable to those achieved by the subjects in the United States trial. With the Vibrant P soundbridge, the subjects demonstrated functional gains as high as 50 dB at 1000 Hz, 55 dB at 1500 Hz, 60 dB at 2000 Hz, 40 dB at 3000 Hz, 50 dB at 4000 Hz, 40 dB at 6000 Hz, 13 and 35 dB at 8000 Hz. These functional gain values reported were at "user settings" and did not necessarily reflect the maximum functional gains attainable with the device. The results of the EN540 trial were considered adequate by the Company's Notified Body for purposes of affixing the CE mark to the Vibrant P soundbridge. Subsequent to the completion of the EN540 trial, the Company received authorization to affix the CE mark to the Vibrant P and HF soundbridges. The Company has begun selling the Vibrant P soundbridge in Europe, and the Vibrant HF soundbridge is currently the subject of limited clinical testing. As of January 31, 1999, approximately 120 patients have been implanted with the Vibrant P and Vibrant HF soundbridges in Europe including patients implanted in the Company's EN540 trial as well as patients implanted subsequent to the completion of the EN540 trial. There can be no assurance that the Company's clinical trial efforts will progress as expected, not be delayed or that such efforts will lead to the successful development of any product. No assurance can be given that any of the Company's proposed clinical trials will continue to be allowed by the FDA or other regulatory agencies or that clinical trials will commence as planned. Any delays in the Company's clinical trials would have a material adverse effect on the Company's business, financial condition and results of operations. Success in preclinical studies or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. Further, there can be no assurance that if such testing of products under development is completed, any such devices will be accepted for formal review by the FDA or approved by the FDA for marketing in the United States. Research and Development The Company had 26 employees engaged in research and development, including regulatory and clinical affairs, as of December 31, 1998. The Company's research and development has focused on developing its patented core FMT technology, developing its family of Vibrant soundbridges and conducting appropriate preclinical and clinical testing. The Company expended approximately $8.3 million and $6.4 million for the years ended December 31, 1998 and 1997, respectively, on research and development. The Company anticipates that it will continue to expend substantial resources on completion of the development and clinical testing of the Vibrant HF and Vibrant D soundbridges, supporting manufacturing scale-up and the development and clinical testing of the Vibrant TI soundbridge. In addition, the Company may devote resources to the development of the Vibrant XP soundbridge and the development of products for the treatment of conductive hearing loss. Product development involves a high degree of risk and there can be no assurance that the Company's product development efforts will result in any commercially successful products. Manufacturing The Company currently manufactures its products in limited quantities for laboratory testing, for its clinical trials and for initial commercial sales. The manufacture of the Company's soundbridges is a complex operation involving a number of separate processes, components and assemblies. Each device is assembled and individually tested by the Company. The manufacturing process consists primarily of 14 assembly of internally manufactured and purchased components and subassemblies, and certain processes are performed in an environmentally controlled area. After completion of the manufacturing and testing processes, implantable devices are sterilized by a sub-contracted supplier. The Company has no experience manufacturing its products in the volumes or with the yields that will be necessary for the Company to achieve significant commercial sales, and there can be no assurance that the Company can establish high volume manufacturing capacity or, if established, that the Company will be able to manufacture its products in high volumes with commercially acceptable yields. The Company will need to expend significant capital resources and develop manufacturing expertise to establish commercial-scale manufacturing capabilities. Furthermore, prior to approval of a PMA, the Company's facilities, procedures and practices will be subject to a pre-approval inspection by the FDA. The Company's inability to successfully manufacture or commercialize its soundbridges in a timely matter could have a material adverse effect on the Company's business, financial condition and results of operations. Raw materials, components and subassemblies for the Company's soundbridges are purchased from various qualified suppliers and are subject to stringent quality specifications and inspections. The Company conducts quality audits of its key suppliers, several of whom are experienced in the supply of components to manufacturers of implantable medical devices, such as pacemakers, defibrillators and drug delivery pumps. A number of components and subassemblies, such as silicone, signal processing electronics and implant packaging are provided by single source suppliers. Certain components of the Vibrant P, Vibrant HF and Vibrant D soundbridges, the analog and digital signal processing microcircuits, are provided by sole source suppliers. None of the Company's suppliers is contractually obligated to continue to supply the Company nor is the Company contractually obligated to buy from a particular supplier. For certain of these components and subassemblies, there are relatively few alternative sources of supply, and establishing additional or replacement suppliers for such components and subassemblies could not be accomplished quickly. In addition, if the Company wishes to significantly modify its manufacturing processes or change the supplier of a critical component, additional approvals will be required from the FDA before the change can be implemented. 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 the Company's decision to change suppliers could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's manufacturing facilities are subject to periodic inspection by regulatory authorities, and its operations must undergo Quality System ("QS") regulation compliance inspections conducted by the FDA and corresponding state agencies. Additionally, prior to approval of a PMA, the Company's and its third- party manufacturers' facilities, procedures and practices will be subject to pre-approval QS regulation inspections. The Company has been inspected by the Food and Drug Branch of the California Department of Health Services ("CDHS") and a Device Manufacturing License has been issued to the Company. The Company will be required to comply with the QS regulation requirements in order to produce products for sale in the United States and with applicable quality system standards and directives in order to produce products for sale in the EU. Any failure of the Company to comply with the QS regulation or applicable standards and directives may result in the Company being required to take corrective actions, such as modification of its policies and procedures. Pending such corrective actions, the Company could be unable to manufacture or ship any products, which could have a material 15 adverse effect on the Company's business, financial condition and results of operations. Sales, Marketing and Training The primary market for the Company's products in the United States is well defined and highly concentrated. Of the approximately 8,000 ENT surgeons in the United States, approximately 400 are specialists in otology. The Company believes that it can address this market with a direct sales force. The Company's strategy is to market its products initially to those specialists in otology who are currently most active in ear surgery, and, subsequently, to the general population of ENT surgeons. Because the surgical procedure for implementing the Company's soundbridges utilizes many of the same techniques employed by surgeons trained and experienced in cochlear implant surgery, the Company believes that surgeon training will not be a significant impediment to market acceptance. The Company intends to position its family of Vibrant soundbridges as technologically advanced implants that address an unmet patient need and add to the products and services that surgeons can offer. Patients who have traditionally been candidates for a hearing aid often are first seen by an ENT surgeon, prior to being referred to a hearing device dealer or dispensing audiologist. Accordingly, endorsement by the surgical community will be an important goal of the Company's marketing programs. The Company will also seek to develop a high degree of awareness by and endorsement from audiologists. The Company intends to promote the benefits of its products to consumers in order to expand usage to include not only those who are currently dissatisfied with hearing aids, but also those who have abandoned hearing aids due to either dissatisfaction or perceived social stigma. The Company has established a European sales and marketing organization which, as of December 31, 1998, is comprised of three marketing management and support personnel located in Basel, Switzerland and three sales managers performing direct sales activities in Germany, France, the United Kingdom, Switzerland and Austria. In addition, the Company has hired a sales manager for South America. The Company's initial selling efforts in Europe have been targeted primarily at those ENT surgeons specializing in otology. While the Company intends to continue to market its products to these specialists, it also plans to focus on the referring physicians, audiologists and the general population of ENT surgeons in an attempt to increase the number of patients that are referred to specialist ear surgeons. The Company is also attempting to gather clinical and other data which it believes will be helpful in obtaining reasonable reimbursement levels for its products. The Company also has distributors in Sweden, Denmark, Italy, Spain, Portugal, Belgium, The Netherlands, Luxembourg, and certain countries in the middle east and North Africa. The Company has also established a distributor for certain countries in South America. In other international markets, including Japan, the Company will seek to establish a network of distributors. There can be no assurance that the Company will be able to build an adequate direct sales force or marketing organization in any country, that establishing a direct sales force or marketing organization will be cost-effective or that the Company's sales and marketing efforts will be successful. In addition, the Company has entered into distribution agreements with only a limited number of international distributors. There can be no assurance that the Company will be able to enter into similar agreements 16 with other qualified distributors on a timely basis on terms acceptable to the Company, or at all, or that such distributors will devote adequate resources to selling the Company's products. Failure to establish an adequate direct sales force domestically and in select international markets, and to enter into successful distribution relationships, could have a material adverse effect on the Company's business, financial condition and results of operations. Competition The medical device industry is subject to intense competition in the United States and abroad. The Company believes its products will compete primarily with the traditional approaches to managing hearing impairment, principally hearing aids. Principal manufacturers of acoustic hearing aids include Siemens Hearing Instruments, Inc., Philips Medical Systems North America Co., Starkey Laboratories Inc., Beltone Electronics Corp., Dahlberg Inc., ReSound Corp., Oticon, Inc., Widex Hearing Aid Co., Inc. and Phonak Inc. There can be no assurance that the Company's soundbridges will be able to successfully compete with established hearing aid products. Although, to the Company's knowledge, none of these acoustic hearing aid manufacturers are currently developing direct drive devices, there can be no assurance that these potential competitors will not succeed in developing technologies and products in the future that are more effective, less expensive than those being developed by the Company or that do not require surgery. The Company is aware of several university research groups and development-stage companies that have active research or development programs related to direct drive sensorineural hearing devices. Research of this type has been conducted at various sites for over 20 years. In addition, some large medical device companies, some of which are currently marketing implantable medical devices, may develop programs in hearing management. Certain of these companies have substantially greater financial, technical, manufacturing, marketing and other resources than the Company. In addition, there can be no assurance that certain of the Company's competitors will not develop technologies and products that may be more effective in managing hearing impairment than the Company's products or that render the Company's products obsolete. The Company believes that the primary competitive factors in the hearing management market will be the quality of the hearing enhancement, safety, whether surgery is required, reliability, endorsement by the surgeon and audiology communities, patient comfort, cosmetic result and price. The Company believes that it will be competitive with respect to these factors. Nonetheless, because the Company's products are either under development or in the very early stages of commercialization, the relative competitive position of the Company in the future is difficult to predict. The medical device industry is characterized by rapid and significant technological change. Accordingly, the Company's success will depend in part on its ability to respond quickly to medical and technological change and user preference through the development and introduction of new products that are of high quality and that address patient and surgeon requirements. Patents and Proprietary Technology In the United States, the Company holds 7 issued patents and 14 pending patent applications, of which 3 have been allowed but not yet issued. Additionally, the Company has 1 issued and 17 pending 17 foreign patent applications. These patents and patent applications generally cover the invention and application of the FMT as well as the specific application of the FMT and other concepts in the field of hearing impairment. In addition, the Company has licensed, on a royalty-free basis, a United States patent covering the magnetic attachment of an external audio processor to an implanted receiver. The Company's success will depend in part on its ability to obtain patent protection for its products and processes, to preserve its trade secrets, and to operate without infringing or violating the proprietary rights of others. The patent positions and trade secret provisions of medical device companies, including those of the Company, are uncertain and involve complex and evolving legal and factual questions. The coverage sought in a patent application either can be denied or significantly reduced before or after the patent is issued. Consequently, there can be no assurance that any patents from pending applications or from any future patent application will be issued, that the scope of the patent protection will exclude competitors or provide competitive advantages to the Company, that any of the Company's patents will be held valid if subsequently challenged or that others will not claim rights in or ownership of the patents and other proprietary rights held by the Company. Since patent applications are secret until patents are issued in the United States or corresponding applications are published in other countries, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, the Company cannot be certain that it was the first to file patent applications for such inventions. In addition, there can be no assurance that competitors, many of which have substantial resources, will not seek to apply for and obtain patents that will prevent, limit or interfere with he Company's ability to make, use or sell its products either in the United States or in international markets. Although the Company has conducted searches of patents issued to other companies, research or academic institutions or others, there can be no assurance that such patents do not exist, have not been filed or could not be filed or issued, which contain claims relating to the Company's technology, products or processes. Patents issued and patent applications filed in the United States or internationally relating to medical devices are numerous and there can be no assurance that current and potential competitors and other third parties have not filed or in the future will not file applications for, or have not received or in the future will not receive, patents or obtain additional proprietary rights relating to products or processes used or proposed to be used by the Company. In addition, patent applications in foreign countries are maintained in secrecy for a period after filing. Publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries and the filing of related patent applications. There may be pending applications, which if issued with claims in their present form, might provide proprietary rights to third parties relating to products or processes used or proposed to be used by the Company. The Company may be required to obtain licenses to patents or proprietary rights of others. Further, the laws of certain foreign countries do not protect the Company's 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 the Company, may also be necessary to enforce patent or other intellectual property rights of the Company or to determine the scope and validity of other parties' proprietary rights. There can be no assurance that the Company will have the financial resources to defend its patents from infringement or claims of invalidity. The Company also relies upon trade secrets and other unpatented proprietary technology, and no 18 assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to or disclose the Company's proprietary technology or that the Company can meaningfully protect its rights in such unpatented proprietary technology. The Company's policy is to require each of its employees, consultants, investigators and advisors to execute a confidentiality agreement upon the commencement of an employment or consulting relationship with the Company. These agreements generally provide that all inventions conceived by the individual during the term of the relationship shall be the exclusive property of the Company and shall be kept confidential and not be disclosed to third parties except in specified circumstances. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's proprietary information in the event of unauthorized use or disclosure of such information. Recently Public Law 104-208 was signed into law in the United States and 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, who 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 the Company's ability to enforce any of its proprietary methods or procedures deemed to be surgical or medical procedures on a body. In certain other countries outside 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 FMT or to narrower aspects of the FMT. The medical device industry in general has been characterized by substantial litigation. Litigation regarding patent and other intellectual property rights, whether with or without merit, could be time-consuming and expensive to respond to and could distract the Company's technical and management personnel. The Company may become involved in litigation to defend against claims of infringement by the Company, to enforce patents issued to the Company or to protect trade secrets of the Company. If any relevant claims of third-party patents are held as infringed and not invalid in any litigation or administrative proceeding, the Company 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 its products or processes to avoid infringement. In addition, in the event of any possible infringement, there can be no assurance that the Company would be successful in any attempt to redesign its products or processes to avoid such infringement or in obtaining licenses on terms acceptable to the Company, if at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure by the Company to redesign its products or processes or to obtain necessary licenses could prevent the Company from manufacturing and selling its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company has not been involved in any litigation to date, in the future, costly and time-consuming litigation brought by the Company may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company, or to determine the enforceability, scope and validity of the proprietary rights of others. 19 Government Regulation The Company's medical products, such as the Vibrant soundbridge, are regulated as medical devices. Accordingly, clinical trials, product development, labeling, manufacturing processes and promotional activities are subject to extensive review and rigorous regulation by government agencies in most countries in which the Company will seek to commercialize its products. United States In the United States, the Company's products are subject to applicable provisions of the United States Federal Food, Drug, and Cosmetic Act ("FDC Act"), and other federal statutes and regulations governing, among other things, the design, manufacture, testing, safety, labeling, storage, record keeping, reporting, approval, advertising and promotion of medical devices. Noncompliance with applicable requirements can result in warning letters, fines, recalls or seizure of products, civil penalties, injunctions, total or partial suspension of production, withdrawal of approval or refusal to approve new marketing applications and criminal prosecution. Changes in existing requirements or adoption of new requirements could have a material adverse effect on the Company's business, financial condition and results of operations. Pursuant to the FDC Act, the FDA regulates the design, manufacture, distribution, preclinical and clinical study and approval of medical devices in the United States. Medical devices are classified in one of three classes (Class I, Class II or Class III) on the basis of the controls necessary to reasonably assure their safety and effectiveness. Safety and effectiveness is considered to be reasonably assured for Class I devices through general controls (e.g., labeling, premarket notification and adherence to current QS regulations) and for Class II devices through the use of additional special controls (e.g., performance standards, post-market surveillance, patient registries and FDA guidelines). Generally, Class III devices are those which must receive premarket approval by the FDA to reasonably assure their safety and effectiveness (e.g., life- sustaining, life-supporting and implantable devices, or new devices which have been found not to be substantially equivalent to legally marketed devices, or devices whose safety and effectiveness cannot be reasonably assured through general controls, even if supplemented by additional special controls). Active implantable devices, such as the Company's implantable hearing devices, are considered Class III devices. Before a new device can be introduced to the market, the manufacturer generally must obtain FDA clearance through a 510(k) Premarket Notification or FDA approval through a PMA application. While the Company has no products for which it expects to seek 510(k) clearance, it may file 510(k) submissions with respect to future products. A 510(k) clearance will generally only be granted if the information submitted to the FDA establishes that the device is "substantially equivalent" to a legally marketed predicate medical device. Frequently, the FDA will require clinical data in support of a 510(k) submission, and the 510(k) process can become time-consuming and expensive. Significant modifications of the labeling, manufacturing and design of any product that has been cleared through the 510(k) process will require a new 510(k) Premarket Notification, if those modifications could significantly affect the safety, effectiveness or intended use of the device. 20 A PMA must be submitted if the device cannot be cleared through the 510(k) process. A PMA must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trials, manufacturing, and labeling to demonstrate the safety and effectiveness of the device. The Company believes that all versions of the Vibrant soundbridge currently under development are Class III devices and will require a PMA, as will future configurations of implantable hearing devices. The FDA has recently implemented a new streamlined PMA process called the modular PMA. Under the modular PMA process, modules reflecting the content requirements of a traditional PMA can be submitted as they are completed, allowing them to be reviewed and approved in a sequential manner. Before the Company's products can be commercialized in the United States, the Company must submit, in a PMA, extensive data on preclinical studies and clinical trials, device design, manufacturing, labeling, promotion and advertising, as well as other aspects of the product. In addition, the Company must submit clinical data gathered in trials conducted under an IDE demonstrating to the satisfaction of the FDA that the product is safe and effective for its labeling claims, and obtain marketing approval from the FDA. Phase I of the IDE study has been completed. Phase I was limited to two sites and five subjects and was intended to test the safety and provide preliminary evidence of the effectiveness of the device and the surgical procedure used to implant the device. In November 1997, the Company filed an IDE supplement summarizing the Phase I results, finalizing the study protocol and proposed labeling claims, providing technical information regarding the Vibrant P soundbridge, and requested permission to proceed to the pivotal study. In December 1997, the FDA approved the multi-center pivotal study in 55 subjects at up to 12 sites with the second generation Vibrant P soundbridge. In November 1998 the Company received FDA approval of an IDE supplement to include the Vibrant HF soundbridge in this study. The Company has enrolled 55 subjects in the study. However, because the IDE supplement allowing the inclusion of the Vibrant HF soundbridge was approved when enrollment was almost complete only one of the 55 subjects is to be fitted with a Vibrant HF soundbridge. To facilitate enrollment of a greater number of subjects who receive the Vibrant HF soundbridge, on December 22, 1998, the Company requested FDA approval of an IDE supplement to allow an additional 15 subjects. This IDE supplement was approved by the FDA on January 19, 1999 and the Company expects to enroll these additional subjects in 1999. There can be no assurance that the Company's clinical trial effort will progress as expected, will not be delayed or that such effort will lead to the successful development of any product. No assurance can be given that any of the Company's clinical trials will continue to be allowed by the FDA or other regulatory agencies or that clinical trials will commence as planned. Any delays in the Company's clinical trials would have a material adverse effect on the Company's business, financial condition and results of operations. Success in preclinical studies or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. Further, there can be no assurance that if such testing of products under development is completed, any such devices will be accepted for formal review by the FDA, or approved by the FDA for marketing in the United States. After a PMA is filed, the FDA begins its review of the submitted information, which generally takes between one and two years, but may take significantly longer. During this review period, the FDA may 21 request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA will be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with QS regulation requirements. There can be no assurance that the Company will be able to meet the FDA's requirements or that any necessary approval will be granted in a reasonable time frame, or at all. New PMAs or PMA supplements are required for significant modifications to the manufacture, labeling and design of a device that is approved through the PMA process. Supplements to a PMA often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel. The PMA process can be expensive, uncertain and can frequently require several years. Even when a PMA is approved, the FDA may impose restrictions on the indications for which the device can be marketed. There can be no assurance that the Company will be able to obtain necessary approvals on a timely basis, or at all, and delays in obtaining or failure to obtain such approvals, the loss of previously obtained approvals, or failure to comply with existing or future regulatory requirements could have an adverse effect on the Company's business, financial condition and results of operations. Subsequent to the receipt of an FDA approval, the Company will continue to be regulated by the FDA with regard to the reporting of adverse events related to its products, and ongoing compliance with QS regulation. The Company's manufacturing facility must be registered with the FDA and the CDHS and will be subject to periodic inspections by the FDA and by the CDHS. A Device Manufacturing License has been issued by the State of California and this license must be renewed annually for the Company to continue manufacture of medical devices in California. Europe The primary regulatory environment in Europe is that of the EU which consists of 15 countries encompassing most of the major countries in Europe. The EU has adopted numerous directives and standards regulating the design, manufacture, clinical trial, labeling, and adverse event reporting for medical devices. The principal directives prescribing the laws and regulations pertaining to medical devices in the EU are the Medical Devices Directive 93/42/EEC ("MDD") and the Active Implantable Medical Devices Directive 90/385/EEC ("AIMDD"). In the EU, the Company's soundbridges will be regulated as active implantables and therefore be governed by the AIMDD. For products, such as those of the Company, that have not previously been commercialized in the EU, CE marking is required prior to initiation of sales in the EU. Certain other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the EU with respect to medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear CE conformity marking, indicating that the device conforms with the essential requirements of the applicable directive, and accordingly, can be commercially distributed throughout the EU. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a Notified Body. 22 This third party assessment may consist of an audit of the manufacturer's quality system and specific testing of the manufacturer's product. An assessment by a Notified Body in one country within the EU is required in order for a manufacturer to commercially distribute the product throughout the EU. For purposes of determining the necessary steps for assessing conformity, devices are classified under the Directives as Class I, Class IIa, Class IIb, Class III, or Active Implantable Medical Devices. Devices having a higher classification are considered to have a higher risk and, accordingly, are subject to more controls in order to bear CE marking. The Vibrant soundbridge is designated as an Active Implantable Medical Device. Essential requirements under the AIMDD include substantiating that the device meets the manufacturer's performance claims and that safety issues, if any, constitute an acceptable risk when weighed against the intended benefits of the device. The two principal aspects of assessing conformity for Active Implantable Medical Devices are determinations from the Notified Body that the processes employed in the design and manufacture of a device qualify as a full quality system in compliance with applicable standards (e.g., EN ISO 9001, EN 46001 and 90/385/EEC), and that the technical, preclinical, and clinical data gathered on the device are adequate to support CE marking. The Company has undergone an inspection by its Notified Body and its quality system has been certified by the Notified Body as being in compliance with the required standards. The Company has received approval to affix the CE mark to the Vibrant P and Vibrant HF soundbridges. With regard to the Vibrant D soundbridge, the Company intends to submit the technical data that its Notified Body has indicated will be required to satisfy the essential requirements of the AIMDD. To satisfy these requirements, the Company generally must complete a clinical trial conducted under European clinical trial standards (EN 540) to determine the safety and performance of the products. The Vibrant HF and Vibrant D soundbridges utilize the same implanted component as the Vibrant P soundbridge. Accordingly, the Notified Body did not require additional clinical data for the Vibrant HF soundbridge. The Notified Body has not yet, but may, request additional clinical data for the Vibrant D soundbridge. The Company must continue to pass annual EN ISO 9001, EN 46001 and AIMDD 2.3 quality system audits in order to retain the authorization to affix the CE mark to its products. Once a manufacturer has satisfactorily completed the regulatory compliance tasks required by the directives and received favorable determinations by the Notified Body, it is eligible to place the CE mark on its products. Manufacturers are subject to ongoing regulation under the AIMDD. The quality system will be subject to periodic audit and recertification, and serious adverse events must be reported to the authorities in the country where the incident takes place. If such incidents occur, the manufacturer may have to take remedial action, including withdrawal of the product from the EU market. While no additional premarket approvals in individual EU countries are required, prior to the marketing of a device bearing the CE mark, practical complications with respect to market introduction may occur. For example, differences among countries have arisen with regard to labeling requirements. Also, as the directives do not cover reimbursement and distribution practices, differences may occur in these and other areas. 23 Third-Party Reimbursement The Company believes that its products will generally be purchased by hospitals and clinics upon the recommendation of a surgeon. In the United States, hospitals, physicians and other health care providers that purchase medical devices generally rely on third-party payors, principally Medicare, Medicaid, private health insurance plans, health maintenance organizations and other sources of reimbursement for health care costs, to reimburse all or part of the cost of the procedure in which the medical device is being used. Such third-party payors have become increasingly sensitive to cost containment in recent years and place a high degree of scrutiny on coverage and payment decisions for new technologies and procedures. Hearing aids, which do not involve surgery and, in certain cases, are exempt from the requirement for 510(k) approval, are generally not reimbursed, although a modest reimbursement is provided under certain insurance plans. Traditionally, hearing aid users have paid for these devices directly. For cochlear implants, however, that are technologically advanced and FDA-approved through the PMA process for the treatment of profound hearing impairment, a reimbursement is available for the device, the audiological testing, and the surgery. Similarly, reimbursement is available for ossicular replacement prostheses that are FDA- approved for the treatment of conductive hearing impairment. The Company anticipates that, as surgically implanted devices that require FDA PMA approval, the Company's products may also be the subject of reimbursement in the future. During clinical trials, the Company does not anticipate that there will be any reimbursement for the Vibrant soundbridge implant or procedure. The Company's strategy is to pursue reimbursement for the Company's soundbridges, once a PMA is approved by the FDA, based on surgeon endorsement and demonstration of improved quality of life for specific patient groups. Quality of life issues are included in the Company's clinical trial to provide data in support of this reimbursement strategy. There can be no assurance that the Company will be able to demonstrate improvement in quality of life or that reimbursement will ever be available for the Company's products. Certain third-party payors are moving toward a managed care system in which they contract to provide comprehensive health care for a fixed cost per person. The fixed cost per person established by these third-party payors may be independent of the hospital's cost incurred for the specific case and the specific devices used. Medicare and other third-party payors are increasingly scrutinizing whether to cover new products and the level of reimbursement for covered products. Because the Company's hearing prostheses are currently under development and have not received FDA clearance or approval, uncertainty exists regarding the availability of third-party reimbursement for procedures that would use the Company's soundbridges. Failure by physicians, hospitals and other potential users of the Company's soundbridges to obtain sufficient reimbursement from third-party payors for the procedures in which the Company's soundbridges are intended to be used could have a material adverse effect on the Company's business, financial condition and results of operations. Third-party payors that do not use prospectively fixed payments increasingly use other cost-containment processes or require various outcomes data that may pose administrative hurdles to the use 24 of the Company's soundbridges. In addition, third-party payors may deny reimbursement if they determine that the device used in a procedure is unnecessary, inappropriate, experimental, used for a non-approved indication or is not cost-effective. Potential purchasers must determine that the clinical benefits of the Company's products justify the additional cost or the additional effort required to obtain prior authorization or coverage and the uncertainty of actually obtaining such authorization or coverage. Even after obtaining the necessary foreign regulatory approvals, market acceptance of the Company's products and products currently under development in international markets will be dependent, in part, upon the availability of reimbursement within prevailing health care payment systems. Reimbursement and health care payment systems in international markets vary significantly by country, and include both government sponsored health care and private insurance. The Company believes that in Europe, the primary source of funding for products such as the Company's soundbridges is the various government sponsored healthcare programs. Requirements for the granting of reimbursement in many countries are not clearly specified and may involve the collection of additional clinical data in support of submissions to the appropriate health care administrations. There can be no assurance that any required data would be available on a timely basis or that any international reimbursement approvals will be obtained in a timely manner, if at all. Failure to receive international reimbursement approvals could have a material adverse effect on market acceptance of the Company's products in the EU as well as in international markets in which such approvals are sought. The Company believes that in the future reimbursement will be subject to increased restrictions both in the United States and in international markets. The Company believes that the overall escalating cost of medical products and services will continue to lead to increased pressures on the health care industry, both foreign and domestic, to reduce the cost of products and services, including the Company's products and products currently under development. There can be no assurance in either United States or international markets that third-party reimbursement and coverage will be available or adequate, that future legislation, regulation or reimbursement policies of third-party payors will not otherwise adversely affect the demand for the Company's products or products currently under development or its ability to sell its products on a profitable basis. The unavailability of third-party payor coverage or the inadequacy of reimbursement could have a material adverse effect on the Company's business, financial condition and results of operations. Product Liability The Company's business involves the inherent risk of product liability claims. The Company maintains limited product liability insurance at coverage levels which the Company believes to be commercially reasonable and adequate given the Company's current operations. However, there can be no assurance that such insurance will continue to be available on commercially reasonable terms, or at all, or that such insurance will be adequate to cover liabilities that may arise. Any claims that are brought against the Company could, if successful, have an adverse effect on the Company's business, financial condition and results of operations. 25 Employees At December 31, 1998, the Company had 61 employees. Of these employees, 26 were in research and development, including regulatory and clinical affairs, 22 were in manufacturing and quality assurance and 13 were in administration, sales and marketing. None of the Company's employees is covered by a collective bargaining agreement and the Company believes that it maintains good relations with its employees. Scientific Advisory Board The Company has established a Scientific Advisory Board consisting of five leading professionals in the fields of otology, otolaryngology and audiology. The Board meets periodically and reviews the Company's clinical progress and product development plans. The Company has also established an Audiology Advisory Board consisting of five leading audiologists. This board brings an audiological perspective to clinical protocol issues, and audiological testing and results. In addition to periodic meetings of the boards, members of the boards are available on an individual basis to consult with the Company. Each member of the Scientific Advisory Board has received options for stock, pursuant to the 1994 Option Plan, for participation on the Board. ITEM 2. PROPERTIES The Company's principal administrative, manufacturing and research and development facility occupies approximately 30,500 square feet in San Jose, California, pursuant to a lease that expires in December 2002. The Company has established an office in Basel, Switzerland for the headquarters of its European sales and marketing organization. The Company believes that its facilities are adequate for its business as presently operated. ITEM 3. LEGAL PROCEEDINGS The Company is not party to any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol "SMPX". The following table sets forth, for the periods indicated, the range of the low and high sales prices for the Company's Common Stock as reported on the Nasdaq National Market beginning February 13, 1998, the date the Common Stock commenced trading. 26
High Low Fiscal 1998: First Quarter (from February 13, 1998).............................. $17 1/2 $12 7/16 Second Quarter...................................................... $16 7/8 $ 10 1/4 Third Quarter....................................................... $12 1/8 $ 3 1/8 Fourth Quarter...................................................... $ 7 $ 2 3/8
As of December 31, 1998, there were approximately 175 holders of record of the Common Stock. On December 31, 1998, the last reported sale price on the Nasdaq National Market for the Common Stock was $ 4 1/8. The Company has not declared or paid any cash dividends on its Common Stock. The Company presently intends to retain earnings for use in its business and therefore does not anticipate paying cash dividends in the foreseeable future. On February 17, 1998, the Company completed the sale of 2,300,000 Common Shares at a per share price of $12.00 in a firm commitment underwritten public offering. The offering was effected pursuant to a Registration Statement on Form S-1 (Registration No. 333-40339), which the United States Securities and Exchange Commission declared effective on February 12, 1998. The offering was underwritten by Cowen & Company and UBS Securities. On February 27, 1998 the Company completed the sale of an additional 345,000 Common Shares at a per share price of $12.00 pursuant to the exercise of the over-allotment option by the underwriters. Of the $31,740,000 in aggregate proceeds raised by the Company in connection with the February offering, (i) approximately $2,221,800 was paid to the underwriters in connection with underwriting discounts and commissions and (ii) approximately $1,120,000 was paid by the Company in connection with offering expenses, including legal, printing and filing fees. From February 17, 1998 to December 31, 1998, the Company has used the remaining proceeds of the offering in the following manner:
Use of Proceeds - --------------- Research & Development, including clinical trials $ 7,400,000 Development of sales and marketing organization $ 1,900,000 Leasehold improvements and capital expenditures $ 1,000,000 Working capital and general corporate $ 2,600,000 Temporary investments - --------------------- Short-term investments $15,500,000
All amounts represent estimates of direct or indirect payments of amounts to third parties. No amounts were paid directly or indirectly for the above purposes to directors or officers of the Company, to persons owning ten percent or more of any class of equity securities of the Company, or to affiliates of the Company. 27 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except per share amounts)
Period from May 17, 1994 (date of inception) to December 31, Years Ended December 31, ------------ ---------------------------------- 1994 1995 1996 1997 1998 ------------------- --------------- --------- --------- ---------- Revenues: - - - - $ 597 Costs and expenses: Cost of goods sold.................................. - - - - 1,663 Research and development............................ $ 707 $ 3,307 $ 5,399 $ 6,401 8,322 Selling, general and administrative................. 141 625 1,047 2,065 5,633 ------ ------- ------- ------- -------- Total costs and expenses.......................... 848 3,932 6,446 8,466 15,618 Loss from operations................................. (848) (3,932) (6,446) (8,466) (15,021) Non-operating income: Interest income, net................................ 96 280 337 475 1,375 ------ ------- ------- ------- -------- Net loss............................................. $ (752) $(3,652) $(6,109) $(7,991) $(13,646) ====== ======= ======= ======= ======== Basic and diluted net loss per common share.......... $(0.42) $ (1.86) $ (2.79) $ (3.10) $ (1.24) ====== ======= ======= ======= ======== Shares used in computing basic and diluted net loss per common share.................................... 1,771 1,962 2,190 2,579 10,987 ====== ======= ======= ======= ======== December 31, ------------------------------------------------------------------ 1994 1995 1996 1997 1998 ------ ------- ------- ------- -------- Balance Sheet Data: Total assets........................................ $4,910 $ 7,685 $11,951 $13,141 $ 28,695 Working capital..................................... $4,365 $ 6,188 $10,069 $ 9,554 $ 23,795 Long-term debt...................................... $ 99 $ 423 $ 596 $ 2,325 $ 2,098 Stockholders' equity................................ $4,568 $ 6,593 $10,238 $ 8,463 $ 23,875
28 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 is developing a family of proprietary semi-implantable and implantable soundbridges for the management of moderate to severe hearing impairment. The Company's family of Vibrant soundbridges is based on its patented core FMT technology. 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 and the Vibrant HF soundbridge in July 1998. The Company began selling activities for the Vibrant P soundbridge in the European Union in March 1998 and plans to commence selling activities for the Vibrant HF in Europe after it has gathered clinical data on a limited number of patients. The Company has established a European sales and marketing organization which, as of December 31, 1998, is comprised of three marketing management and support personnel located in Basel, Switzerland and three sales managers performing direct sales activities in Germany, France, the United Kingdom, Switzerland and Austria. In addition, the Company has hired a sales manager for South America. The Company's initial selling efforts in Europe have been targeted primarily at those ENT surgeons specializing in otology. While the Company intends to continue to market its products to these specialists, it also plans to focus on the referring physicians, audiologists and the general population of ENT surgeons in an attempt to increase the number of patients that are referred to specialist ear surgeons. The Company is also attempting to gather clinical and other data which it believes will be helpful in obtaining reasonable reimbursement levels for its products. 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 soundbridges or in obtaining reimbursement for its products. In September 1996 the Company initiated clinical trials of the Vibrant soundbridge in the United States. On December 11, 1997, the FDA approved a multi-center pivotal study in 55 subjects at up to 12 sites with the second generation Vibrant P soundbridge. As of January 31, 1999 the Company had enrolled a total of 55 subjects in this pivotal study. During the year ending December 31, 1998, the Company was selected by the FDA to participate in the new, streamlined PMA process called the modular PMA. Under the modular PMA process, modules reflecting the content requirements of a traditional PMA are submitted as they are completed, allowing them to be reviewed and approved in a sequential manner. To date, the Company has submitted four modules of its PMA for the Vibrant P soundbridge. There can be no assurance that the Company's participation in the modular PMA program 29 will lead to the timely approval of the Vibrant P soundbridge, if at all. In November 1998, the FDA approved the inclusion of the Vibrant HF soundbridge in the existing pivotal trial, and in January 1999 granted the Company permission to enroll an additional 15 subjects for purposes of evaluating the Vibrant HF soundbridge. Symphonix has a limited operating history. Through December 31, 1998 the Company had not generated significant revenue from product sales and had an accumulated deficit of $32.2 million. The Company expects to incur substantial losses through at least 2000. 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, an equipment lease financing and bank borrowings. Results of Operations Revenue. Revenue of $597,000 was recorded in the year ended December 31, 1998 for sales of the Vibrant P soundbridge in Europe. No revenue was recorded in 1997 or 1996 because the Company had no product sales in those years. Cost of goods sold. Cost of goods sold was $1.7 million in the year ended December 31, 1998, and represents the direct cost of the products sold as well as a portion of the manufacturing overhead. There was no cost of goods sold for 1997 or 1996 because the Company had no product sales in those years. Research and Development Expenses. Research and development expenses were $8.3 million, $6.4 million and $5.4 million, in the years ended December 31, 1998, 1997 and 1996, 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, preparation and filing of patent applications and the start-up of manufacturing. Research and development expenses increased from 1997 to 1998 in part due to higher facility costs attributable to the commencement of a lease on a new facility in January 1998. In addition, the Company increased the level of spending on supplies, professional services and equipment and hired more employees. During 1997, the Company increased its product development efforts, developed clinical research and regulating functions, initiated clinical trials and established a pilot manufacturing capability. To support these activities, the Company hired more employees and increased the level of spending on supplies, professional services and equipment. The Company expects its research and development expenses to increase in 1999, primarily due to the development of the Vibrant TI soundbridge. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $5.6 million, $2.1 million and $1.0 million in the years ended December 31, 1998, 1997 and 1996, respectively. Selling, general and administrative expenses consist primarily of personnel, marketing, legal and consulting costs. Expenses increased from 1997 to 1998, due to the establishment of a European sales and marketing organization, the initiation of selling and marketing activities in Europe, amortization of deferred compensation and increases in administrative costs associated with expanded operations and becoming a public company. Expenses increased from 1996 to 1997 due to increases in the level of staffing and spending on professional services as the Company expanded the scope of its operations. The Company plans to expand its European sales organization in 1999 and as a result expects 30 selling general and administrative expenses to increase in 1999. 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 $191,000 and $556,000 attributed to such options was amortized during the years ended December 31, 1997 and 1998, respectively. The remaining deferred compensation will be amortized over the vesting period of the options (generally four years). Interest Income, net. Interest income, net was $1.4 million, $475,000 and $337,000 in the years ended December 31, 1998, 1997 and 1996, respectively. Most of the increase from 1997 to 1998 was generated from interest income on net proceeds from the Company's February 1998 initial public offering. Income Taxes. To date, the Company has not incurred any U.S. income tax obligations. At December 31, 1998, the Company had net operating loss carryforwards of approximately $25.0 million for federal and $19.3 million for state income tax purposes, which will expire at various dates through 2013 and 2003, 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. Liquidity and Capital Resources Since its inception, the Company has funded its operations and its capital expenditures from net proceeds of its initial public offering completed in February 1998 totaling $28.4 million, from the private sale of equity securities totaling $26.5 million, from an equipment lease financing totaling $1.3 million and from bank borrowings totaling $2.0 million, net. At December 31, 1998, the Company had $23.8 million in working capital, and its primary source of liquidity was $25.3 million in cash, cash equivalents and short-term investments. Capital expenditures, related primarily to the Company's research and development and manufacturing activities, were $1.6 million, $898,000 and $409,000 in the years ended December 31, 1998, 1997 and 1996, respectively. The increased capital expenditures in 1998 and 1997 relate primarily to the Company's new facility. At December 31, 1998, 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, 1998, the Company has made approximately $1.6 million in capital expenditures, primarily attributable to leasehold improvements and furniture and fixtures related to the new facility. 31 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, 1998, the Company had borrowings of $2.0 million and an outstanding letter of credit in the amount of $195,000 under the loan agreement. Borrowings under the loan agreement are repayable over four years commencing in January 2000. Symphonix used $12.7 million in cash for operations in 1998, an increase of $6.2 million from the $6.5 million used in 1997. The increase was primarily due to an increase in net loss from 1997 to 1998. 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, if approved for marketing, 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 1999, there can be no assurance that the Company will not require additional financing prior to that time. 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. Year 2000 Compliance The Company has initiated planning for issues related to the upcoming new millennium. These issues derive from the use of software and hardware with embedded chips or processors that use two digits to refer to a year and do not properly recognize a year that begins with "20" instead of the familiar "19". The use of such software and hardware occurs at many internal and external points in the Company's development, supply, manufacturing and distribution chain both within the Company's internal operations as well as at important external partners, such as vendors and customers. The Company has developed a plan to address these issues and to enhance the Company's readiness for Year 2000. The Company's plan (the "Year 2000 Readiness Program") focuses on five areas: (1) network and facility infrastructure, (2) business applications software, (3) process control systems, (4) external partners, and (5) the Company's products. Within each area, the Year 2000 Readiness Program will involve (a) the identification of systems that may be susceptible to Year 2000 32 issues (the "identification phase"), (b) the assessment of the degree of readiness of those systems for the Year 2000 and an assessment of the risks that may be posed to the Company's business (the "assessment phase"), (c) the remediation of problems that are identified (the "remediation phase"), and (d) contingency planning. Network and facility infrastructure: Included in this category are the computer networks in the Company's San Jose, California headquarters and Basel, Switzerland European headquarters (including servers, computers, other network equipment and computer and network operating systems), together with general facility systems such as telephone and security systems. The Company expects that the identification and assessment phases will be completed during the first quarter of 1999, at which time remediation and contingency planning will be initiated as appropriate. Business applications software: Included in this category are various applications used in design, manufacturing, distribution and finance. The Company's primary business application is a company-wide system used for manufacturing planning, accounting, inventory management and sales transactions. The Company expects that the identification and assessment phases will be completed during the second quarter of 1999, at which time remediation and contingency planning will be initiated as appropriate. For many software applications, the Company will, in the assessment phase, rely on the software developer's representations regarding Year 2000 compliance of their software. There can be no assurance, however, that software applications represented by developers as being Year 2000 compliant will be free from Year 2000 errors and defects. Process control systems: Included in this category are instrumentation and systems used in design and manufacturing processes. The Company expects that the identification and assessment phases will be completed during the second quarter of 1999 at which time remediation and contingency planning will be initiated as appropriate. External partners: The Company intends to assess the possible effects on its operations of the Year 2000 compliance of certain relevant third parties, such as customers and service providers by using questionnaires and, in limited cases, site visits and interviews to solicit information from these parties. In the event the Company identifies a problem with respect to a particular vendor, then the Company may be forced to identify alternative sources of supply. However, the Company's ability to seek alternative sources of supply is subject to FDA restrictions and may involve extensive validation processes. The failure to timely identify and validate an alternative supplier could have a material adverse effect on the Company's business, financial condition and results of operations. The Company expects to complete the identification phase and initiate the assessment phase by the first quarter of 1999. Symphonix products: The Company's products are regulated by the FDA and the FDA has advised manufacturers of medical devices to address readiness of their products for year 2000 issues. The Company has completed a preliminary assessment and has informed the FDA that the Company does not believe that any of its existing products are susceptible to Year 2000 issues. The Company does not expect to incur costs in its Year 2000 Readiness Program that will be 33 material to its business, financial condition or results of operations. However, until the Company completes the identification and assessment phases of its program, the full extent of the remediation costs will not be known and there can be no assurance that such costs will not be material. The Company will utilize both internal and external resources, such as consultants and professional advisors, in implementing the Year 2000 Readiness Program and the Company currently estimates that the external resources required during the identification and assessment phases of the Year 2000 Readiness Program will cost approximately $50,000. Because the Year 2000 Readiness Program is an ongoing process, all cost estimates are subject to change. Specific contingency plans will be developed upon completion of the assessment phases and may include additional procurement of inventory to assure continued supply from vendors. Although the Company intends to complete all phases of its Year 2000 Readiness Program by December 31, 1999, there can be no assurance, even if this program is successfully completed on schedule, that disruptions in the Company's business will be avoided. The Year 2000 issues are pervasive in nature and involve highly technical issues, not all of which are under the Company's control. Possible consequences of Year 2000 issues that the Company is unable to adequately identify, assess or remediate include but are not limited to: delays in supplies from vendors, delays in shipment to customers, errors in processing transactions, deficiencies in management of inventory, delays in collection of funds from customers, and diversion of management time and effort to addressing difficulties that emerge. The goal of the Company's Year 2000 Readiness Program is to plan for and reduce the risk of such difficulties. There can be no assurance that the Year 2000 Readiness Program will be completed in a timely manner or will be successful. Recent Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company, to date, has not engaged in derivative and hedging activities. The Company will adopt SFAS No. 133 as required for its first quarterly filing of 2000. Additional Factors That Might Affect Future Results History of Losses and Expectation of Future Losses. At December 31, 1998, the Company had an accumulated deficit of $32.2 million. Since the Company's inception in 1994, substantially all of the Company's resources have been dedicated to research and development, establishment of a European sales and marketing organization and the initiation of sales and marketing activities in Europe. In March 1998, the Company received the authorization to affix the CE Mark to the Vibrant and Vibrant P soundbridges, permitting the initiation of commercial sales in the European Union ("EU"). Although the Company has commenced selling the Vibrant P soundbridge in Europe, through December 31,1998 the Company has not generated significant revenues from these sales. The Company received CE Mark approval for the Vibrant HF soundbridge 34 in July 1998 and plans to commence selling the Vibrant HF soundbridge after it has gathered clinical data on a limited number of patients. In the United States, the Company's Vibrant P and Vibrant HF soundbridges will require additional clinical testing prior to the submission of a regulatory application for commercial use. All of the Company's other products will require additional development, and preclinical and clinical testing prior to the submission of a regulatory application for commercial use internationally and domestically. Since the Vibrant P soundbridge only recently became available for sale in the EU and is not currently available for sale in the United States, significant product revenues will not be realized for at least several years, if ever. The Company expects its operating losses to continue at least through the year 2000 as it continues to expend substantial funds for clinical trials in support of regulatory approvals, expansion of research and development activities and establishment of commercial-scale manufacturing and sales and marketing capabilities. There can be no assurance that any of the Company's soundbridges will be successfully commercialized internationally or in the United States or that the Company will achieve significant revenues from product sales. In addition, there can be no assurance that the Company will achieve or sustain profitability in the future. The Company's results of operations may fluctuate from quarter to quarter or year to year and will depend upon numerous factors, including action relating to regulatory matters, progress of clinical trials, the timing and scope of research and development efforts, the extent to which the Company's products gain market acceptance or achieve reasonable reimbursement levels, the timing of scale-up of manufacturing capabilities, the timing of expansion of sales and marketing activities and competition. Limited Clinical Testing Experience. In the United States, the Company has conducted only limited clinical trials of the Vibrant and Vibrant P soundbridges. The Company has received approval of an IDE to conduct a clinical trial of the Vibrant, Vibrant P and Vibrant HF soundbridges. In Europe, the Vibrant and Vibrant P soundbridges have been the subject of limited clinical testing. The Company intends to conduct clinical testing of the external components of the Vibrant HF soundbridge. The implanted components of the Vibrant HF soundbridge are the same as the implanted components of the Vibrant P soundbridge which was tested in clinical trials previously conducted by the Company in Europe. None of the Company's other soundbridges under development have been tested in human clinical trials and these soundbridges will require additional development, clinical trials and regulatory approval prior to commercialization. The results from preclinical studies and early clinical trials may not be indicative of results obtained in later clinical trials, and there can be no assurance that clinical trials conducted by the Company will demonstrate sufficient safety and efficacy to obtain requisite approvals. The rate of completion of the Company's clinical trials may be delayed by many factors, including slower than anticipated patient enrollment or adverse events occurring during clinical trials. Completion of preclinical and clinical activities may take several years, and the length of time for completion of the required studies is unpredictable. In addition, data obtained from preclinical and clinical activities are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. No assurance can be given that any of the Company's clinical trials will be successfully completed on a timely basis, or at all, that additional clinical trials will be allowed by the FDA or other regulatory authorities or that such clinical trials will commence as planned. Any delays in the Company's clinical trials would have a material adverse effect on the Company's business, financial condition and results of operations. Success in preclinical studies or early stage clinical trials 35 does not assure success in later stage clinical trials. Reliance on FMT Technology. The Company has concentrated its efforts primarily on the development, implementation and acceptance of the FMT, the patented core direct drive technology upon which all of the Company's soundbridges are based. The Company's soundbridges employ a direct drive approach to the management of hearing impairment, which is a novel development. There can be no assurance that the Company's soundbridges, based on the Company's FMT technology, will prove to be safe and effective, or that if proven safe and effective, can be manufactured at a reasonable cost or successfully commercialized. No Assurance of Market Acceptance. The market acceptance of the Company's soundbridges will depend upon their acceptance by the medical community and patients as clinically useful, reliable and cost-effective compared to other devices. Clinical acceptance will depend on numerous factors, including the establishment of the safety and the effectiveness of the soundbridge's ability to drive the ossicles directly and improve hearing over currently available hearing aids. Clinical acceptance will also depend on the receipt of regulatory approvals in the United States and the Company's ability to adequately train ear surgeons on the techniques for implanting the Company's soundbridges. There can be no assurance that the Company's soundbridges will be preferable alternatives to existing devices, some of which, such as the acoustic hearing aid, do not require surgery, or that the Company's soundbridges will not be rendered obsolete or noncompetitive by products under development by other companies. Patient acceptance of the Company's soundbridges 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 the Company's soundbridge, a patient may speak with a number of medical professionals, including the patient's primary care physician, an audiologist, an ENT specialist, as well as surgeons who specialize in ear surgery. The failure by any of these medical professionals to favorably recommend the Company's 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 the Company's soundbridges. Even if the Company's soundbridges are adopted by the medical community, a significant market may not develop for the Company's products unless acceptable reimbursement from health care payors is available. There can be no assurance that the Company's soundbridges will be accepted by the medical community or consumers, that acceptable reimbursement from third- party payors will be available or that market demand for such products will be sufficient to allow the Company to achieve profitable operations. Failure of the Company's soundbridges, for whatever reason, to achieve significant adoption by the medical community or consumers or failure of the Company's products to achieve any significant market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. Future Capital Requirements; Uncertainty of Additional Funding. The Company will expend substantial funds in the future for research and development, 36 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 upon several factors, including the progress of its 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, if approved for marketing, and internationally and other factors not within the Company's control. On February 17, 1998, the Company completed an initial public offering of 2,300,000 shares of common stock. On February 27, 1998, the Company completed the sale of an additional 345,000 shares of common stock pursuant to the exercise by the underwriters of an over allotment option. Net proceeds to the Company totaled approximately $28.4 million. While the Company believes that the net proceeds of the offering, together with its previously existing capital resources and projected interest income, will be sufficient to fund its operations and its capital investments through 1999, there can be no assurance that the Company will not require additional financing prior to that time. 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, to license to third parties the rights to commercialize certain products or technologies that the Company would otherwise seek to commercialize for itself, or to 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. Dependence upon Key Personnel. The Company's future success depends in significant part upon the continued service of certain key scientific, technical and management personnel. Competition for such personnel is intense and there can be no assurance that the Company can retain its key scientific, technical and managerial personnel or that it can attract, assimilate or retain other highly qualified scientific, technical 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 have a material adverse effect upon the Company's business, financial condition and results of operations. The Company has not entered into employment agreements with any of its key personnel. The Company is the beneficiary under a $1.0 million key man insurance policy on Harry S. Robbins, its President and Chief Executive Officer. Volatility of Stock The market prices for securities of medical device companies have historically been highly volatile. Announcements of technological innovations or new products by the Company or its competitors, developments concerning proprietary rights, including patents and litigation matters, publicity regarding actual or potential results with respect to products under development by the Company or others, regulatory developments in both the United States and foreign countries and public concern as to the safety of new technologies, changes in financial estimates by securities analysts or failure of the Company to meet such estimates and other factors may have a significant impact on the market price 37 of the common stock. In addition, the Company believes that fluctuations in its operating results may cause the market price of its common stock to fluctuate, perhaps substantially. 38 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company considered the provision 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, 1998. 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 with minimal impact. 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 these transactions in other currencies, primarily certain European currencies. At December 31, 1998, 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. 39 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT ACCOUNTANTS San Jose, California January 22, 1999 To the Board of Directors and Stockholders of Symphonix Devices, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and of cash flows present fairly, in all material respects, the financial position of Symphonix Devices, Inc. at December 31, 1998 and 1997, and the results of operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements 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 financial statements in accordance with generally accepted auditing standards, 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. PricewaterhouseCoopers LLP 40 SYMPHONIX DEVICES, INC. CONSOLIDATED BALANCE SHEET (in thousands, except share and per share data)
December 31, ----------------------------- 1998 1997 ----------------------------- ASSETS Current assets: Cash and cash equivalents $ 3,401 $ 4,908 Short-term investments 21,916 6,549 Accounts receivable, net of allowance for doubtful accounts of $3 in 1998 228 - Inventories 761 - Prepaid expenses and other current assets 211 451 -------- -------- Total current assets 26,517 11,908 Property and equipment, net 2,100 1,157 Other assets 78 76 -------- -------- Total assets $ 28,695 $ 13,141 -------- -------- LIABILITIES Current liabilities: Accounts payable $ 684 $ 366 Accrued compensation 1,060 888 Other accrued liabilities 751 778 Current portion of capital lease obligation 227 322 -------- -------- Total current liabilities 2,722 2,354 Capital lease obligation, less current portion 98 325 Bank borrowings, less current portion 2,000 2,000 -------- -------- Total liabilities 4,820 4,679 -------- -------- Commitments (Note 6). STOCKHOLDERS' EQUITY Convertible preferred stock, $.001 par value Authorized: 50,000,000 shares Issued and outstanding: no shares in 1998, 9,195,000 shares in 1997 - 9 Common stock, $.001 par value: Authorized: 50,000,000 shares Issued and outstanding: 12,201,000 in 1998 and 2,785,000 in 1997 12 3 Notes receivable from stockholders (484) (499) Deferred compensation (1,517) (2,073) Additional paid-in capital 58,040 29,526 Accumulated other comprehensive loss (26) - Accumulated deficit (32,150) (18,504) -------- -------- Total stockholders' equity 23,875 8,462 -------- -------- Total liabilities and stockholders' equity $ 28,695 $ 13,141 -------- -------- The accompanying notes are an integral part of these consolidated financial statements
41 SYMPHONIX DEVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Year Ended December 31, --------------------------------------------------------------- 1998 1997 1996 ---------------- ------------------ ------------------- Revenue $ 597 $ - $ - Costs and expenses: Costs of goods sold 1,663 - - Research and development 8,322 6,401 5,399 Selling, general and administrative 5,633 2,065 1,047 -------- ------- ------- (15,618) (8,466) (6,446) -------- ------- ------- Operating loss (15,021) (8,466) (6,446) Interest income 1,486 581 423 Interest expense (111) (106) (86) -------- ------- ------- Net loss $(13,646) $(7,991) $(6,109) -------- ------- ------- Basic and diluted net loss per common share $ (1.24) $ (3.10) $ (2.79) -------- ------- ------- Shares used in computing basic and diluted net loss per common share 10,987 2,579 2,190 -------- ------- ------- The accompanying notes are an integral part of these consolidated financial statements
42 SYMPHONIX DEVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, ------------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net loss $(13,646) $ (7,991) $(6,109) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred compensation 556 191 - Depreciation and amortization 682 498 421 Changes in operating assets and liabilities: Accounts receivable (228) - - Inventory (761) - - Prepaid expenses and other current assets 240 (374) (23) Accounts payable 318 324 (26) Accrued compensation 172 213 251 Other accrued liabilities (27) 661 100 -------- -------- ------- Net cash used in operating activities (12,694) (6,478) (5,386) -------- -------- ------- Cash flows from investing activities: Purchases of short-term investments (37,086) (10,009) (8,222) Sales of short-term investments 21,704 8,028 7,890 Purchases of property and equipment (1,625) (898) (409) Change in other assets (2) (68) 51 -------- -------- ------- Net cash used in investing activities (17,009) (2,947) (690) -------- -------- ------- Cash flows from financing activities: Proceeds from capital leases - 63 518 Payments on capital lease obligations (322) (296) (222) Proceeds from bank borrowings - 2,000 - Proceeds from issuance of preferred stock, net of issuance costs - 5,990 9,682 Proceeds from issuance of common stock, net of issuance costs 28,514 35 71 Payments received on notes receivable from stockholders 15 - - -------- -------- ------- Net cash provided by financing activities 28,207 7,792 10,049 -------- -------- ------- Net increase (decrease) in cash and cash equivalents (1,496) (1,633) 3,973 Effect of exchange rates on cash and cash equivalents (11) 2 - Cash and cash equivalents, beginning of year 4,908 6,539 2,566 ------- --------- ------- Cash and cash equivalents, end of year $ 3,401 $ 4,908 $ 6,539 ------- --------- -------
43
Supplemental disclosure of cash flow information and non-cash activities Cash paid during the year for interest $ 111 $106 $ 86 ----- ---- ---- Common stock issued in exchange for promissory note $ - $360 $124 ----- ---- ---- Change in short-term investments $ (15) $ 2 $ - ----- ---- ---- The accompanying notes are an integral part of these consolidated financial statements
44 SYMPHONIX DEVICES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the three years ended December 31, 1998 (in thousands, except per share data)
Preferred Stock Common Stock Notes Receivable from Stockholders ---------------- ---------------- Shares Amount Shares Amount ---------------- ---------------- Balances, December 31, 1995 6,842 $7 1,980 $2 $ (15) Series C preferred stock issued at $5.35 per share, net of issuance costs of $54 1,162 1 Series D preferred stock issued at $8.00 per share, net of issuance costs of $9 441 - Common stock issued in connection with stock option exercise in exchange for $71 in cash and $124 of notes, net of repurchase of 73 shares 404 - (124) Net loss ----- -- ----- -- ----- Balances, December 31, 1996 8,445 8 2,384 2 (139) Series D preferred stock issued at $8.00 per share, net of issuance costs of $10 750 1 Common stock issued in connection with stock option exercise in exchange for $34 in cash and $360 in notes 401 1 (360) Deferred compensation related to grant of options Amortization of deferred compensation Unrealized losses on short-term investments Translation adjustments Net loss ----- -- ----- -- ----- Balances, December 31, 1997 9,195 9 2,785 3 (499) Deferred Paid-In Comprehensive Accummulated Total Compensation Capital Income Deficit Stockholders' (Loss) Equity ------------ -------- ------------- ------------ -------------- Balances, December 31, 1995 $11,003 $ (4,404) $ 6,593 Series C preferred stock issued at $5.35 per share, net of issuance costs of $54 6,162 6,163 Series D preferred stock issued at $8.00 per share, net of issuance costs of $9 3,519 3,519 Common stock issued in connection with stock option exercise in exchange for $71 in cash and $124 of notes, net of repurchase of 73 shares 195 71 Net loss (6,109) (6,109) ------- -------- -------- Balances, December 31, 1996 20,879 (10,513) 10,237 Series D preferred stock issued at $8.00 per share, net of issuance costs of $10 5,989 5,990 Common stock issued in connection with stock option exercise in exchange for $34 in cash and $360 in notes 394 35 Deferred compensation related to grant of options $(2,264) 2,264 - Amortization of deferred compensation 191 191 Unrealized losses on short-term investments $(2) (2) Translation adjustments 2 2 Net loss (7,991) (7,991) ------- ------- -- -------- -------- Balances, December 31, 1997 (2,073) 29,526 - (18,504) 8,462
45 Preferred Stock Common Stock Notes Receivable from Stockholders ---------------- ---------------- Shares Amount Shares Amount ---------------- ---------------- Common stock issued in connection with the Company's initial public offering at $12.00 per share, net of issuance costs of $1,119 2,645 2 Conversion of preferred stock to common stock upon the closing of the Company's initial public offering (9,195) (9) 6,682 7 Common stock issued in conncetion with stock option exercises for cash 65 - Common stock issued pursuant to the Company's Stock Purchase Plan 24 - Payment of promissory note 15 Amortization of deferred compensation Unrealized losses on short-term investments Translation adjustments Net loss ------ -- ------ --- ----- Balances, December 31, 1998 - - 12,201 $12 $(484) ====== == ====== === =====
Deferred Paid-In Comprehensive Accummulated Total Compensation Capital Income Deficit Stockholders' (Loss) Equity ------------ -------- ------------- ------------ -------------- Common stock issued in connection with the Company's initial public offering at $12.00 per share, net of issuance costs of $1,119 28,397 28,399 Conversion of preferred stock to common stock upon the closing of the Company's initial public offering 2 - Common stock issued in conncetion with stock option exercises for cash 40 40 Common stock issued pursuant to the Company's Stock Purchase Plan 75 75 Payment of promissory note 15 Amortization of deferred compensation 556 556 Unrealized losses on short- term investments (15) (15) Translation adjustments (11) (11) Net loss (13,646) (13,646) ------- ------- ---- -------- -------- Balances, December 31, 1998 $(1,517) $58,040 $(26) $(32,150) $ 23,875 ======= ======= ==== ======== ========
The accompanying notes are an integral part of these consolidated financial statements 46 SYMPHONIX DEVICES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands)
Year Ended December 31, --------------------------------------------------------------------- 1998 1997 1996 ---------------- ---------------- ----------------- Net loss $(13,646) $(7,991) $(6,109) Unrealized losses on short-term investments (15) (2) - Translation adjustments (11) 2 - -------- ------- ------- Comprehensive loss $(13,672) $(7,991) $(6,109) -------- ------- ------- The accompanying notes are an integral part of these consolidated financial statements
47 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 Europe and South America through its direct sales force and distributors. The Company's commercial operations commenced during 1998 at which time it emerged from the development stage. In the course of its development activities, the Company has sustained operating losses and expects such losses to continue at least through 2000. 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 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. Short-Term Investments: All short-term investments are classified as available-for-sale and therefore are carried at fair market value. Unrealized gains and losses on such securities, when material, are reported as a separate component of stockholders' equity. 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. 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 48 obligations is computed using the straightline 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. Research and Development: Research and development costs are charged to operations as incurred. 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, 1998, three customers accounted for approximately 22.7%, 19.1% and 18.4% of accounts receivable, respectively. The Company's products require approvals from the Food and Drug Administration and international regulatory agencies prior to commercialized sales. During 1998, the Company received approvals to market its Vibrant P and Vibrant HF soundbridges in the European Union. There can be no assurance that the Company's products will receive additional required approvals. If the Company was denied such approvals or such approvals were delayed, it would have a materially adverse impact on the Company. Fair value of Financial Instruments: Carrying amounts 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. 49 Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles 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 stockholders' equity. Computation of Basic and Diluted Net Loss per Common Share: The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" and the provisions of the Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 98, and accordingly all prior periods have been restated. Basic and diluted net loss per common share are computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options, warrants, and preferred stock are excluded from the computation of diluted net loss per share, as their effect is antidilutive. The Company has determined that no incremental shares should be included in the computation of net loss per share in accordance with SAB No. 98. Stock options, preferred stock, and warrants to purchase 694,000, 600,000 and 618,000 shares of common stock at prices ranging from $0.14 to $4.13 per share were outstanding at December 31, 1998, 1997, and 1996, respectively, but were not included in the computation of diluted net loss per common share because they were antidilutive. The aforementioned stock options, preferred stock and warrants could potentially dilute earnings per share in the future. Revenue Recognition: Revenue is generally recognized upon shipment of product to the customer. 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. 50 Recent Accounting Pronouncement: In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company, to date, has not engaged in derivative and hedging activities. The Company will adopt SFAS No. 133 as required for its first quarterly filing of 2000. 3. BALANCE SHEET DETAIL: Short-Term Investments: Marketable securities are deemed by management to be available-for-sale and at December 31, 1998 and 1997 comprise (in thousands):
December 31, 1998 December 31, 1997 -------------------------------- ----------------------------------- Estimated Estimated Cost Accrued Fair Cost Accrued Fair Basis Interest Value Basis Interest Value ------- -------- --------- --------- -------- --------- Municipal bonds $ - $ - $ - $ 500 $ 8 $ 508 Certificate of Deposit 11,504 405 11,909 - - - Commercial paper 3,500 26 3,526 2,000 16 2,016 Medium term notes 4,426 45 4,471 3,006 21 3,026 U.S. Government agencies 2,019 6 2,010 996 4 999 ------- -------- --------- --------- ------- --------- $21,449 $ 482 $ 21,916 $ 6,502 $ 49 $ 6,549 ------- -------- --------- --------- ------- ---------
At December 31, 1998 and 1997, scheduled maturities for all of the available- for-sale securities were less than one year. There were no realized gains or losses recognized in 1998 and 1997. Property and Equipment: Property and equipment include amounts for assets acquired under capital leases of $1,187,000 and $1,202,000, with related accumulated amortization of $1,107,000 and $882,000 at December 31, 1998 and 1997, respectively. Property and equipment consist of the following (in thousands):
December 31, ---------------------- 1998 1997 --------- -------- Furniture and Fixtures $ 471 $ 151 Machinery and equipment 2,006 1,407 Leasehold improvements 1,067 626 Software 170 108 --------- -------- 3,714 2,292 Less accumulated depreciation and amortization (1,614) (1,135) --------- -------- $ 2,100 $ 1,157 --------- --------
51 Accrued Liabilities Accrued liabilities comprise (in thousands):
December 31, --------------------------- 1998 1997 ----------- ----------- Professional fees $ 146 $ 116 Clinical trials 396 170 Other 209 492 ----- ----- $ 751 $ 778 ----- -----
Inventories Inventories are comprised of the following (in thousands):
December 31, --------------------------- 1998 1997 ----------- ----------- Raw Materials $ 418 $ - Work-in-Process 182 - Finished Goods 161 - ----------- ----------- $ 761 $ - ----------- -----------
4. CAPITAL LEASE OBLIGATIONS: The Company has capital lease obligations under seven lease lines that expire between 1998 and 2001. Under the terms of these lease lines, the Company is responsible for property taxes and insurance. At December 31, 1998, the future minimum payments under capital leases are as follows (in thousands): 1999 $ 256 2000 97 2001 8 ----- Minimum lease payments 361 Less amount representing interest 36 ----- Principal amount of minimum lease payments 325 Less current portion 227 ----- $ 98 -----
5. 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 agreement provides a revolving line of credit through December 31, 1999 after which the principal amount is repayable over four years. Borrowings under the agreement bear interest at the bank's prime rate plus 0.75% (8.5% at December 31, 1998) and are 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. 52 At December 31, 1998, the Company had borrowings of $2,000,000 and an outstanding letter of credit in the amount of $195,000 under the Loan Agreement. Future payments of principal under the Loan Agreement are as follows (in thousands):
1999 $ - 2000 500 2001 500 2002 500 2003 500 ------ $2,000 ------
6. COMMITMENTS: The Company rents its 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 31,1998 are as follows (in thousands): 1999 $ 656 2000 665 2001 635 2002 666 ------ $2,622 ------
Rent expense for the periods ended December 31, 1998, 1997, 1996 was $750,000, $162,000, and $118,000, respectively. 7. 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 eliminated the existing convertible preferred stock, changed the number of authorized preferred stock to 5,000,000 shares, $0.001 par value, and increased the shares of common stock authorized to 50,000,000 shares. 53 Reincorporation in Delaware In January 1998, the Company reincorporated in Delaware. Under the reincorporation, 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 reincorporation. 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. Convertible Preferred Stock: Under the Company's Certificate of Incorporation, the Company's preferred stock is issuable in series and the Company's Board of Directors is authorized to Shares Issued determine the rights, preferences and terms of each series. Upon the closing of the Company's initial public offering, all outstanding preferred stock was automatically converted into common stock. At December 31, 1997, the amounts, terms and liquidation value of Series A, Series B, Series C and Series D convertible preferred stock were (in thousands):
Shares of Common Shares Stock Preferential Shares Issued and Reserved for Liquidation Series Amount Authorized Outstanding Conversion Value ----- -------- ----------- ------------- ------------ -------------- A $ 5,436 5,500 5,463 5,500 $ 5,463 B 5,498 1,500 1,379 1,500 5,516 C 6,163 1,500 1,162 1,500 6,217 D 9,509 1,250 1,191 1,250 9,528 -------- -------- -------- -------- -------- Balances, December 31, 1997 $ 26,606 9,750 9,195 9,750 $ 26,724 -------- -------- -------- -------- --------
Warrants: The Company has 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 warrants are exercisable until October 2004. 54 Notes Receivable: In 1997, 1996 and 1994, the Company issued 338,000, 207,000, 1,076,000 shares, respectively, of its common stock to one of the founders and other key persons in exchange for promissory notes of $360,000, $124,000 and $30,000, respectively. The 1997 and 1996 promissory notes bear annual interest ranging from 6.36% to 6.84%, payable in the years 2001 and 2002. The 1994 promissory notes bore annual interest of 5.36%, payable in the year 1999, but were repaid by two principal payments of $15,000 made in each of 1994 and 1998. The related shares are pledged as collateral for the notes. 1997 Employee Stock Purchase Plan: The Company adopted the 1997 Employee Stock Purchase Plan (the "Purchase Plan") under which 75,000 shares of common stock have been reserved for issuance. Eligible employees may purchase a limited number of common stock at 85% of the market value at certain plan-defined dates. During 1998, 24,459 shares 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. 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. 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. 55 Activity under the 1994 Plan is as follows (in thousands, except per share data):
Options Outanding ------------------------------- Shares Available for Number of Exercise Aggregate Grant Shares Price Price -------------- ---------- ---------------- --------------- C> Balance, December 31, 1995 44 701 $ 0.14 - $ 0.55 $ 175 Additional options reserved 654 Options granted (572) 572 $ 0.14 - $ 0.83 420 Options exercised (477) $ 0.14 - $ 0.83 (196) Options canceled 211 (211) $ 0.14 - $ 0.55 (60) Repurchase of common shares 73 ------ ------ ------ Balance, December 31, 1996 410 585 $ 0.14 - $ 0.83 339 Additional options reserved 375 Options granted (396) 396 $ 1.10 - $ 8.81 803 Options exercised (401) $ 0.14 - $ 2.20 (394) Options canceled 13 (13) $ 0.14 - $ 1.10 (7) ------ ------ ------ Balance, December 31, 1997 402 567 $ 0.14 - $ 8.81 741 Options granted (281) 281 $ 3.13 - $ 10.50 1,145 Options exercised (65) $ 0.14 - $ 3.13 (40) Options canceled 123 (123) $ 0.14 - $ 10.50 (648) ------ ------ ------ Balance, December 31, 1998 244 660 $ 0.14 - $ 4.13 $1,198 ------ ------ ------
The difference between the exercise price and the deemed fair market value of the Company's common stock at the date of issue of certain stock options, totaling $2,264,000 has been recorded as deferred compensation as a component of stockholders' equity. Of this amount, $747,000 has been recognized as an expense through December 31, 1998. The remaining $1,517,000 will be recognized as an expense as the shares and options vest over periods of up to four years. The options outstanding and currently exercisable by exercise price at December 31, 1998 are as follows:
Options outstanding Options currently exercisable - -------------------------------------------------------------------------- ---------------------------------------------- Weighted Average Weighted Weighted Remaining Average Average Exercise Number Contractual Life Exercise Number Exercise Price Outstanding (years) Price Exercisable Price - --------- --------------- ---------------------- ---------------- --------------- --------------------------- $0.14 94 5.96 $ 0.14 92 $0.14 $0.55 29 6.94 $ 0.55 19 $0.55 $0.73 77 7.59 $ 0.73 32 $0.73 $0.83 11 7.73 $ 0.83 6 $0.83 $1.10 128 8.41 $ 1.10 41 $1.10 $2.20 86 8.76 $ 2.20 17 $2.20 $3.13 196 9.67 $ 3.13 7 $3.13 $4.13 39 9.88 $ 4.13 0 $4.13 ------------ ------------ 660 8.37 $1.820 214 $0.73 ------------ ------------
56 At December 31, 1997 and 1996, outstanding options to purchase 215,000 and 267,000 shares were exercisable at weighted average exercise prices of $0.59 and $0.62 per share, respectively. 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 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 proforma amounts shown below (thousands except per share data):
Year Ended December 31, ---------------------------------------------------- 1998 1997 1996 -------------- -------------- ---------------- Net loss-as reported $13,646 $7,991 $6,109 Net loss-pro forma $13,828 $8,032 $6,127 Basic and diluted net loss per common share - as reported $ 1.24 $ 3.10 $ 2.79 Basic and diluted net loss per common - proforma $ 1.26 $ 3.11 $ 2.80
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:
1998 1997 1996 -------------- -------------- ---------------- Expected dividend yield 0.0% 0.0% 0.0% Risk-free interest rate 5.2% 6.0% 5.8% Expected volatility 73.0% 0.0% 0.0% Expected life (in years) 5.0 5.0 5.4
The weighted average estimated fair values of employee stock options granted during 1998, 1997, and 1996 were $2.59, $2.03, and $0.70, respectively. The weighted average estimated fair value of the Purchase Plan options issued during 1998 was $3.38. The above proforma 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. 8. INCOME TAXES: The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 1998 and 1997 are presented below (in thousands):
1998 1997 ------------ ------------ Depreciation $ 44 $ 153 Capitalized start-up costs 1,604 1,402 Net operating loss carryforward 9,631 5,241 Research and development credits 1,648 1,017 Other 332 51 Valuation allowance (13,259) (7,864) -------- ------- $ - $ - -------- -------
57 Due to the uncertainties surrounding the realization of deferred tax assets, the Company has provided a full valuation allowance and, therefore, no benefit has been recognized for the net operating loss and other deferred tax assets. At December 31, 1998, the Company has $25,019,000 for federal and $19,302,000 for state net operating loss carryforwards which expire from 2009 through 2013 and 1999 through 2003, 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. 9. 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, 1998, no Company contributions have been made to the Plan. 10. RELATED PARTY TRANSACTIONS: In 1998, the Company purchased furniture and fixtures totaling $242,000 from an entity where the Company's President and Chief Executive Officer is a member of the board of directors. There were no outstanding payables relating to these transactions at December 31, 1998. In February 1997, the stockholders approved the assignment of technology relating to and including two patent applications to VibRx in consideration for repayment of approximately $10,000 of related patent expenses and issuance of common stock equal to 20% of all VibRx's outstanding shares at such time as VibRx completes an initial financing with aggregate proceeds of at least $500,000. VibRx was formed and is controlled by the Company's President and Chief Executive Officer. 11. GEOGRAPHIC INFORMATION AND MAJOR CUTOMERS The Company operates in one business segment; namely, the design, manufacture, and sale of implantable and semi-implantable hearing devices. During 1998, the Company received regulatory approvals and began to market certain products in the European Union and South America. Two customers individually accounted for 18.9% and 14.7%, respectively of the Company's revenue. 58 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no disagreements with the independent public accountants on accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the information regarding Directors appearing under the heading "Election of Directors" in the Registrant's proxy statement to be filed with the Commission in connection with the annual meeting of stockholders to be held on May 6, 1999, which information is hereby incorporated by reference. The executive officers of the Registrant, and their ages as of January 31, 1999, are as follows:
Name Age Position ----- --- -------- Harry S. Robbins.............................. 51 Chairman of the Board of Directors, President and Chief Executive Officer Geoffrey R. Ball.............................. 35 Vice President, Chief Technical Officer and Director Alfred G. Merriweather........................ 45 Vice President of Finance, Chief Financial Officer and Assistant Secretary Deborah A. Arthur............................. 48 Vice President of Clinical Affairs R. Michael Crompton........................... 40 Vice President of Regulatory Affairs and Quality Assurance Bob H. Katz................................... 38 Vice President of Research and Development Patrick J. Rimroth............................ 44 Vice President of Operations
Harry S. Robbins co-founded the Company and has served as Chairman of the Board of Directors, President and Chief Executive Officer of the Company since its founding in May 1994. From January 1991 to December 1993, Mr. Robbins was President and Chief Executive Officer of CardioRhythm, Inc., a medical device company that, from May 1992, was a subsidiary of Medtronic, Inc. Previously, Mr. Robbins held executive sales and marketing positions with Laserscope and Diasonics, Inc., medical device companies. Mr. Robbins is a director of Business Resource Group, a distributor of office furniture and systems. Mr. Robbins holds a B.A. degree in arts and sciences from Pennsylvania State University. Geoffrey R. Ball invented the FMT, co-founded the Company and has served as Vice President and Chief Technical Officer and a director since May 1994. From 1987 to March 1994, Mr. Ball was a biomedical engineer in the hearing research laboratory at the Veterans Hospital in Palo Alto, California, affiliated with Stanford University. Mr. Ball holds an M.S. degree in systems management from the University of Southern California and a B.S. degree in human development and performance from the University of Oregon. 59 Alfred G. Merriweather has been Vice President of Finance and Chief Financial Officer of the Company since March 1996. From September 1993 to March 1996, Mr. Merriweather was Senior Vice President of Finance and Administration and Chief Financial Officer of LipoMatrix Inc., a medical device company. From 1983 to August 1993, Mr. Merriweather held executive management positions with Laserscope, including serving as Vice President of Finance and Chief Financial Officer from 1988. Mr. Merriweather holds a B.A. degree in economics from the University of Cambridge, England. Deborah A. Arthur has been Vice President of Clinical Affairs of the Company since August 1998. From 1990 to August 1998, Ms. Arthur was employed by the Ear Nose and Throat Division of Smith & Nephew, Inc., a leading supplier of ear, nose and throat medical devices. At Smith & Nephew, Ms. Arthur served in a variety of management positions in clinical affairs, regulatory affairs and quality assurtance, including from June 1993 to July 1996 as Group Manager of Regulatory and Clinical Affairs, from July 1996 to January 1998 as Group Manager of Regulatory and Clinical Affairs and Quality Assurance, and from January 1998 to August 1998, as Director of Regulatory and Clinical Affairs and Quality Assurance. Ms. Arthur holds a B.S. degree in speech and hearing science from East Tennessee State University and an M.A. degree in audiology from the University of Tennessee. R. Michael Crompton has been Vice President of Regulatory Affairs and Quality Assurance of the Company since June 1996 and Vice President of Regulatory and Clinical Affairs and Quality Assurance since January 1998. From June 1995 to May 1996, from October 1993 to January 1994 and from February 1992 to August 1992, Mr. Crompton was employed by Advanced Bioresearch Associates, a medical device consulting company, where he specialized in regulatory consultation for FDA- regulated products. From February 1994 to May 1995, Mr. Crompton was an attorney with Hyman, Phelps & McNamara, a Washington, D.C. law firm specializing in FDA matters. From September 1992 to September 1993, Mr. Crompton was Manager of Regulatory Affairs at Tosoh Medics, Inc., a medical device company. Mr. Crompton has a J.D. degree from the University of San Francisco, and a B.A. degree in biochemistry and an M.P.H. degree in biomedical sciences from the University of California at Berkeley. Bob H. Katz has been Vice President of Research and Development of the Company since October 1994. From April 1990 to October 1994, Mr. Katz was employed by Telectronics Pacing Systems, a manufacturer of implantable medical devices. At Telectronics Pacing Systems, he served as Program Manager, Bradycardia Product Development, from 1990 to September 1993 and as Director of Strategic Planning, Instrument Systems, from September 1993 to October 1994. Mr. Katz holds a B.A. degree in business administration and a B.S. degree in electrical engineering from Rutgers University, an M.S. degree in biomedical engineering from Boston University and an M.B.A. from Nova Southeastern University. Patrick J. Rimroth has served as Vice President of Operations of the Company since March 1996 and as Vice President of Manufacturing, from November 1995 to March 1996. From June 1994 to October 1995, Mr. Rimroth was Vice President of Research and Development for Camino Neurocare, a medical device company. From December 1988 to June 1994, Mr. Rimroth held multiple research and development management positions with divisions of C.R. Bard, Inc., a 60 medical device company. Mr. Rimroth has a B.S. degree in biology and a B.S.E.E. degree in electronic engineering from Purdue University. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the information regarding executive compensation appearing under the heading "Executive Compensation and Other Matters" in the Registrant's proxy statement to be filed with the Commission in connection with the annual meeting of stockholders to be held on May 6, 1999, which information is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the information regarding security ownership appearing under the heading "Record Date and Principal Share Ownership" in the Registrant's proxy statement to be filed with the Commission in connection with the annual meeting of stockholders to be held on May 6, 1999, which information is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the information regarding appearing under the heading "Certain Transactions" in the Registrant's proxy statement to be filed with the Commission in connection with the annual meeting of stockholders to be held on May 6, 1999, which information is hereby incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - (a) FINANCIAL STATEMENTS AND SCHEDULES 1. The financial statements as set forth under Item 8 of this report on Form 10-K are included. 2. FINANCIAL STATEMENT SCHEDULES. The following consolidated financial statement schedule of Symphonix Devices, Inc. for the year ended December 31, 1998 is filed as part of this Report and should be read in conjunction with the consolidated financial statements: Description Page No. Schedule II Valuation and Qualifying Accounts............... 64 61 Schedules not listed above have been omitted because they are not applicable or are not required to be set forth therein is included in the consolidated financial statements or notes thereto. (b) REPORTS ON FORM 8-K None. 62 INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE To the Board of Directors and Stockholders of Symphonix Devices, Inc. Our audits of the consolidated financial statements referred to in our report dated January 22, 1999, appearing on page 42 of this Form 10-K also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents farily, in all material respects, the information set forth therein when read in conjunction with the related financial statements. San Jose, California January 22, 1999 PricewaterhouseCoopers LLP 63 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Thousands)
Balance at beginning of Balance at period Additions Deductions end of period Allowance for doubtful accounts: Year ended December 31, 1998 - $3 - $3 Year ended December 31, 1997 - - - - Year ended December 31, 1996 - - - -
64 (c) EXHIBITS.
Exhibit Description 1.1* Form of Underwriting Agreement. 3.1* Certificate of Incorporation of Symphonix Devices, Inc., a Delaware corporation, as currently in effect. 3.2* Bylaws of the Registrant, as currently in effect. 3.3* Certificate of Amendment of the Certificate of Incorporation of the Registrant, amending Exhibit 3.1. 4.1* Specimen Common Stock Certificate. 10.1* Form of Indemnification Agreement between the Registrant and each of its directors and officers. 10.2* 1994 Stock Option Plan and forms of Stock Option Agreements thereunder. 10.3* 1998 Employee Stock Purchase Plan. 10.4* Restated Investors Rights Agreement dated June 11, 1997 between the Registrant and certain holders of the Registrant's securities. 10.5* Master Equipment Lease Agreement between the Registrant and Lighthouse Capital Partners dated December 2, 1994. 10.6* Assignment by the Registrant to VibRx, Inc. dated March 14, 1997. 10.7* Registrant's Series D Preferred Stock Purchase Agreement dated June 11, 1997. 10.8* Net Lease Agreement between Realtec Properties I, L.P., a California limited partnership, and the Registrant dated July 28, 1994; letter agreements dated July 28, 1994 and August 17, 1994 and First Amendment dated April 17, 1997. 10.9* Lease between Silicon Valley Properties, L.L.C., a Delaware limited liability partnership, and the Registrant dated October 27, 1997. 10.10* Form of Option Vesting Agreement between the Registrant and its officers. 10.11* License Agreement dated June 1, 1995 between Baptist Medical Center of Oklahoma, Inc. and the Registrant. 10.12* Loan and Security Agreement dated December 30, 1997 between the Registrant and Silicon Valley Bank. 10.13 Loan Modification Agreement dated December 24, 1998 between the Registrant and Silicon Valley Bank. 10.14 Premium Contribution Plan Effective November 1, 1998, as Amended and Restated on January 1, 1999. 10.15 Form of Distribution Agreement. 21.2 List of Subsidiaries of the Registrant. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants 24.1 Power of Attorney (see page 66). 27.1 Financial Data Schedule.
* Filed as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 333-40339) and incorporated herein by reference. 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of San Jose, State of California, on the 23rd day of February, 1999. SYMPHONIX DEVICES, INC. By: /S/ Harry S. Robbins --------------------------------- Harry S. Robbins President, Chief Executive Officer and Director POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Harry S. Robbins and Alfred G. Merriweather, and each of them, his attorneys-in-fact, and agents, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and conforming all that said attorneys-in-fact and agents of any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date /s/ Harry S. Robbins President, Chief Executive Officer and February 23, 1999 - -------------------------------- Director Harry S. Robbins /s/ Alfred G. Merriweather Vice President and Chief Financial February 23, 1999 - -------------------------------- Officer Alfred G. Merriweather /s/ Geoffrey R. Ball - -------------------------------- Director February 23, 1999 Geoffrey R. Ball
66
Signature Title Date /s/ B.J. Cassin - -------------------------------- Director February 23, 1999 B. J. Cassin /S/ Terry Gould - -------------------------------- Director February 23, 1999 Terry Gould /s/ Michael J. Levinthal - -------------------------------- Director February 23, 1999 Michael J. Levinthal /S/ Petri T. Vainio - -------------------------------- Director February 23, 1999 Petri T. Vainio
67 EX-10.13 2 LOAN MODIFICATION AGREEMENT EXHIBIT 10.13 LOAN MODIFICATION AGREEMENT LOAN MODIFICATION AGREEMENT This Loan Modification Agreement is entered into as of December 24, 1998, by and between Symphonix Devices, Inc. ("Borrower") and Silicon Valley Bank ("Bank"). 1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may ------------------------------------ be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other documents, a Loan and Security Agreement, dated December 30, 1997, as may be amended from time to time, (the "Loan Agreement"). The Loan Agreement provided for, among other things, a Committed Line in the original principal amount of Two Million Dollars ($2,000,000). Defined terms used but not otherwise defined herein shall have the same meanings as in the Loan Agreement. Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the "Indebtedness." 2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is ---------------------------------------- secured by the Collateral as described in the Loan Agreement. In addition, Borrower has agreed not to encumber any of its intellectual property pursuant to that certain Negative Pledge Agreement dated December 30, 1997. Hereinafter, the above-described security documents and guaranties, together with all other documents securing repayment of the Indebtedness shall be referred to as the "Security Documents". Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. ------------------------------ A. Modification(s) to Loan Agreement. ---------------------------------- 1. Section 2.1.2 entitled "Advances" is hereby amended in part to provide that (i) the "Availability End Date" shall be December 31, 1999 and (ii) the "Loan Maturity Date" shall be December 31, 2003. 2. Section 2.2 entitled "Interest Rate, Payments" is hereby amended in part to provide that Advances outstanding as of the Availability End Date accrue interest at Borrower's option of either (i) a fixed rate equal to 425 basis points above the Treasury Note Rate or (ii) a variable per annum rate of 0.75 percentage points above the Prime Rate. 3. Section 6.7 entitled "Financial Covenants" is hereby amended in part to provide that (i) Borrower shall maintain a Tangible Net Worth of at least $6,000,000; (ii) Borrower shall maintain a Debt/Tangible Net Worth Ratio of not more than 0.50 to 1.00, increasing to 0.75 to 1.00 for the quarter ending December 31, 1999 only; and (iii) Liquidity Coverage shall be defined as unrestricted cash (and equivalents) plus marketable securities ---- (both short and long) plus fifty percent (50%) of net trade ---- eligible accounts receivable or net availability under an accounts receivable revolving line of credit with Bank; and (iv) Remaining Months Liquidity shall be measured in reference to the change in cash and marketable securities, etc. 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended ------------------ wherever necessary to reflect the changes described above. 1 5. PAYMENT OF LOAN FEE. Borrower shall pay to Bank a fee in the amount of ------------------- Five Thousand Dollars ($5,000) (the "Loan Fee") plus all out-of-pocket expenses. 6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing ----------------------- below) agrees that, as of the date hereof, it has no defenses against the obligations to pay any amounts under the Indebtedness. 7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing ------------------- below) understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrower's representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. The terms of this paragraph apply not only to this Loan Modification Agreement, but also to all subsequent loan modification agreements. 8. CONDITIONS. The effectiveness of this Loan Modification Agreement is ---------- conditioned upon Borrower's payment of the Loan Fee. This Loan Modification Agreement is executed as of the date first written above. BORROWER: BANK: SYMPHONIX DEVICES, INC. SILICON VALLEY BANK By:____________________ By:____________________ Name:__________________ Name:__________________ Title:_________________ Title:_________________ 2 EX-10.14 3 PREMIUM CONTRIBUTION PLAN EXHIBIT 10.14 PREMIUM CONTRIBUTION PLAN Symphonix Devices, Inc. PREMIUM CONTRIBUTION PLAN PLAN DOCUMENT Effective November 1, 1998 As Amended and Restated on January 1, 1999 TABLE OF CONTENTS SECTION I - ESTABLISHMENT AND PURPOSE.................................... 1 1.1 Establishment and Purpose........................................ 1 1.2 Original Effective Date.......................................... 1 1.3 Amendment and Restatement........................................ 1 SECTION II - DEFINITIONS................................................. 2 2.1 Account.......................................................... 2 2.2 Affiliated Organization.......................................... 2 2.3 Beneficiary or Beneficiaries..................................... 2 2.4 Code............................................................. 2 2.5 Employee......................................................... 2 2.6 Employer......................................................... 2 2.7 Participant...................................................... 2 2.8 Plan............................................................. 2 2.9 Plan Administrator............................................... 2 2.10 Plan Year........................................................ 3 2.11 Salary Reduction Agreement....................................... 3 2.12 Salary Reduction Contribution.................................... 3 2.13 Sponsor.......................................................... 3 SECTION III - ELIGIBILITY AND PARTICIPATION.............................. 4 3.1 Eligibility and Participation.................................... 4 3.2 Cessation of Participation....................................... 4 3.3 Reinstatement of Former Participant.............................. 4 SECTION IV - SALARY REDUCTION............................................ 5 4.1 Salary Reduction Contributions................................... 5 4.2 Salary Reduction Agreement....................................... 5 4.3 Maximum Amount of Contributions.................................. 6 4.4 Notification..................................................... 6 4.5 Return or Recharacterization of Contributions.................... 6 SECTION V - PARTICIPANT ACCOUNTS......................................... 7 5.1 Establishment of Accounts........................................ 7
Table of Contents (continued) SECTION VI - BENEFIT ELECTIONS........................................................................ 8 6.1 Benefits Provided............................................................................. 8 6.2 Benefit Cost.................................................................................. 8 6.3 Election Procedure............................................................................ 8 SECTION VII - PLAN BENEFITS........................................................................... 10 7.1 Benefit Options............................................................................... 10 7.2 Benefit Descriptions.......................................................................... 10 7.3 Beneficiary Designation....................................................................... 10 SECTION VIII - ADMINISTRATION......................................................................... 11 8.1 Appointment of the Plan Administrator......................................................... 11 8.2 Powers and Responsibilities................................................................... 11 8.3 Allocation of Duties and Responsibilities..................................................... 12 8.4 Expenses...................................................................................... 12 8.5 Liabilities................................................................................... 12 8.6 Claims Procedures............................................................................. 12 SECTION IX - AMENDMENT, TERMINATION, AND MERGER....................................................... 14 9.1 Amendment and Termination..................................................................... 14 9.2 Successor Employer............................................................................ 14 9.3 Action by Symphonix........................................................................... 14 SECTION X - MISCELLANEOUS............................................................................. 15 10.1 Nonguarantee of Employment.................................................................... 15 10.2 Mailing Notices............................................................................... 15 10.3 Submitting Notices............................................................................ 15 10.4 Gender and Number............................................................................. 15 10.5 Applicable Law................................................................................ 15 10.6 Consolidated Omnibus Budget Reconciliation Act of 1985........................................ 15 10.7 Family and Medical Leave Act.................................................................. 15 10.8 Official Document............................................................................. 16 APPENDIX A - BENEFITS AND COSTS....................................................................... 17
- -------------------------------------------------------------------------------- SECTION I - ESTABLISHMENT AND PURPOSE 1.1 Establishment and Purpose Symphonix Devices, Inc. (Symphonix), has established the Symphonix Devices, Inc. Premium Contribution Plan (Plan) to provide taxable and nontaxable benefits to Employees and to permit those Employees to choose which of the benefits they wish to receive. The Plan is intended to meet the requirements of Section 125 of the Internal Revenue Code of 1986 and is to be interpreted in a manner consistent with the requirements thereof. 1.2 Original Effective Date This Plan originally became effective November 1, 1998. 1.3 Amendment and Restatement This Plan has been amended and restated as of January 1, 1999. - -------------------------------------------------------------------------------- SECTION II - DEFINITIONS As used herein, the following words and phrases shall have the following respective meanings when capitalized: 2.1 Account The Account established by Symphonix pursuant to Section 5 to which a Participant's Salary Reduction Contributions are credited. 2.2 Affiliated Organization Any organization which is affiliated with Symphonix organized under the laws of any State. 2.3 Beneficiary or Beneficiaries The covered dependent(s) of a Participant, or the individual(s) designated as beneficiary of a Participant's benefit under the Plan pursuant to Section 7.3. 2.4 Code The Internal Revenue Code of 1986, as it may be amended from time to time. 2.5 Employee Any individual who is employed by Symphonix, or by any Affiliated Organization who has adopted the Plan, and who meets the eligibility requirements specified in Section 3 and elects to participate in the benefit plans described in Appendix A, other than a person who would be treated as an employee by Symphonix under Section 414(n). 2.6 Employer Symphonix, any predecessor or successor entity, and any other Affiliated Organization that shall adopt the Plan with the consent of Symphonix. 2.7 Participant Any Employee of Symphonix, who has met the eligibility requirements of Section 3 and who has made benefit elections pursuant to a Salary Reduction Agreement in accordance with Section 4.2. 2.8 Plan The Symphonix Devices, Inc. Premium Contribution Plan as set forth herein and as amended from time to time. 2.9 Plan Administrator The person, persons or entity appointed by Symphonix pursuant to Section 8 to manage and administer the Plan. 2.10 Plan Year The period beginning on January 1 and ending on December 31 of the same year. 2.11 Salary Reduction Agreement The agreement between the Participant and Symphonix pursuant to Section 4.2 under which the Participant elects between taxable and nontaxable benefits under the Plan. 2.12 Salary Reduction Contribution The amount of compensation which a Participant elects to forego pursuant to a Salary Reduction Agreement and which Symphonix contributes to the Plan for the purchase of benefits for the Participant pursuant to Section 4. 2.13 Sponsor Symphonix Devices, Inc. - -------------------------------------------------------------------------------- SECTION III - ELIGIBILITY AND PARTICIPATION 3.1 Eligibility and Participation Each Employee shall be eligible to participate in the Plan as of the later of the Effective Date or upon date of hire by making benefit elections pursuant to a Salary Reduction Agreement in accordance with Section 4.2. . Full-time work is 30 hours or more per week. The effective date of such benefit elections shall be determined in accordance with the provisions of Section 4.2(d) and Section 6. 3.2 Cessation of Participation A Participant shall cease to be a Participant as of the earliest of (a) the date on which the Plan terminates, (b) the date on which his Salary Reduction Agreement under the Plan expires or is terminated, or (c) the date on which he ceases to be an Employee. 3.3 Reinstatement or Former Participant A former Participant whose participation in the Plan had ceased due to cessation of employment with Symphonix, and who returns to employment, must meet Symphonix's then current entry guidelines to participate in the Plan. - -------------------------------------------------------------------------------- SECTION IV - SALARY REDUCTION 4.1 Salary Reduction Contributions With the consent of the Plan Administrator, Participants may elect each Plan Year to make Salary Reduction Contributions, pursuant to a Salary Reduction Agreement, under the terms of Section 4.2, to purchase the benefits provided under Section 7 of this Plan. 4.2 Salary Reduction Agreement (a) Nature of Agreement The Salary Reduction Agreement shall be a legally binding agreement (on a form prescribed by the Plan Administrator) under which the Participant agrees to reduce the compensation otherwise payable to him thereafter by a specified amount or, upon notice from the Plan Administrator, fails to decline coverage under the Plan. The Salary Reduction amount may change within a Plan Year if any third party insurance company providing the selected benefits adjusts the amount it charges for such coverage. Symphonix agrees to apply the total amount of Salary Reduction Contributions elected by the Participant toward the purchase of benefits elected under Section 6. The Salary Reduction Agreement may take the form of a benefit election form under the Plan. (b) Agreement Election Period With respect to any given Plan Year, a Participant may enter into a Salary Reduction Agreement with Symphonix only during the Annual Election Period provided for under Section 6.3(a). (c) Timing of Salary Reduction The reduction of a Participant's compensation that is used for the purpose of providing benefits elected under Section 6 shall be done on a monthly, semi-monthly, biweekly, weekly or other periodic basis in accordance with the Participant's payroll period. (d) Effective Date A Participant's Salary Reduction Agreement shall be effective as soon as practicable following the day the agreement is received in executed form by the Plan Administrator, but not before the beginning of the Plan Year to which the Agreement applies or the date of the commencement of the Participant's participation in the Plan. (e) Amendment or Termination of Agreement A Participant may amend or terminate his Salary Reduction Agreement only at such time as he is permitted to change his benefit election under Section 6.3(d). A Participant's amended Salary Reduction Agreement, if consistent with Section 6.3(d), shall be effective as soon as practicable following the date the amended agreement is received in executed form by the Plan Administrator, but not before the earlier of the beginning of the Plan Year to which it applies or the occurrence of an event specified in Section 6.3(d), provided that the amendment is on account of that change. The Plan Administrator may prescribe uniform and nondiscriminatory rules and procedures limiting the number of times a Participant may amend his Salary Reduction Agreement during any Plan Year. (f) Transfer to Affiliated Organization; Termination of Employment A Participant's Salary Reduction Agreement shall automatically terminate if the Participant terminates his employment with Symphonix or transfers to an Affiliated Organization which has not adopted the Plan. If such Participant (or former Participant) subsequently returns to the employment of Symphonix, the Participant shall, subject to the eligibility and participation requirements set forth in Section 3, be permitted to execute a new Salary Reduction Agreement and resume having Salary Reductions made on his behalf. A Participant's Salary Reduction Agreement shall continue in effect (so long as it was not based on a negative enrollment) if the Participant transfers to an Affiliated Organization which has adopted the Plan. 4.3 Maximum Amount of Contributions The amount of Salary Reduction Contributions permitted shall be limited to a maximum determined by Symphonix each year. 4.4 Notification Before making annual benefit elections, all Participants shall be notified of the maximum amount of Salary Reduction Contributions they may elect to make. 4.5 Return or Recharacterization of Contributions Notwithstanding any provision in this Plan to the contrary, in the event the Plan Administrator determines that the Plan may be discriminatory under the Code, a Participant's Salary Reduction Agreement may be: (a) disregarded to the extent necessary to prevent such discrimination and, as a result, the amount of Salary Reduction Contributions which would otherwise have been made pursuant to such Agreement may instead be paid directly to the Participant as additional compensation; or (b) recharacterized as after-tax Employee Contributions, which are voluntary nondeductible Employee contributions. - -------------------------------------------------------------------------------- SECTION V - PARTICIPANT ACCOUNTS 5.1 Establishment of Accounts Symphonix shall create and maintain a bookkeeping account on behalf of each Participant who elects to have Salary Reduction Contributions made to the Plan. Each Participant's Account shall be divided into subaccounts which shall be established, as necessary, and credited with a Participant's Salary Reduction Contributions for benefits provided under Section 7 of the Plan and listed in Appendix A. - -------------------------------------------------------------------------------- SECTION VI - BENEFIT ELECTIONS 6.1 Benefits Provided A Participant may elect, pursuant to the procedures described in Section 6.3, to purchase benefits under Section 7 of the Plan through Salary Reduction Contributions or with after-tax Employee contributions. 6.2 Benefit Cost The cost to Participants of any benefits provided under the Plan shall be determined by Symphonix, regardless of the method of funding the Plan. (a) Current Cost The currently effective costs of the benefits provided under the Plan are set forth in Appendix A to the Plan. Appendix A may be amended from time to time to reflect, among other things, changes in the rates charged by third party insurance companies. (b) Cost Review Each year, Symphonix shall review the costs of the benefits provided under the Plan. Symphonix may at any time make changes to these costs at its discretion and shall amend Appendix A to reflect such changes. (c) Notification Before making their annual benefit elections, all eligible Employees and Participants shall be notified as to the currently effective costs of the benefits provided under the Plan. 6.3 Election Procedure (a) Annual Election Period Each year, during the period beginning on December 1 and ending on December 31 or, in the case of new Participant, during the period beginning on his date of employment and ending on the first day on which he becomes eligible to participate, each Participant shall complete an election form indicating which of the benefits, or combination of benefits, provided, under Section 7 herein, he has elected or, at the discretion of Symphonix, declined coverage under the Plan upon written notice to Symphonix. (b) Effective Period An election made under Section 6.3(a) shall be effective only during the Plan Year for which the election is made. Once made, such election, or a failure to make such an election, shall be irrevocable as to the Plan Year to which it applies, except as provided in Sections 6.3(d) and 6.3(i). (c) Elections Irrevocable All elections made by a Participant can be changed for the following Plan Year during the Annual Election Period described in Section 6.3(a). Once a Plan Year has commenced, a Participant shall not be permitted to revoke an election which applies to that Plan Year or reallocate his Salary Reduction Contributions among a different mix of benefits, except as provided in Section 6.3(d). (d) Special Rule Notwithstanding the foregoing, a Participant may revoke a benefit election (including, but not limited to, an election not to receive benefits under the Plan) after the Plan Year has commenced and make a new election with respect to the remainder of the Plan Year if both the revocation and new election are on account of and consistent with a Change in Family Status pursuant to Section 3(e). (e) Change in Family Status For purposes of this Plan, the following events shall constitute a Change in Family Status: (i) Legal marital status. Events that change Employee's legal marital status, including marriage, death of Employee's spouse, divorce, legal separation, or annulment; (ii) Number of dependents. Events that change the number of Employee's dependents (as defined in IRC Section 152), including birth, adoption, placement for adoption (as defined in IRS Regulations under Section 9801), or death of a dependent; (iii) Employment status. A termination or commencement by Employee, Employee's spouse, or Employee's dependent; (iv) Work schedule. A reduction or increase in Employee's hours of employment, or those of Employee's spouse or dependent, including a switch between part-time and full-time, a strike or lockout, or commencement or return from an unpaid leave of absence; (v) Dependent satisfies or ceases to satisfy the requirements for unmarried dependents. An event that causes Employee's dependent to satisfy or cease to satisfy the requirements for coverage due to attainment of age, student status, or any similar circumstance as provided in the accident or health plan under which the Employee receives coverage; (vi) Residence or worksite. A change in Employee's place of residence or work, or that of Employee's spouse or dependent; and (vii) Enrollment in health coverage. Employee's enrollment in health coverage pursuant to IRS Regulations under Section 9801. (f) Allocation of Salary Reduction Contributions Election of benefits by a Participant in accordance with Section 6.3(a) and 6.3(d) shall constitute authorization for the Plan Administrator to allocate the Participant's Salary Reduction Contributions made on behalf of the Participant as necessary to purchase the benefits elected. (g) Procedures The Plan Administrator shall specify the procedures to be followed in the distribution, completion and collection of the benefit election forms. The Plan Administrator may specify any other administrative procedures deemed necessary to implement and administer the Plan. (h) Notification Before making their annual benefit elections, all eligible Employees and Participants shall be notified of any administrative procedures involved in the benefit election process. (i) Failure to Submit an Election Form An Employee eligible to participate in the Plan but failing to submit a completed election form to the Plan Administrator on or before the specified due date for the first Plan Year for which he is eligible shall be deemed not to be a Participant. Upon failure to submit a completed election form in subsequent Plan Years, the Employee shall be deemed to have made the same election as was in effect on the last day of the Preceding Plan Year. If the Employee is deemed to be a Participant, he shall also be deemed to have agreed to a reduction of his compensation for the Plan Year equal to the Participant's share of the costs of such insured benefits, as set forth in Appendix A. - -------------------------------------------------------------------------------- SECTION VII - PLAN BENEFITS 7.1 Benefit Options Participants may elect, in accordance with the procedures outlined in Section 6, any of the benefits listed in Appendix A in which they are eligible to participate. Each year, Symphonix shall review the benefits provided under the Plan. Symphonix may make changes to these benefits at its discretion and shall amend Appendix A to reflect such changes and shall notify Employees of such changes. 7.2 Benefit Descriptions Detailed descriptions of each benefit offered under the Plan are contained in the separate written plan of benefits. 7.3 Beneficiary Designation The Participant shall designate the individual(s) who may receive benefits under the Plan due to the Employee's status as a Participant as follows: (a) Covered Dependents Where applicable, the Participant shall designate his dependent(s) who shall be covered under the Plan on a form provided by the Plan Administrator, and shall provide such additional information regarding the covered dependent(s) as deemed necessary by the Plan Administrator with regard to the benefit coverage provided. (b) Beneficiary The Participant shall elect, on a form provided by the Plan Administrator, the individual(s) who shall receive any benefit under the Plan upon the Participant's death. - -------------------------------------------------------------------------------- SECTION VIII - ADMINISTRATION 8.1 Appointment of the Plan Administrator Symphonix shall designate the Plan Administrator who shall administer Symphonix's Plan. Such Plan Administrator may consist of an individual, a committee of two or more individuals, whether or not, in either such case, the individual or any of such individuals are Employees of Symphonix, a consulting firm or other independent agent, or Symphonix itself. The Plan Administrator shall be charged with the full power and the responsibility for administering the Plan in all its details. If no Plan Administrator has been appointed by Symphonix, or if the person designated as Plan Administrator by Symphonix is not available to serve as such for any reason, Symphonix shall be deemed to be the Plan Administrator of the Plan. The Plan Administrator may be removed by Symphonix, or may resign by giving notice in writing to Symphonix, and in the event of the removal, resignation, death or other termination of service by the Plan Administrator, Symphonix shall, as soon as practicable, appoint a successor Plan Administrator, such successor thereafter to have all of the rights, privileges, duties and obligations of the predecessor Plan Administrator. 8.2 Powers and Responsibilities (a) Administration of the Plan The Plan Administrator shall have all powers necessary to administer this Plan, including the power to construe and interpret the Plan documents; to decide all questions relating to an Employee's eligibility to participate in the Plan; to determine the amount, manner, and timing of any payment of benefits or change of accordance with Section 8.6 of the Plan; and to appoint or employ advisors, including legal counsel, to render advice with respect to any of the Plan Administrator's responsibilities under the Plan. Any construction, interpretation, or application of the Plan by the Plan Administrator shall be final, conclusive and binding. All actions by the Plan Administrator shall be taken pursuant to uniform standards applied to all persons similarly situated. The Plan Administrator shall have no power to add to, subtract from or modify any of the terms of the Plan, or to change or add to any benefits provided by the Plan, or to waive or fail to apply any requirements of eligibility for a benefit under the Plan. (b) Records and Reports The Plan Administrator shall be responsible for maintaining sufficient records to reflect the compensation of each Participant for purposes of determining the amount of contributions that may be made by others on behalf of the Participant under the Plan. The Plan Administrator shall be responsible for submitting all required reports and notifications relating to the Plan to Participants or their Beneficiaries, the Internal Revenue Service and the Department of Labor. (c) Rules and Decisions The Plan Administrator may adopt such rules as it deems necessary, desirable or appropriate in the administration of the Plan. All rules and decisions of the Plan Administrator shall be applied uniformly and consistently to all Employees and Participants in similar circumstances. When making a determination or calculation, the Plan Administrator may rely upon all such information so furnished, including the Participant's, former Participant's or Beneficiary's current mailing address. 8.3 Allocation of Duties and Responsibilities The Plan Administrator may, by written instrument, designate persons other than the Plan Administrator to carry out any of its duties and responsibilities under the Plan. Any such duties or responsibilities thus allocated must be described in the written instrument. If a person other than an Employee of Symphonix is so designated, such person must acknowledge acceptance of the allocated duties and responsibilities in writing. All such instruments shall be attached to, and made part of, the Plan. 8.4 Expenses Symphonix shall pay all expenses authorized and incurred by the Plan Administrator in the administration of the Plan, unless, by agreement or common practice, the Plan Administrator absorbs such expenses. 8.5 Liabilities Symphonix agrees to indemnify any Employee, person or entity serving as the Plan Administrator or as a member of a committee designated as Plan Administrator (including any Employee, person or entity who formerly served as Plan Administrator or as a member of such committee) against all liabilities, damages, costs and expenses (including attorneys' fees and amounts paid in settlement of any claims approved by Symphonix) occasioned by any act or failure to act in connection with the Plan, except where such act, or failure to act, is the result of willful neglect or gross negligence on the part of such Employee, person or entity. 8.6 Claims Procedures (a) Filing a Claim Any Participant or Beneficiary under the Plan may file aritten claim for a Plan benefit with the Plan Administrator or with a person named by the Plan Administrator to receive claims under the Plan. Notwithstanding any other language in this Section 8.6, any claim which arises under any benefit program listed on Appendix A shall not be subject to review under this Plan but rather shall be subject to review under the provisions of the specific programs listed on Appendix A. (b) Notice of Denial of Claim In the event of denial or limitation of any benefit or payment due to or requested by any Participant or Beneficiary under the Plan ("Claimant"), the Claimant shall be given written notification containing specific reasons for the denial or limitation of his benefit. The written notification shall contain specific reference to the pertinent Plan provisions on which the denial or limitation of his benefit is based. In addition, it shall contain a description of any other material or information necessary for the Claimant to perfect a claim, and an explanation of why such material or information is necessary. The notification shall further provide appropriate information as to the steps to be taken if the Claimant wishes to submit his claim for review. This written notification shall be given to a Claimant within 60 days after receipt of his claim by the Plan Administrator or, within 120 days if special circumstances require an extension of time for processing is required, written notice of the extension shall be furnished to the Claimant prior to the termination of said sixty (60) day period, and such notice shall indicate the special circumstances which make the postponement appropriate. (c) Right of Review In the event of a denial or limitation of his benefit, the Claimant or his duly authorized representative shall be permitted to review pertinent documents and to submit to the Plan Administrator issues and comments in writing. In addition, the Claimant or his duly authorized representative may make a written request for a full and fair review of his claim and its denial by the Plan Administrator; provided, however, that such written request must be received by the Plan Administrator (or its delegate) within sixty (60) days after receipt by the Claimant of written notification of the denial or limitation of the claim. In appropriate cases, the Plan Administrator may waive the sixty (60) day requirement. (d) Decision on Review A decision shall be rendered by the Plan Administrator within sixty (60) days after the receipt of the request for review, provided that, where special circumstances require an extension of time for processing the decision, it may be postponed on written notice to the Claimant (prior to the expiration of the initial sixty (60) day period) for an additional sixty (60) days, but in no event shall the decision be rendered more than one hundred twenty (120) days after the receipt of such request for review. Any decision by the Plan Administrator shall be furnished to the Claimant in writing and shall set forth the specific reasons for the decision and the specific Plan provisions on which the decision is based. - -------------------------------------------------------------------------------- SECTION IX - AMENDMENT, TERMINATION, AND MERGER 9.1 Amendment and Termination The Plan may at any time and from time to time be amended, modified or terminated by written instrument executed by a duly authorized representative of Symphonix. Any such amendment, modification, or termination shall become effective on such date as Symphonix shall determine and may apply to persons eligible to receive benefits or persons receiving benefits under the Plan at the time thereof, or both, as well as to persons who otherwise would be eligible to receive benefits in the future, provided, however, that no such amendment, modification, or termination shall deprive any Participant of any benefits attributable to reduction in his compensation made prior to the date of such amendment, modification, or termination. 9.2 Successor Employer In the event of the dissolution, merger, consolidation, or reorganization of Symphonix, provision may be made by which the Plan shall be continued by the successor employer, in which case such successor employer shall be substituted for Symphonix under the Plan, as shall constitute an assumption of Plan liabilities by the successor employer, and the successor employer shall have all the powers, duties, and responsibilities of Symphonix under the Plan. 9.3 Action by Symphonix Any action by Symphonix under this Plan shall be by any individual duly authorized by Symphonix to take such action. - -------------------------------------------------------------------------------- SECTION X - MISCELLANEOUS 10.1 Nonguarantee of Employment Nothing contained in this Plan shall be construed as a contract of employment between Symphonix and any Employee, or as a right of any Employee to be continued in the employment of Symphonix, or as a limitation of the right of Symphonix to discharge any of its Employees, with or without cause. 10.2 Mailing Notices Notices, accountings and reports required to be given by the Plan Administrator may be given by personal delivery or by mail, addressed to the party involved at the last address of such party recorded on the general address files of the Plan Administrator. If given by mail, the date of mailing shall be deemed to be the date as of which the same was given or furnished to the addressee. Any notice required under the Plan may be waived in writing by the person entitled to such notice. 10.3 Submitting Notices All notices, designations and elections of Participants shall be submitted to the Plan Administrator on forms and to the address specified by the Plan Administrator. 10.4 Gender and Number Whenever used in the Plan, words in the masculine gender shall include masculine or feminine gender, and unless the context otherwise requires, words in the singular shall include the plural, and words in the plural shall include the singular. 10.5 Applicable Law This Plan shall be construed and enforced in accordance with the laws of the State of California to the extent not superseded by federal law. 10.6 Consolidated Omnibus Budget Reconciliation Act of 1985 Notwithstanding anything in the Plan to the contrary, to the extent required by Code Section 4980B and the Proposed Treasury Regulations thereunder (COBRA), a Qualified Beneficiary who would lose coverage under an insurance contract or under the Health Care Expense Account upon the occurrence of a qualifying event (as defined in Code Section 4980B(f)(3)) shall be permitted to continue coverage under the Plan by electing to make the applicable contributions, on an after-tax basis, in accordance with procedures established by the Administrator that are consistent with COBRA. Symphonix shall provide notice to each covered Employee and his Spouse of their rights under COBRA accordance with applicable law. 10.7 Family and Medical Leave Act Notwithstanding anything in the Plan to the contrary, to the extent Symphonix is subject to the provisions of the Family and Medical Leave Act (FMLA) and the regulations thereunder, an Employee on leave of absence under FMLA may choose to continue coverage under the Plan by making the applicable contributions in the following modes as permitted under the rules established by the Administrator and in compliance with the FMLA regulations: (a) Pre-payment made prior to the commencement of the FMLA period on a pre-tax or after-tax basis; or, (b) Pay-as-you-go basis during the term of the leave on an after-tax basis or pre-tax basis to the extent that the contributions are made from taxable compensation; or, (c) Catch-up option so long as the employer and the Participant have agreed in advance of the coverage period that the Employer will recoup contributions on a pre-tax basis when the Participant returns from FMLA leave. An Employee on FMLA leave may also revoke an existing election for the remainder of the coverage period (i.e., to the end of the Plan Year) or elect to be reinstated upon return from FMLA leave. Where FMLA leave spans two cafeteria Plan Years, the Employee on FMLA leave may only make an election for the remainder of the Plan Year in which the FMLA leave begins. 10.8 Official Document This document, together with all attachments and appendices, constitutes the entire Plan, and it is the official Plan Document which sets forth in particularly the terms and conditions of the Plan. Any discrepancy between the terms, condition or language contained in this Plan document and the terms, conditions or language of other documents will be resolved in accordance with this Plan Document. If there are differences in interpretations between this Plan Document and other documents, the interpretation of this Plan Document shall prevail. IN WITNESS WHEREOF, the undersigned authorized representative of Symphonix has executed this amended and restated Plan this _________ day of ___________________, 19 ___, on behalf of Symphonix to evidence the adoption of the Plan as set forth herein. (Full Name) By:____________________________________ Attest: By ___________________________ Title ___________________________ APPENDIX A Symphonix Devices, Inc. Premium Contribution Plan BENEFITS & COSTS Effective Date Effective January 1, 1999, the benefits and costs under the Plan are as follows: Benefits Benefits are available to Participants under the health plans sponsored by Symphonix. A copy of the Plan document and its appendices are attached hereto. Cost The following schedule of bi-weekly contributions states the amount of premiums required to pay the cost of the benefits elected by a Participant, subject to the limitations set forth in the Symphonix Devices, Inc. Premium Contribution Plan. Bi-Weekly Contributions (for the period beginning January 1, 1999)
Coverage Employee Employee Employee Employee + Spouse + Child(ren) + Family HMO PacifiCare $ 0 $ 0 $ 0 $ 0 United Healthcare $ 0 $ 0 $ 0 $ 0 Blue Shield $ 0 $ 0 $ 0 $ 0 CIGNA $ 4.62 $ 6.92 $ 6.92 $ 9.23 PPO PacifiCare $10.15 $33.69 $33.69 $50.77 United Healthcare $ 7.85 $26.77 $26.77 $40.15 Blue Shield $10.15 $33.69 $33.69 $50.77 CIGNA $13.85 $46.15 $46.15 $69.23
EX-10.15 4 FORM OF DISTRIBUTION AGREEMENT EXHIBIT 10.15 FORM OF DISTRIBUTION AGREEMENT DISTRIBUTION AGREEMENT between SYMPHONIX DEVICES, INC. and ________________________ Dated ________ This distribution agreement (this "Agreement") is entered into by and between Symphonix Devices, Inc., ("Symphonix") with a place of business at 2331 Zanker Road, San Jose, CA 95131, U.S.A., and ______________ ("Distributor") with a place of business at _______________. Whereas Distributor desires to purchase from Symphonix for resale in the Territory certain Products (as defined below) and Symphonix is willing to sell said Products to Distributor upon the terms and conditions hereinafter set forth; The Products to be sold under this Agreement require surgical implantation following which the patient will require audiological fitting and assistance; The Products are considered to be Active Implantable Medical Devices within the European Union and are subject to regulation by relevant governmental or quasi-governmental authorities in the Territory; Symphonix and Distributor desire to fully comply with all laws, standards, regulations, and other guidelines applicable to the marketing and sale of the Products, including but not limited to the Active Implantable Medical Devices Directive, ISO 9001 and ISO 9002, EN 46001; and In view of the fact that Symphonix has a regulatory obligation to ensure the traceability of its products and in view of the fact that patients benefit from such traceability particularly in case of a defect Symphonix and Distributor recognize the need for a system of traceability for Products sold in the territory. Now therefore, in considerations of the foregoing premises and the mutual covenants contained herein, the parties hereby agree as follows: 1. DEFINITIONS "DOA" or Dead on Arrival means that Products do not conform to user specifications and applies to Products sold for the period of the first fourteen (14) days following invoice date to end user. "Distributor's Purchase Price" The Distributor's Purchase Price shall be the price at which Symphonix sells the Products to Distributor under this Agreement as set forth on Exhibit A hereto, which Exhibit A may be amended by Symphonix from time to time. "Effective Date" The Effective Date of this Agreement shall be the date set forth in the first paragraph of this Agreement. "EW" or "Ex Works" shall have the meaning set forth in INCOTERMS 1990. "List Price" The List Price shall be the price suggested by Symphonix for reference purposes for the Products in the Territory as set forth on Exhibit A hereto, which Exhibit A may be amended by Symphonix from time to time. "Products" The products listed in Exhibit A hereto, which Exhibit A may be amended by Symphonix from time to time. "Promotional Materials" Promotional Materials shall include all printed, video, audio and similar materials, labeling, labels and packaging materials used in the marketing, sale and distribution of the Products. "Quality System Requirements" Quality System Requirements includes those standard operating procedures ("SOP's") and other policies and procedures issued from time to time by Symphonix to enable compliance by Symphonix and Distributor with Regulatory Requirements, the Symphonix Quality System and with good business practices. "Regulatory Requirements" Regulatory Requirements include those laws, regulations, standards, guidelines that are applicable or become applicable during the Term of this Agreement to the distribution of the Products in the Territory as set forth on Exhibit D, which exhibit may be changed from time to time during the Term. "Quotas" The minimum volume of purchases by Distributor, expressed in units and/or currency amounts, established by Symphonix for specified periods during the Term as set forth on Exhibit C. "Term", "Initial Term" and "Renewal Term" The Term shall be the period of time during which the Agreement is in force. The Initial Term shall be the period of time commencing with execution of this Agreement and terminating as specified in this Agreement. A Renewal Term shall be any subsequent Term arising out of an agreed extension of this Agreement beyond the Initial Term. "Territory" The geographic area set forth on Exhibit B hereto. "Trademarks" shall mean the Symphonix logos, trademarks, artwork and/or tradenames designated by Symphonix from time to time during the Term. 2. DISTRIBUTOR, PRODUCTS AND TERRITORY 2.1. Symphonix grants Distributor the right to be its exclusive distributor for the Products in the Territory during the Term. Symphonix agrees that it shall not during the Term appoint another distributor for the Products in the Territory. 2.2. Neither Distributor nor any of its affiliates shall promote the Products, seek customers, or establish any branch or maintain any distribution depot for the Products outside the Territory. 2.3. Symphonix shall have the right to change the specifications of, or discontinue, any Products; and shall inform the Distributor of any such change with at least sixty (60) days prior notice in writing, unless, in the opinion of Symphonix, the circumstances require a more rapid change. 2.4 During the Term of this Agreement, Distributor shall not represent, act for, distribute and/or sell middle ear implant systems or related equipment of any manufacturer other than Symphonix without the prior written consent of Symphonix, and shall not manufacture or distribute products which Symphonix reasonably believes to be competitive with the Products, or in conflict with the proper representation of the Products in the Territory. 2.5 Except for the rights expressly granted to Distributor herein, neither this Agreement, nor sale of Products to Distributor hereunder shall convey any license or right, under any patent, copyright, trademark, trade secret or any other intellectual property right with respect to Products. 3. TERM, EXTENSION AND TERMINATION 3.1. The Initial Term of this Agreement shall commence on the Effective Date and continue until the second anniversary thereof unless sooner terminated as provided herein. 3.2 This Agreement may be renewed by mutual agreement of the parties. Neither party shall be obligated to agree to a renewal of this Agreement beyond the end of the Initial Term or any Renewal Term. 3.3 This Agreement shall automatically terminate upon adjudication of the Distributor's bankruptcy. 3.4 Either party shall be entitled to terminate this agreement at the end of the Initial Term or at the end of any Renewal Term, with written notice delivered not less than ninety (90) days before the end of such Initial Term or Renewal Term. If the parties have not agreed on any Renewal Term, but tacitly renewed this Agreement after the expiry of the Initial Term or any Renewal Term this Agreement can be terminated by either party by giving not less than ninety (90) days notice at any time. 3.5 This Agreement will terminated upon a breach by either party of any material term or condition of this Agreement which such party fails to cure within thirty (30) days after written notice thereof. If such breach (excluding any failure to pay money) will take more than thirty (30) days to cure and the party in breach has promptly begun reasonable substantial corrective action and has diligently continued said action within thirty (30) days after written notice of the breach, termination will not be effective until ninety (90) days after written notice of the breach. 3.6 This Agreement may be terminated by one party, upon written notice to the other, in the event any reorganization, or insolvency proceeding is initiated against the other party and is not dismissed within thirty (30) days of the onset of such event, or if such proceeding is initiated by the other party, or if a receiver is appointed for the other party, or if any substantial part of the business assets of the other party are the subject of an attachment, sequestration or other related judicial proceeding. 3.7 Upon expiration or termination of this Agreement in accordance with its terms (i) the rights granted to Distributor pursuant to this Agreement will automatically terminate and Symphonix shall have the right to immediately appoint a new distributor for the Products in the Territory, (ii) Distributor will cease using all Trademarks and shall have no continuing rights in the Trademarks, and (iii) Distributor will pay immediately to Symphonix all due and outstanding amounts under this Agreement. Upon expiration or termination of this Agreement for any reason whatsoever, Symphonix shall have no further obligation to Distributor other than those set forth in this Article 3. Symphonix shall not be liable to Distributor for, and Distributor hereby expressly waives all rights to, compensation or damages of any kind, resulting from such termination (including, without limitation, special, consequential or indirect loss or any loss of prospective profits or any damages occasioned by loss of goodwill) whether on account of the loss by Distributor of present or prospective profits, commissions, anticipated orders, expenditures, investments, or commitments made in connection with this Agreement, or in anticipation of the continuation of this Agreement, or goodwill created, or on account of any other reason whatsoever. 3.8 Upon any termination of this Agreement, the Distributor shall provide Symphonix with reasonably detailed information regarding its activity during the Term and any Renewal Term to ensure business continuity and sufficient to enable Symphonix to trace all Products supplied by the Distributor. 3.9 In the event of termination of this Agreement by Symphonix for any reason, Symphonix shall repurchase and Distributor shall resell all of the Distributor's unsold inventory (except inventory subject to Customer orders prior to the date of termination notice) whereas in case of termination of this Agreement by Distributor for any reason, Symphonix shall have the right to repurchase and Distributor shall resell all of the Distributors unsold inventory (except inventory subject to Customer orders prior to the date of termination notice); provided, however, that the Products were received by Distributor less than nine months prior to the date of notice of termination and that the Products are in "as supplied" condition and that Distributor has fulfilled all its obligations to Symphonix. The repurchase amount paid to the Distributor shall be the Distributor's cost into Distributor's warehouse in the Territory. Payment for such inventory will be made upon receipt by Symphonix, or its designee, of such inventory. 3.10 The provisions of Articles 11, 13, 14, 17, 21 and 22 and Sections 3.7, 3.8, 3.9, 9.3 and 9.4 will survive the termination of this Agreement for any reason. 4. PAYMENT AND CREDIT TERMS 4.1 Distributor will duly obtain any government licences or approvals required in connection with payment under this Agreement. Acceptance and endorsement by Symphonix of any check, draft or other instrument from Distributor for less than the full amount Symphonix claims to be due and payable shall not be deemed to be an admission of payment in full notwithstanding any conditions to the contrary which are noted thereon. 4.2 {payment terms, with reversion to letter of credit if payments not acceptable}All payments to Symphonix hereunder shall be made sixty (60) days net invoice in United States Dollars by wire transfer only to an account as directed in writing by Symphonix. Distributor will bear all transfer charges. In the event of any late payment, Distributor shall pay interest (which shall accrue daily) on all overdue amounts of ten percent (10%) per annum or the highest lawful rate, whichever is less, applicable after as well as before any judgement. Notwithstanding any provisions for later payments contained herein, if Distributor does not make payments when due or if Distributor's aggregate obligation exceeds the credit limit, if any, established by Symphonix, then Symphonix may require payment in advance by letter of credit in respect of future shipments. Distributor shall have no right of set-off without Symphonix's prior written consent. OR 4.2 {Letter of credit terms} All payments to Symphonix hereunder shall be made in United States Dollars by means of an irrevocable letter of credit drawn on a major bank approved by Symphonix, which irrevocable letter of credit shall be established by Distributor in favour of Symphonix prior to the requested shipment date of any order. The letter of credit shall be upon terms acceptable to Symphonix, shall allow for partial shipments, and shall be in an amount equal to Distributor's Purchase Price for the Products plus all applicable taxes, shipping charges, and other charges to be borne by Distributor. All exchange, interest, banking, collection, and other charges shall be at Distributor's expense. Distributor shall have no right of set-off without Symphonix's prior written consent. 5. ORDERS AND PRICES 5.1. All orders must be in writing and be received by Symphonix by mail, courier or facsimile. Orders must indicate the Products ordered by part number, quantities, required delivery dates, delivery location and any other requirements. All orders will be governed solely by the provisions of this Agreement. 5.2 Any orders for Products may be rejected by Symphonix on reasonable grounds, and no order placed by Distributor shall be deemed accepted unless and until formal written acceptance signed by a duly authorized official of Symphonix has been dispatched to Distributor. Unless explicitly stated in writing Symphonix does not agree to any general purchase conditions of the Distributor. The same applies with respect to any provision that contradicts this Agreement. 5.3 Distributor shall place its firm orders for the Products approximately monthly but always at least one (1) month ahead of their required date of shipment from Symphonix. Distributor shall meet during all relevant periods, the Quotas as specified in Exhibit C. 5.4 Distributor agrees to schedule its orders such as to maintain in stock an inventory of Products equivalent to not less than six weeks anticipated sales, or in such other amount as the parties agree is necessary to properly service customers. 5.5. Symphonix may refuse to accept any order for Products or refuse to deliver any order that has been previously accepted if the Distributor is in arrears with any payment due to Symphonix or in the reasonable opinion of Symphonix is or will be unable to pay its debts as they fall due or if Symphonix shall otherwise reasonably believe that such action is necessary. 5.6. Symphonix shall not be liable for loss of trade or profit which Distributor may incur as a result of prevention of, or delay in, delivery. Symphonix shall endeavor to inform the Distributor of any appreciable expected delay of which it becomes aware. 5.7. Symphonix shall notify Distributor of its List Prices for the Products at least annually. Symphonix shall sell Products to Distributor at the Distributor's Purchase Price indicated on Exhibit A, which shall be calculated at an agreed upon discount from List Price. All shipments are EX WORKS. Distributor's sole remuneration hereunder shall be the difference between the Price paid by Distributor to Symphonix and the amount received by Distributor from customers. Symphonix may increase prices at any time upon sixty (60) days notice. Such change will apply to purchase orders accepted by Symphonix after the effective date of such change. If at the time of notice to the Distributor of an intended price increase, there are existing tenders or sales offers made by the Distributor which have quoted current prices, and which cannot be covered from Distributor's existing inventory or orders, the Parties will negotiate a mutually agreeable solution. 5.8 All freight, crating, insurance, handling, forwarding agent's fees, taxes and storage, and all other charges shall be borne by Distributor. Any present or future sales, revenue, excise, use or other taxes, import or export duties, fees, or other charges of any nature, imposed by any public authority (national, state, local or other) applicable to the Products, its manufacture or sale, are in addition to the purchase price and shall be paid by Distributor. In the event Symphonix agrees to reconfigure or change Products, delay delivery, or cancel a purchase order at Distributor's request, Symphonix may impose reasonable reconfiguration, change, delay or restocking charges in accordance with Symphonix's prices and standard practices. 6. SHIPMENT, ACCEPTANCE, RISK OF LOSS AND PASSAGE OF TITLE 6.1 Shipment is EW Symphonix. Symphonix shall make commercially reasonable efforts to ship by the requested shipment date. Time is not of the essence. Symphonix will have no liability for special or consequential damages or otherwise or for any penalty for delay for Product not shipped when originally indicated. Distributor shall pay expedited shipment costs for any expedited shipping requested by Distributor. Partial shipments are allowed with Distributor's consent. Carriers used for shipment are not agents of Symphonix. Products will be suitably packed in Symphonix's standard containers, or in special packaging requested by Distributor at Distributor's expense. Symphonix may ship Products up to five (5) days in advance of the requested shipment date without Distributor's consent. 6.2 Distributor shall carefully inspect all Products upon receipt. Unless Distributor notifies Symphonix promptly (and in no event greater than thirty (30) days after receipt) of any damage to Products, all Products received by Distributor shall be deemed accepted. 6.3 Risk of loss or damage shall pass to Distributor EW Symphonix. 6.4 Title to Products (excluding any Software, title to which does not transfer to Distributor or end user) shall pass to Distributor at the time of shipment. 6.5 Distributor shall obtain the appropriate licenses or permits required to import Products into the Territory. To the extent permitted by law, all such licenses and permits shall specify Symphonix as the approved entity for importation. Symphonix shall have the exclusive rights to all such licenses or permits if this Agreement is terminated for any reason. Notwithstanding the above, Distributor shall pay all customs and excise taxes and duties in connection with the importation of the Products into the Territory. 7. BUSINESS FORECASTING AND REPORTING 7.1. Every six months during the Term of this Agreement, Distributor shall provide to Symphonix: (i) Sales Report. A monthly record showing the quantity of each ------------ type of Product sold as well as the period-end inventory position on hand for each type of Product. Such records shall be kept at Distributor's principal place of business for at least three (3) years following the end of the calendar quarter to which they pertain. (ii) Forecast. A forecast of the quantity of Products Distributor -------- expects to purchase each month during the following twelve (12) months. (iii) Business Report. A report detailing (a) significant business, --------------- market or competitive issues that have arisen during the preceding six months or are expected to impact future periods, and (b) Distributor's activities in promoting the Products during the preceding six months and plans for promoting the Products in the following twelve months. 7.2 If, prior to the time of the next required six months forecast, the Distributor becomes aware of any significant change in the outlook for sales, Distributor shall promptly advise Symphonix of the general nature of such change. 8. DISTRIBUTION PRACTICES AND STANDARDS 8.1. Distributor shall use its best efforts to develop the market for the Products in the Territory, and to increase the sales of the Products in the Territory to the extent practicable and by all usual means, including but not limited to, advertising of the Products, market research, personal solicitation by employees of Distributor of customers and prospective customers throughout the Territory, demonstration of the Products and distribution of technical literature, catalogues, brochures and advertising materials. Promotional activities will be directed at both the medical community, including surgeons, audiologists, hospitals and clinics, and individual consumers. Distributor will make no false or misleading representations with regard to Symphonix or the Products and will not (i) employ or co-operate in the publication or employment of any misleading or deceptive advertising with regard to the Products, (ii) make representations, warranties or guarantees to its end- users or to the trade with respect to the Products other than those which are consistent with the then-current end-user documentation or Symphonix Product brochures or (iii) enter into any contract or engage in any practice in conflict with its obligations hereunder. Neither party shall make any public statements or announcements in respect of this Agreement, the contents hereof or their relationship without the express written permission of the other. 8.2 Expenses and costs incident to the performance by Distributor of the marketing and sales activities undertaken by it shall be borne by Distributor. 8.3. Distributor shall not without the prior written approval of Symphonix engage in any promotional activity outside the Territory. 8.4. Distributor agrees to use the Promotional Materials and Trademarks approved by the Symphonix Regulatory Affairs department, and shall not use any other materials logos or marks in connection with promotion and sales of the Products. Symphonix shall make available limited quantities of its Promotional Materials, or artwork used in the preparation thereof, at no charge. Additional quantities may be provided at a mutually agreed upon cost. Distributor may develop its own Promotional Materials, but will submit all such Promotional Materials to Symphonix Regulatory Affairs department for approval. 8.5 Symphonix shall refer to Distributor all inquiries, orders and other requests emanating from the Territory and relating to Products for delivery in the Territory. 8.6 Distributor shall ensure that all of its employees, agents and the like who are engaged in marketing and sales activities under this Agreement are adequately trained with respect to the Products. Distributor shall make available such customer training and service as Symphonix may from time to time reasonably require. 8.7. Symphonix agrees to provide Distributor with technical and clinical support services as follows: (a) Symphonix shall periodically sponsor training programs for sales and marketing personnel either at its European headquarters location or at another central location. Symphonix shall pay for the costs of presenting such training except that Distributor shall pay the travel and related expenses of Distributor's employees attending the training. (b) Symphonix marketing personnel shall visit Distributor in the Territory at reasonable intervals to assist in the promotion of the Products in the Territory. Symphonix shall pay the travel and related expenses of its employees providing this support. (c) Symphonix shall, subject to reasonable notice with regard to scheduling, arrange for one of its marketing personnel to attend, along with one of Distributor's sales personnel, certain initial surgeries and audiological fittings involving the Products in the Territory. Thereafter, Distributor's personnel will be obligated to provide such support for customers. 8.8 Distributor shall be responsible for compliance with all Regulatory Requirements, Symphonix Quality System requirements, as well as with the provisions of any specific regulatory approval or conditions pertaining to the Products as may be notified to Distributor by Symphonix from time to time, and to provide all reasonable assistance to Symphonix to enable Symphonix and Distributor to comply with applicable Regulatory Requirements. 8.9 Distributor agrees to make available its facilities, records and personnel for periodic inspection by Symphonix personnel for purposes of audit and review procedures to exclusively assure compliance with Symphonix Quality System Requirements as well as Regulatory Requirements. 9. REGULATORY COMPLIANCE 9.1 The Distributor is to obtain from Customers, an undertaking to abide by the patient selection criteria as are advised by Symphonix in writing from time to time. 9.2 Until advised by Symphonix to the contrary the Distributor is to obtain agreement from each member of the medical community to whom it sells Products to give Symphonix access to the clinical records for each patient for the purpose of supplying data that may be required by regulatory authorities in the Territory and internationally. 9.3 The Distributor agrees that if it receives a complaint regarding a Product it shall refer the complaint within two working days to Symphonix, using the Symphonix Problem Report Form. If a complaint requires follow up actions to be taken, the Distributor will provide all required information to Symphonix within one working day. 9.4 Pursuant to the United States Federal Drug Administration's ("FDA") Medical Device Reporting Regulations, Symphonix may be required to report to the FDA information that reasonably suggests that a Product may have caused or contributed to the death or serious injury or has malfunctioned and that the device would be likely to cause or contribute to a death or serious injury if the malfunction were to recur. Distributor agrees to supply to Symphonix any such information within forty-eight (48) hours after becoming aware of such information so that each can comply with governmental reporting requirements. In the event that a Product is recalled, Distributor shall cooperate with and assist Symphonix in locating, and retrieving if necessary, recalled Product from Distributor's customers. 10. TRACEABILITY 10.1 Distributor shall maintain a system of traceability of the Products such as to enable compliance with the Regulatory Requirements and the Quality System Requirements. In particular, Distributor shall maintain the following consignee information (the "Consignee Information")in respect of each Product sold: (1) Symphonix part number (2) date of receipt of Product from Symphonix (3) serial numbers / expiration date (4) invoice number under which the unit was shipped to Distributor's customer (5) date of shipment of unit from Distributor's warehouse (6) name and address of Distributor's consignee (this shall at a minmum be to the level of the hospital or clinic) 10.2 Distributor shall use its best efforts to encourage surgeons who buy the Products from Distributor to complete and submit the surgeon registration card included with each Product. In addition, Distributor shall use its best efforts to encourage surgeons who buy the Products from Distributor to encourage their patients to complete and submit the patient registration card included with each Product. 11. LIMITED WARRANTY AND DISCLAIMER 11.1 Symphonix warrants to Distributor that the Products will on the date of shipment be free from defects in materials and workmanship, and will under normal use, conform in material respects to the then-current user documentation and for a period of three years for the implanted portion of such product and for a period of one year for its external portion. This limited warranty will not apply to any Product which has been (i) modified without Symphonix's written authorisation, (ii) not used or maintained in compliance with Symphonix's instructions, (iii) subjected to misuse, improper maintenance, unusual stress or accident, (iv) damaged by deviation from applicable environmental specifications or vandalism, burglary and/or theft, or (v) used or sold after the "Use Before" date specified by Symphonix. This limited warranty extends only to Distributor and not to any end user or customer of Distributor. The provisions of this Section 11.1 shall not affect the statutory rights of any end-user. 11.2 Symphonix's entire liability and Distributor's exclusive remedy for DOA Products will be, at Symphonix's option, and subject to Symphonix's confirmation of the defect, to (i) remedy any defect within a reasonable time, or (ii) replace the defective Products. The foregoing remedies are available only in connection with DOA Products notified to Symphonix within fourteen (14) days of receipt of Product by Distributor or end user or in case of hidden defects upon fourteen (14) days of the discovery of such defect and may be performed on an exchange basis, whereby Distributor must properly return the defective Product to Symphonix. To properly return defective Products, Distributor must promptly notify Symphonix in writing of the defect and request a Returned Goods Authorization ("RGA") number. Only RGA numbers provided by Symphonix will be accepted. Distributor must return the defective Products in the original package to Symphonix, freight prepaid and properly insured with the RGA number displayed on the outside of the carton. Symphonix may refuse to accept any returned Product that does not bear an RGA number on the outside of the carton. If Symphonix confirms the defect, Symphonix will pay the shipping charges to return the Products back to Distributor; otherwise, Distributor will pay all shipping charges. 11.3 THE LIMITED WARRANTY IN SECTION 11.1 ABOVE IS THE ONLY WARRANTY MADE BY SYMPHONIX AND THE REMEDIES IN SECTIONS 11.1 AND 11.2 ABOVE ARE THE ONLY REMEDIES OF DISTRIBUTOR WITH RESPECT TO THE PRODUCTS. SYMPHONIX SPECIFICALLY DISCLAIMS ALL OTHER WARRANTIES INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY, SATISFACTORY QUALITY (EXCEPT AS SPECIFIED HEREIN) AND FITNESS FOR A PARTICULAR PURPOSE. NOTWITHSTANDING ANY FAILURE OF THE ESSENTIAL PURPOSE OF ANY REMEDY, SYMPHONIX'S LIABILITY FOR BREACH OF WARRANTY WILL BE LIMITED TO A REFUND OF DISTRIBUTOR'S PURCHASE PRICE FOR THE DEFECTIVE PRODUCTS. SYMPHONIX DOES NOT WARRANT THAT OPERATION OF PRODUCTS WILL BE UNINTERRUPTED OR ERROR FREE. THE PROVISIONS OF THIS SECTION 11.3 SHALL NOT AFFECT THE STATUTORY RIGHTS OF ANY END-USER. 11.4 Distributor shall make no representations to third parties regarding the performance or functional capabilities or characteristics of the Products beyond those stated in Symphonix's then-current printed literature and brochures. Distributor shall not offer extended warranties except as mutually agreed with Symphonix. Distributor shall indemnify and hold Symphonix harmless from and against any claims, losses, costs, damages or liabilities which result from Distributor's failure to comply with the provisions of this Section 11.4 or which are based on warranties provided by Distributor to its customers with respect to the Products. 11.5 Distributor must ensure that procedures for ordering of Product and shipment of stock precludes having expired Product in stock. Expired Product must not be sold and is not returnable except for resterilization, at the cost, including freight, of the Distributor. Symphonix may by notice in writing require the Distributor to return any expired Product to Symphonix for re-sterilization which shall be performed at the cost including freight of the Distributor. 12. INTELLECTUAL PROPERTY INDEMNITY Symphonix will defend, at its expense, any action brought against Distributor to the extent that it is based on a claim that a Product (excluding Software), when used in accordance with this Agreement, infringes a patent, trademark or copyright in the Territory. Symphonix will pay any costs, settlements and damages finally awarded provided that Distributor (i) promptly notifies Symphonix in writing of any claim, (ii) gives Symphonix sole control of the defense and settlement, and (iii) provides all reasonable assistance in connection therewith. Symphonix agrees to keep Distributor advised of the status of any claim. If any Product is finally adjudged to so infringe, or in Symphonix's opinion such a claim is likely to succeed, Symphonix will, at its option (i) procure for Distributor the right to continue using the Product, (ii) modify or replace the Product so there are no infringements, or (iii) refund the price paid upon return of the Product. Symphonix will have no liability regarding, and Distributor shall hold Symphonix harmless from and against any claim arising out of (i) compliance with Distributor's designs, specifications or instructions, (ii) use of the Product in combination with non-Symphonix software, data or equipment, if the infringement was caused by such use in combination, (iii) any modification or marking of the Product not specifically authorised in writing by Symphonix or in accordance with the provisions hereof, or (iv) third party software, whether or not supplied by Symphonix. The foregoing states the entire liability of Symphonix and the exclusive remedy for Distributor relating to infringement or claims of infringement of any patent, trademark, copyright, mask work right, trade secret or other proprietary right by the Product. 13. LIMITATION OF LIABILITY To the maximum extent permitted by law and taking into account the terms and conditions of this Agreement, Symphonix's liability under this Agreement will in no event in any single event or in the aggregate exceed the price received by Symphonix from Distributor under this Agreement except for damages to property which shall be limited to $150,000. In no event will Symphonix be liable for special, incidental, indirect, consequential or exemplary damages including without limitation lost profits or anticipated savings however caused and on any theory of liability, whether in an action for contract, strict liability or tort, arising in any way out of this Agreement or the termination thereof, even if Symphonix has been advised of the possibility of such damage and notwithstanding any failure of essential purpose of any remedy. Distributor agrees that it has accepted the terms and conditions of this Agreement in the knowledge that Symphonix's liability is limited and that the prices payable have been, and will be throughout the term, calculated accordingly. Distributor agrees to make its own insurance arrangements should it desire to further limit its exposure to risk. Distributor will use all reasonable endeavours to mitigate any losses or damages. Symphonix shall have no obligation and Distributor shall hold Symphonix harmless from loss caused by Distributor's negligence or breach of this Agreement. 14. GENERAL INDEMNITY Distributor will indemnify and hold Symphonix harmless from and against any and all losses, damages, claims, liabilities, costs and expenses (including reasonable attorneys' fees) resulting from (i) any breach by Distributor of this Agreement or any duty or obligation hereunder, (ii) any claims raised by Distributor's subsidiaries, affiliates, agents, employees or customers in connection with or arising out of the subject matter or terms of this Agreement or the supply or use of the Products, or (iii) any claims that may be made by reason of any act or omission of Distributor or any of its subsidiaries, affiliates, agents, or employees. In addition, Distributor will indemnify Symphonix for any and all losses which result from Distributor's unethical practices. Distributor shall promptly report details of any infringement of Symphonix's proprietary rights which comes to Distributor's attention and cooperate with Symphonix in pursuing any remedies available to Symphonix or Distributor. 15. SOFTWARE LICENSE 15.1 Symphonix may provide certain software in connection with its Products. The terms and conditions provided by Symphonix's licensor of any such software shall govern the use of that software. 15.2 The Software and any related documentation are protected under copyright, trade secret laws and international treaties, and contain proprietary information of Symphonix and/or its licensors. Distributor shall abide by the terms of any proprietary notices or markings, and shall use the documentation and the Software only to comply with its obligations under this Agreement, and shall not disclose to others or reproduce the Software, unless specifically authorised in writing by Symphonix. Distributor shall be liable for all loss or damage to Symphonix from any failure to so abide or from any unauthorised disclosure of the documentation or Software to any other party. Distributor shall not disassemble, decompile, reverse engineer, or perform competitive analysis on the Software, provided however, in jurisdictions where statutes permit, Distributor or end-users may incidentally decompile the Software only if it is essential to do so in order to achieve interoperability with other software and provided that no information obtained therefrom is used without Symphonix's written consent or used to create any software substantially similar to the expression of the Software nor used in any manner restricted by copyright. Symphonix and its suppliers, as applicable, retain all title and ownership of the Software and documentation, including any revisions. Distributor's right to distribute shall also extend to any revisions to the Software as are supplied by Symphonix. The provisions of this Article 15 shall not affect the statutory rights of any end-users. 16. TRADEMARKS 16.1 Distributor may use the Trademarks in connection with marketing and sale of the Products, subject to this Article 16 and any guidelines specified by Symphonix from time to time, and shall not use the Trademarks in any other manner without the express written consent of Symphonix. All advertising and other material utilising any Trademarks shall include such statements or other identifying references as may be requested by Symphonix. 16.2 Distributor recognises the right, title, and interest of Symphonix in and to all the Trademarks and agrees not to engage in any activities or commit any acts, directly or indirectly, which may contest, dispute, or otherwise impair such right, title, or interest. Distributor acquires no right, title or interest in or to Trademarks whether by virtue of this Agreement or through any use by Distributor of the Trademarks. The parties agree that any and all uses of such Trademarks by shall inure at all times to the benefit of Symphonix. Distributor agrees to execute any manner of documentation required by Symphonix to register Distributor as a registered user of the Trademarks. 16.3 Distributor shall not utilise in connection with any of the Products, including the promotion, distribution, and sale of any of the Products, any trademark other than the Trademarks without obtaining the prior written authorisation of such use from Symphonix. 16.4 If any trademarks, trade names or service marks of Distributor are used by Distributor in combination with the Trademarks in such manner as to be distinctive, such distinctive features and associated goodwill thereof shall become the property of and inure to the benefit of Symphonix, and Distributor shall, without any payment or other consideration, execute such documents as are necessary to assign all rights thereto to Symphonix. 17. CONFIDENTIAL INFORMATION 17.1 Distributor will not use for its own benefit (except as authorised in this Agreement) or disclose or make available to any third party any Symphonix Confidential Information provided to Distributor or any information derived from such Confidential Information to any person or entity except to those of Distributor's employees who are under obligation to maintain the confidentiality of such party confidential information and for whom access is necessary in order to perform their jobs in accordance with the purposes of this Agreement. This obligation does not apply to information (i) known by Distributor prior to its receipt from Symphonix and not subject to restrictions on disclosure, (ii) rightfully received by Distributor from a third party with the right to disclose such Confidential Information without restriction on disclosure, or (iii) publicly available without restriction other than as a result of any act or omission of Distributor. These restrictions will continue for a period of three (3) years after the expiration or termination of this Agreement. 17.2 Distributor acknowledges that any unauthorised use or disclosure of the Products or Symphonix's Confidential Information may cause irreparable damage to Symphonix and make available equitable relief in addition to any remedy at law. Distributor will promptly notify Symphonix in writing of any such unauthorised use or disclosure that may come to Distributor's attention and, at Distributor's sole expense, Distributor will take all steps requested by Symphonix that are reasonably necessary to recover the Products and/or Symphonix's Confidential Information and to prevent subsequent unauthorised use or dissemination. If Distributor fails to take these steps in a timely and adequate manner in accordance with Symphonix's request, Symphonix may take them independently or on Distributor's behalf and at Distributor's expense. Nothing in this Section will be understood to limit any remedies that Symphonix may have against Distributor for the unauthorised use or disclosure of the Products or Symphonix's Confidential Information, including actions for seizure and injunctive relief. The parties stipulate that unauthorised use or disclosure by Distributor hereunder shall constitute just cause for termination of this Agreement. 18. INSURANCE 18.1. Symphonix shall maintain, during the Term of this Agreement product liability insurance in relation to the Products, in amounts and on terms that it considers reasonable, to the extent such insurance is available on commercially reasonable terms. Such insurance shall cover such claims and amounts as Symphonix considers appropriate which might be made against Symphonix and/or Distributor as a result of any defect in manufacture. 18.2. Distributor shall maintain during the Term of this Agreement proper and adequate liability insurance in relation to his activities in sales, marketing, distribution, repair and maintenance if these are carried out by him and shall procure evidence thereof to Symphonix upon request. Such insurance shall cover such claims and amounts as Symphonix may consider appropriate. 19. ASSIGNMENT 19.1. Symphonix may assign or otherwise transfer this Agreement at any time under any circumstances without Distributor's consent, as long as said assignment and/or transfer etc., does not in any way infringe the Distributor's right to sell Symphonix Products in the Territory according to the terms stated in this Agreement. 19.2. Distributor will not assign this Agreement nor any right, licence or obligation hereunder without the prior written consent of Symphonix. Any assignment in the violation of this provision shall be void. Distributor's use of any agents in connection with any obligations it undertakes pursuant to this Agreement shall not relieve Distributor of said obligations, nor imply Symphonix's consent to such use of such agents. 20. COMMUNICATIONS; NOTICES All notices, reports and other communications hereunder or in connection herewith (other than orders for the Products) shall be deemed effective two days after dispatch by a recognized overnight courier or on the date sent via facsimile to the respective address set forth below or at such other addresses as the parties may designate in writing form time to time in accordance with the provisions of this Article 20.
For Symphonix For Distributor ------------- --------------- Symphonix Devices, Inc. ______________________ 2331 Zanker Road ______________________ San Jose, CA 95131, USA ______________________ with a copy to: Symphonix Devices, AG Schaferweg 20 CH 4057, Basel, Switzerland
21. DISPUTE RESOLUTION AND ARBITRATION The parties agree that they will attempt to settle any claim or controversy arising out of this Agreement through consultation and negotiation in good faith. Any dispute which the parties cannot resolve between themselves within forty-five (45) days after the date of the initial demand by either party for such resolution will be submitted for final and binding determination to the exclusion of the ordinary courts held in Zurich Switzerland under the then- current International Arbitration Rules of the Zurich Chamber of Commerce by three (3) arbitrators appointed in accordance with such Rules. The parties agree that they will not request, and the arbitrator shall have no authority to award, punitive or exemplary damages against any party. The costs of any arbitration, including administrative fees and fees of the arbitrator, shall be shared equally by the parties. The decision of the arbitral tribunal shall be final, and the parties waive all challenge of the award in accordance with Art. 192 Private International Law Statute. 22. MISCELLANEOUS 22.1 This Agreement will be governed by Swiss law, without reference to and excluding its conflict of laws rules. This Agreement will not be governed by the United Nations Convention on Contracts for the International Sales of Goods. 22.2 No modification to this Agreement, nor any waiver of any rights, will be effective unless consented to in writing by both parties. Waiver of any breach or default will not constitute a waiver of any other right or any subsequent breach or default. 22.3 In addition to the compliance with all laws, rules and regulations required elsewhere in this Agreement, Distributor covenants and represents that it has not made, authorised, offered or promised to make or give any money or anything of value to any government official, political officer, or to any person, while knowing or having reason to know that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to any of the foregoing, for purposes of inducing the foregoing to use his or its influence with a government or instrumentality thereof to affect or influence any act of decision of such government or instrumentality. 22.4 Either party's performance of any part of this Agreement will be excused to the extent that such performance is hindered, delayed or otherwise made impractical by: (1) the acts or omissions of the other party; (2) fires, floods, riots, strikes, epidemics, acts of terrorism, labour disputes, freight embargoes, transportation delays, shortage of labour, inability to secure fuel, material, supplies, equipment or power at commercially reasonable prices, acts of God or of the public enemy or acts of any federal, state or local government; or (3) any other cause (whether similar or dissimilar to those listed) beyond the reasonable control of the party whose performance is affected. The parties agree to notify each other of any such event, the extent of the delay, and will make a reasonable, good faith effort to resume performance as soon as practicable. 22.5 If any provision of this Agreement is ruled unenforceable, it will be enforced to the extent permissible, the parties will negotiate a substitute valid provision which most nearly effects the parties' intent and the remainder of this Agreement will remain in effect; provided, however, that if any provision determined to be unenforceable is an essential term of this Agreement, and the parties cannot reasonably agree on a substitute provision, Symphonix may terminate this Agreement, effective immediately, upon giving written notice to Distributor. 22.6 This Agreement constitutes the entire and exclusive agreement between the parties with respect to this subject matter. All previous discussions and agreements with respect to this subject matter are superseded by this Agreement. 22.7 The headings and titles used in this Agreement are for convenience only and are not part of this Agreement and shall not be referred to in interpreting and construing terms and conditions hereof. 22.8 Notwithstanding any translation of this Agreement into a foreign language, the English language shall be the controlling language of this Agreement. 22.9 All exhibits referred to in and attached to this Agreement are a part of this Agreement and are incorporated herein by reference. 22.10 The relationship of the parties established by this Agreement is that of independent contractors, and nothing contained in this Agreement shall be construed to (i) give either party the power to direct or control the day-to-day activities of the other, (ii) constitute the parties as partners, joint venturers, co-owners or otherwise as participates in a joint or common undertaking or (iii) allow a party to create or assume any obligation on behalf of the other party for any purpose whatsoever. 22.11 All deliveries made by Symphonix under this Agreement shall be subject to the terms of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives, as of the date first above written. Symphonix Devices, Inc. ("Symphonix") ("Distributor") Signed: _____________________ Signed: ______________________ Title:_______________________ Title:_________________________ EXHIBIT A PRODUCTS EXHIBIT B TERRITORY EXHIBIT C QUOTES EXHIBIT D REGULATORY REQUIREMENTS EX-21.2 5 LIST OF SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.2 LIST OF SUBSIDIARIES 1. Symphonix Devices Ltd. 2. Symphonix Devices AG 3. Symphonix Devices GmBH EX-23.1 6 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of Symphonix Devices, Inc. on Form S-8 of our report dated January 22, 1999, on our audits of the consolidated financial statements and financial statement schedule of Symphonix Devices, Inc. as of December 31, 1998 and 1997 and for the three years ended December 31, 1998 which report is included in this Annual Report on Form 10-K. San Jose, California February 25, 1999 /s/ PricewaterhouseCoopers LLP EX-27.1 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 3,401 21,916 231 3 761 26,517 3,714 1,614 28,695 2,722 0 0 0 12 56,013 28,695 597 597 1,663 15,618 0 0 111 13,646 0 13,646 0 0 0 13,646 1.24 1.24
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