-----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, KPjkHFW+cPOT8lJgYAHi1qllC8SarIAyHt13ionnX7NTvFpKTzxjBeCh5B1gb4l/ C+zYQ3B3UibhKQpiG6E12A== 0001012870-99-004247.txt : 19991117 0001012870-99-004247.hdr.sgml : 19991117 ACCESSION NUMBER: 0001012870-99-004247 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 000-23767 FILM NUMBER: 99755518 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-Q 1 FORM 10-Q FOR QUARTER ENDED 9/30/99 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999. OR [ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO _______. COMMISSION FILE NO. 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 No.) 2331 Zanker Road SAN JOSE, CALIFORNIA 95131-1107 (Address of principal executive offices, including zip code) (408) 232-0710 (Registrant's telephone number, including area code) 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 ----- --- As of October 31, 1999, 12,441,949 shares of the Registrant's Common Stock were outstanding. SYMPHONIX DEVICES, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998....................................................1 Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 1999 and 1998....................2 Condensed Consolidated Statements of Comprehensive Loss for the nine months ended September 30, 1999 and 1998.............................3 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998....................................4 Notes to Condensed Consolidated Financial Statements.................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................6 Item 3. Quantitative and Qualitative Disclosures About Market Risk..........26 PART II. OTHER INFORMATION Item 1. Legal Proceedings...................................................26 Item 2. Changes in Securities and Use of Proceeds...........................26 Item 3. Defaults Upon Senior Securities.....................................26 Item 4. Submission of Matters to a Vote of Security Holders.................26 Item 5. Other Information...................................................27 Item 6. Exhibits............................................................27 -i- PART I. FINANCIAL INFORMATION Item 1. Financial Statements SYMPHONIX DEVICES INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)
September 30, December 31, 1999 1998 -------------------- ------------------------ ASSETS Current assets: Cash and cash equivalents $ 7,816 $ 3,401 Short-term investments 5,954 21,916 Accounts receivable, net 93 228 Inventories 971 761 Prepaid expenses and other current assets 340 211 -------- -------- Total current assets 15,174 26,517 Property and equipment, net 1,673 2,100 Other assets 79 78 -------- -------- Total assets $ 16,926 $ 28,695 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 271 $ 684 Accrued compensation 1,192 1,060 Other accrued liabilities 1,496 751 Current portion of bank borrowings 375 - Current portion of capital lease obligations 111 227 -------- -------- Total current liabilities 3,445 2,722 Capital lease obligations, less current portion 24 98 Bank borrowings, less current portion 1,625 2,000 -------- -------- Total liabilities 5,094 4,820 -------- -------- Stockholders' equity: Common stock 12 12 Notes receivable from stockholders (1,019) (484) Deferred compensation (1,100) (1,517) Additional paid-in capital 58,380 58,040 Accumulated other comprehensive loss (45) (26) Accumulated deficit (44,396) (32,150) -------- -------- Total stockholders' equity 11,832 23,875 -------- -------- Total liabilities and stockholders' equity $ 16,926 $ 28,695 ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements
-1- SYMPHONIX DEVICES INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
Three months ended September 30, Nine months ended September 30, ---------------------------------- -------------------------------------- 1999 1998 1999 1998 -------------- ------------------ ------------------ ------------------ Revenue $ 73 $ 242 $ 224 $ 327 Costs and expenses: Cost of goods sold 891 709 2,771 1,076 Research and development 2,088 1,990 5,819 5,528 Selling, general and administrative 1,506 1,493 4,458 3,987 ------- ------- -------- -------- Operating loss (4,412) (3,950) (12,824) (10,264) Interest income 171 421 654 1,151 Interest expense (15) (41) ( 76) (102) ------- ------- -------- -------- Net loss $(4,256) $(3,570) $(12,246) $ (9,215) ======= ======= ======== ======== Basic and diluted net loss per common share $(0.35) $(0.29) $(1.00) $(0.87) ======= ======= ======== ======== Shares used in computing basic and diluted net loss per common share 12,338 12,170 12,264 10,582 ======= ======= ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements
-2- SYMPHONIX DEVICES INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) (unaudited)
Three months ended September 30, Nine months ended September 30, ----------------------------------- ---------------------------------- 1999 1998 1999 1998 ----------------- ---------------- ----------------- --------------- Net loss $(4,256) $(3,570) $(12,246) $(9,215) Unrealized gains (losses) on short-term investments (6) 7 (36) 6 Translation adjustments 16 (4) 17 (14) ---------------- --------------- ---------------- -------------- Comprehensive loss $(4,246) $(3,567) $(12,265) $(9,223) ================ =============== ================ ============== The accompanying notes are an integral part of these condensed consolidated financial statements.
-3- SYMPHONIX DEVICES INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine months ended September 30, -------------------------------------------- 1999 1998 --------------------- --------------------- Cash flows from operating activities: Net loss $(12,246) $ (9,215) Adjustments to reconcile net loss to cash used in operating activities: Amortization of deferred compensation 417 417 Depreciation and amortization 585 486 Changes in operating assets and liabilities: Accounts receivable 135 (214) Inventories (210) (430) Prepaid expenses and other current assets (129) 206 Accounts payable (413) 362 Accrued compensation 132 76 Other accrued liabilities 745 (307) -------- -------- Net cash used in operating activities (10,984) (8,619) -------- -------- Cash flows from investing activities Purchases of short-term investments (3,150) (28,056) Maturities of short-term investments 19,112 16,248 Purchases of property and equipment (158) (1,378) Change in other assets (1) (2) -------- -------- Net cash provided by (used in) investing activities 15,803 (13,188) -------- -------- Cash flows from financing activities Payments on capital lease obligations (190) (242) Proceeds from bank borrowings 6,000 6,000 Payments on bank borrowings (6,000) (6,000) Payments received on notes receivable from stockholders - 15 Proceeds from issuance of common stock, net 115 28,433 Issuance of notes receivables to stockholders (310) - -------- -------- Net cash provided by (used in) financing activities (385) 28,206 -------- -------- Net increase in cash and cash equivalents 4,434 6,399 Effect of exchange rates on cash and cash equivalents (19) (14) Cash and cash equivalents, beginning of period 3,401 4,908 -------- -------- Cash and cash equivalents, end of period $ 7,816 $ 11,293 -------- -------- The accompanying notes are an integral part of these condensed consolidated financial statements
-4- SYMPHONIX DEVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation: The accompanying unaudited condensed consolidated financial statements as of September 30, 1999 of Symphonix Devices, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1999, or any future interim period. These financial statements and notes should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1998 and footnotes thereto, included in the Company's Annual Report on Form 10-K. 2. Computation of Basic and Diluted Net Loss per Common Share: 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 common share, as their effect is antidilutive. Stock options and warrants to purchase 1,405,182 and 531,506 shares of common stock at prices ranging from $0.14 to $10.50 per share were outstanding at September 30, 1999 and 1998, respectively, but were not included in the computation of diluted net loss per common share because they were antidilutive. The aforementioned stock options and warrants could potentially dilute earnings per share in the future. 3. Inventories: Inventories comprise (in thousands): September 30, 1999 December 31, 1998 --------------------- ------------------- Raw materials $116 $418 Work in Progress 590 182 Finished goods 265 161 ---- ---- -5- $971 $761 ==== ==== 4. Recent Accounting Pronouncement: In June 1998, the Financial Accounting Standards Board 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 the year 2001. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the attached condensed consolidated financial statements and footnotes thereto, and with the Company's audited financial statements for the year ended December 31, 1998 and the footnotes thereto. The information set forth below contains forward-looking statements and the Company's actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including those set forth below under "Factors That May Affect Future Results". 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 instruments, represent a novel approach in the management of hearing impairment. The Company's initial products, the Vibrant P, Vibrant D and Vibrant HF 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 D soundbridge incorporates digital signal processing and the Vibrant HF soundbridge is designed for people with a noise-induced high frequency hearing loss. 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, Vibrant D and Vibrant HF soundbridges. Selling activities were commenced for the -6- Vibrant P soundbridge in March 1998 and for the Vibrant D soundbridge in June 1999. 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. In the United States, the Company has submitted a PMA pursuant to the modular PMA process, which included data gathered in the clinical trial of the Vibrant P and Vibrant D soundbridges. The Company has also submitted information related to a manufacturing change recently implemented by the Company, and the Company has proposed to enroll additional patients to provide safety data on this manufacturing change. During the period of the FDA's review of the application's fileability, the Company placed an applicant hold on such review pending agreement of a final protocol for the safety follow-up of those patients as a result of the manufacturing change. As of September 30, 1999, approximately 255 patients have been implanted with the Company's soundbridges. Results of Operations Revenue. Revenue was $73,000 in the three months ended September 30, 1999 compared to $242,000 in the three months ended September 30, 1998. Revenue was $224,000 for the nine months ended September 30, 1999 compared to $327,000 for the nine months ended September 30, 1998. Revenue in these periods was the result of initial selling activities in Europe. Cost of goods sold. Cost of goods sold increased from $709,000 for the three months ended September 30, 1998 to $891,000 for the three months ended September 30, 1999 and increased from $1.1 million for the nine months ended September 30, 1998 to $2.8 million for the nine months ended September 30, 1999. Cost of goods sold represents the direct cost of the products sold as well as manufacturing variances and unabsorbed manufacturing overhead. Research and Development Expenses. Research and development expenses were $2.1 million in the three months ended September 30, 1999 compared to $2.0 million in the three months ended September 30, 1998. Expenses were $5.8 million for the nine months ended September 30, 1999 compared to $5.5 million for the nine months ended September 30, 1998. The Company has incurred substantial costs in both 1999 and 1998 on the clinical trials of its Vibrant soundbridges. Research and development expenses consist primarily of personnel costs, professional services, materials, supplies and equipment in support of product development, clinical trials, regulatory submissions, and the preparation and filing of patent applications. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $1.5 million in the three months ended September 30, 1999 compared to $1.5 million in the three months ended September 30, 1998 and were $4.5 million in the nine months ended September 30, 1999 compared to $4.0 million for the nine months ended September 30, 1998. Selling, general and administrative expenses consist primarily of personnel costs, promotional costs, legal and consulting costs. These costs increased primarily due to costs associated with the increased scope of the Company operations, including its European sales and marketing organization. Commencing in 2000, the Company expects to incur substantial expenses in developing a U.S. sales and marketing organization. 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 options grant dates. Deferred compensation expense of $139,000 attributed to such options was amortized during the quarter ended September 30, 1999. The remaining deferred compensation will be amortized over the vesting period of the options (generally four years). -7- Interest Income (Expense). Interest income, net of expense, decreased to $156,000 in the three months ended September 30, 1999 from $380,000 in the three months ended September 30, 1998 and decreased to $578,000 for the nine months ended September 30, 1999 from $1,049,000 for the nine months ended September 30, 1998. These reductions in interest income were due to the reduction in the Company's cash and short term investment balances. Interest earned in the future will depend on the Company's funding cycles and prevailing interest rates. Income Taxes. As a result of the net losses incurred, the Company has not incurred any U.S. income tax obligations. At December 31, 1998, the Company had net operating loss carryforwards of $25 million for federal and $19 million for state income tax purposes, which will expire at various dates through 2013 and through 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 federal 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 shares occur. Such events could limit the future utilization of the Company's net operating loss carryforwards. Liquidity and Capital Resources Since inception, the Company has funded its operations and its capital investments from proceeds from its initial public offering completed in February 1998 totaling $28.4 million, from the private sale of equity securities, totaling $26.5 million, from equipment lease financing totaling $1.3 million and from bank borrowings totaling, net, $2.0 million. At September 30, 1999, the Company had $11.7 million in working capital, and its primary source of liquidity was $13.8 million in cash, cash equivalents and short-term investments. Symphonix used $11.0 million in cash for operations in the nine months ended September 30, 1999, compared to $8.6 million in the nine months ended September 30, 1998. Capital expenditures, primarily related to the Company's research and development and manufacturing activities, were $25,000 and $206,000 in the three months ended September 30, 1999 and 1998, respectively and were $158,000 and $1.4 million in the nine months ended September 30, 1999 and 1998, respectively. At September 30, 1999, the Company did not have any material commitments for capital expenditures. In October 1997 the Company entered into a five-year lease for a new facility that commenced in January 1998. During the quarter ended March 31, 1998, the Company occupied the new facility and relocated its research and development and administrative activities to the new facility. The relocation of manufacturing activities to the new facility was completed in April 1998. Through December 31, 1998, the Company had incurred approximately $1.6 million in capital expenditures on leasehold improvements and furniture and fixtures related to the new facility. The Company has a loan agreement with a bank providing for borrowings of up to $2.0 million and for the issuance of letters of credit up to $250,000. At September 30, 1999, the -8- 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. 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 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 if approved for marketing and other factors not within the Company's control. The Company believes that its existing capital will be sufficient to fund its operations and its capital investments through the first half of 2000. Commencing in 2000, the Company expects to incur substantial expenses in developing a U.S. sales and marketing organization. To fully develop such a capability and to effectively launch its products commercially in the United States, if approved by the U.S. Food and Drug Administration ("FDA"), the Company expects that it will have to raise additional financing. 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 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 -9- 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 has completed the identification and assessment phases and has partially completed remediation of identified issues. The Company plans to complete the remaining remediation efforts before the end of the fourth quarter of 1999. The cost of such remediation efforts is not expected to be material. The Company will carefully monitor the performance of its network and facility systems, but based on its remediation efforts to date, does not anticipate a need for specific contingency plans. 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 has completed the identification and assessment phases. Regarding the Company's primary business application, the Company has evaluated the software developer's representation, has installed the version of the software represented as being year 2000-compliant and has completed testing to verify proper functioning of the software. This testing yielded satisfactory results and the remediation is considered complete. For many other software applications, the Company has, in the assessment phase, relied on the software developer's representations regarding Year 2000 compliance of their software. Remediation is substantially completed for these applications. 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. The Company intends to monitor the operation of its business applications to identify as quickly as possible any Year 2000 errors that may arise. Process control systems: Included in this category are instrumentation and systems used in design and manufacturing processes. The Company has completed the identification and assessment phases and has partially completed the remediation phase. The Company plans to complete the remaining remediation efforts during the fourth quarter of 1999. The Company plans to monitor system operations closely to identify as quickly as possible any year 2000 errors and defects. 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 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 has completed the -10- identification phase and has initiated the assessment phase. Contingency planning, including the timing of procurement and production activities, will be assessed during the fourth 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 material to its business, financial condition or results of operations. However, until the Company completes all 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, assessment and remediation 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 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 the year 2001. -11- Factors That May Affect Future Results History of Losses and Expectation of Future Losses. At September 30, 1999, the Company had an accumulated deficit of $44.4 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. The Company has received the authorization to affix the CE Mark to the Vibrant P, Vibrant D and Vibrant HF soundbridges, permitting the initiation of commercial sales in the European Union ("EU"). Although the Company has commenced selling the Vibrant P and Vibrant D soundbridges in Europe, through September 30,1999 the Company has not generated significant revenues from these sales. The Company plans to commence selling the Vibrant HF soundbridge in Europe after it has gathered clinical data on a limited number of patients. The Vibrant HF soundbridge 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 Company's Vibrant P and Vibrant D soundbridges only recently became available for sale in the EU and are 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 2001 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 received approval of an IDE and IDE supplements to conduct clinical trials of the Vibrant, Vibrant P, Vibrant D and Vibrant HF soundbridges. In Europe, the Vibrant P and Vibrant D 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 is the same as the implanted components of the Vibrant P and Vibrant D soundbridges which were 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. -12- 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 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. 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 -13- 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. 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 -14- approval of an IDE supplement to include the Vibrant HF soundbridge in this study. During 1998, the Company 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 to 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 has enrolled 7 subjects in this clinical trial. In March, 1999 the FDA approved an IDE supplement permitting the evaluation of the Vibrant D soundbridge. Patients who had completed the clinical trial protocol for the Vibrant P soundbridge were eligible for enrollment in the evaluation of the Vibrant D soundbridge. The Company has submitted a PMA pursuant to the modular process, which included data gathered in the clinical trial of the Vibrant P and Vibrant D soundbridges. The Company has also submitted information related to a manufacturing change recently implemented by the Company, and the Company has proposed to enroll additional patients to provide safety data on this manufacturing change. The Company placed an applicant hold on the FDA's fileability review of the Company's PMA, pending agreement of a final protocol for the safety follow-up of those patients as a result of the manufacturing change. The Company is presently discussing with the FDA the details of the protocol for follow-up of these additional patients, of whom 73 have already been enrolled, including 14 in the U.S. 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, or that the FDA will file or approve the Company's PMA. 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 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 Quality System ("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 -15- 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 California Department of Health Services ("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 MDD and the 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. 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. -16- 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, Vibrant D and Vibrant HF soundbridges. 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. No Assurance of Market Acceptance. The market acceptance of the Company's soundbridges will depend upon their acceptance by the medical and audiology communities 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 -17- 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 and audiology communities, 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 and audiology communities, 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 and audiology communities 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. Highly Competitive Market; Risk of Competing Hearing Devices. 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 Audiologische Technik GmbH, Phonak AG, Oticon, Widex, Philips Medical Systems, Starkey Laboratories Inc., Beltone Electronics Corp., Dahlberg Inc., and GN Danavox/ReSound. 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. -18- 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. Limited Manufacturing Experience; Scale-Up Risk; Dependence on Key Suppliers. 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 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 D and Vibrant HF 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 -19- 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 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 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 adverse effect on the Company's business, financial condition and results of operations. Dependence upon Patents and Proprietary Technology. In the United States, the Company holds 11 issued patents and 12 pending patent applications, of which 1 has been allowed but not yet issued. Additionally, the Company has 1 issued and 17 pending 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 the -20- 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 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. -21- 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. Future Capital Requirements; Uncertainty of Additional Funding. 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 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. 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 the first half of 2000. Commencing in 2000, the Company expects to incur substantial expenses in developing a U.S. sales and marketing organization. To fully develop such a capability and to effectively launch its products commercially in the United States, if approved by the U.S. Food and Drug Administration ("FDA"), the Company expects that it will have to raise additional financing. 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 -22- 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. Lack of Sales, Marketing and Distribution Experience. 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 September 30, 1999, is comprised of 10 marketing, sales, clinical and support personnel. These personnel are performing direct sales activities in Germany, France, the United Kingdom, Switzerland and Austria, and are supporting distributors in other European countries. 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 and Portugal. 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 -23- 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 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. Uncertain Availability of 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 -24- 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 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. -25- 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 in the United States. Product Liability Risk; Possible Insufficiency of Insurance. 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company had no holdings of derivative financial or commodity instruments at September 30, 1999. A review of the Company's other financial instruments and risk exposures at that date revealed that the Company had exposure to interest rate risk. At September 30, 1999 the Company performed sensitivity analyses to assess the potential effect of this risk and concluded that near-term changes in interest rates should not materially adversely affect the Company's financial position, results of operations or cash flows. -26- PART II. OTHER INFORMATION Item 1. Legal Proceedings. None Item 2. Changes in Securities and Use of Proceeds. 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. The Company has used the remaining proceeds of the offering in the following manner: Use of Proceeds --------------- Research & Development, including clinical trials $11,200,000 Development of sales and marketing organization $ 3,800,000 Leasehold improvements and capital expenditures $ 1,200,000 Working capital and general corporate $ 8,600,000 Temporary Investments Short-term investments $ 3,600,000 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. The use of proceeds described above do not represent a material change in the use of proceeds described in the offering prospectus. Item 3. Defaults upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. -27- None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 OEM and Supply Agreement between Symphonix Devices, Inc. and Siemens Audiologische Technik GmbH dated June 4, 1999. * 27.1 Financial Data Schedule. (b) No reports on Form 8-K were filed during the quarter ended September 30, 1999. * Confidential treatment has been requested with respect to certain portions of this Exhibit. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this 10-Q report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 12, 1999 SYMPHONIX DEVICES, INC. /s/ Kirk Davis ------------------------------------------ Kirk Davis President and Chief Executive Officer /s/ Alfred G. Merriweather ------------------------------------------ Alfred G. Merriweather Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer -28- EX-10.1 2 OEM & SUPPLY AGREEMENT CONFIDENTIAL TREATMENT REQUESTED CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE PORTIONS OF THIS AGREEMENT MARKED [*]. THE OMITTED PORTIONS OF THIS AGREEMENT HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Erlangen, June 4, 1999 SAT, AVO, Me OEM and Supply Agreement ------------------------ between Symphonix Devices, Inc. 2331 Zanker Road, San Jose, CA 95131.1109, U.S.A. (hereinafter referred to as "PURCHASER") and Siemens Audiologische Technik GmbH, Erlangen, Germany (hereinafter referred to as "S.A.T.") Preamble S.A.T. has developed and will continue to develop COMPONENTS to be used in Hearing Instruments and a SOFTWARE to program these Hearing Instruments. PURCHASER is interested in buying such COMPONENTS for the use in it's Middle Ear Hearing Devices and in using such SOFTWARE to program these Middle Ear Hearing Devices. In consideration of the aforementioned, the parties hereto agree as follows: 1. Definition 1.1 The term "COMPONENTS" means Integrated Circuits and Hybrids to be used as integrated parts for the manufacturing of Middle Ear Hearing Devices as specified in Exhibit 1 hereto. --------- S.A.T. will make available future generations of COMPONENTS to PURCHASER on similar terms to those provided in this agreement and revised editions of Exhibit 1 will be mutually agreed by the parties --------- to formulize the availability of such future COMPONENTS. 1.2 The term "SOFTWARE" means the fitting software CONNEXX, the term "DATA-BASE" means PURCHASER's specific data-base, the term "HICOSS" means a configuration and service software for internal use. 1.3 The term "UPDATES" means modifications, enhancements of and additions to the SOFTWARE as described in Section 5 herein below. 2. Prices 2.1 S.A.T. will deliver and PURCHASER will purchase from S.A.T. COMPONENTS for the prices laid out in Exhibit 1 hereto as mutually amended from --------- time to time by the parties. 2.2 Payments are due within 30 days after receipt of COMPONENTS and will be made without deduction. 3. Rights and obligations of PURCHASER 3.1 Forecast PURCHASER shall provide S.A.T. with a non-binding rolling twelve- months forecast of COMPONENTS to be updated quarterly. The first such forecast shall cover the time between October 1999 and September 2000. 4. DATABASE to the SOFTWARE 4.1 S.A.T. shall generate a software tool to allow PURCHASER to develop it's own DATABASE to the SOFTWARE. 4.2 S.A.T. will assist PURCHASER in developing it's DATA-BASE. 5. Modifications, enhancements of and additions to the SOFTWARE 5.1 Upon availability of UPDATES to the SOFTWARE at S.A.T., S.A.T. shall provide PURCHASER with the SOFTWARE accordingly updated. 6. License S.A.T. will deliver copies of the SOFTWARE under the conditions described in Section 7. S.A.T. hereby grants to PURCHASER - subject to receipt of the payments as per Sections 7.1 to 7.2 / Sections 7.3 to 7.4 herein below - the non-exclusive, worldwide, non-transferable, perpetual right to use the SOFTWARE and it's UPDATES and to grant sublicenses to its customers to use such SOFTWARE and it's UPDATES for the fitting of Middle Ear Hearing Devices. S.A.T. will deliver up to 10 copies of each version of the HICOSS for internal use at PURCHASER. 7. Consideration 7.1 As consideration for the License to use and sell the SOFTWARE as per Section 1 PURCHASER shall pay to S.A.T. a non-recurring lumpsum payment of [*] This payment includes the delivery of up to [*] copies plus [*] copies for internal and demonstration use by PURCHASER and PURCHASER's distributor's sales personal of the SOFTWARE. 7.2 As consideration for the availability of and the right to use UPDATES to the SOFTWARE as per Section 7.1, PURCHASER shall pay to S.A.T. an amount of [*] for each year during the lifetime of this Agreement. Payment of the aforementioned yearly amount will be made on October 1. of each year, commencing October 1, 2000. This payment includes the delivery of [*] copies plus [*] copies for internal and demonstration use by PURCHASER and PURCHASER's distributor's sales personnel of the SOFTWARE of the UPDATES to the SOFTWARE. 7.3 As soon as PURCHASER starts to sell their Middle Ear Hearing Devices in larger quantities PURCHASER shall pay to S.A.T. a non-recurring lumpsum payment of [*] This payment includes the delivery of a total of [*] copies plus [*] copies for internal and demonstration use by PURCHASER and PURCHASER's distributor's sales personnel of the SOFTWARE. 7.4 As consideration for the availability of and the right to use UPDATES to the SOFTWARE as per Section 7.3 PURCHASER shall pay to S.A.T. an amount of [*] instead of [*] (stated in Section 7.2) for each year during the lifetime of this Agreement. Payment of the aforementioned yearly amount will be made on October 1. of each year, commencing October 1 of the year after section 7.3 becomes valid. This payment includes the delivery of a total of [*] copies plus [*] copies for internal and demonstration use by PURCHASER and PURCHASER's distributor's sales personnel of the SOFTWARE 7.5 Further copies of SOFTWARE may be purchased for [*] per copy. CONFIDENTIAL TREATMENT REQUESTED CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE PORTIONS OF THIS AGREEMENT MARKED [*]. THE OMITTED PORTIONS OF THIS AGREEMENT HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 8. Delivery Terms 8.1 S.A.T. shall deliver COMPONENTS "ex works" Erlangen or Singapore (Incoterms 1990 as amended). 8.2 The delivery time upon receipt of a formal order from PURCHASER shall be not longer than 8 weeks as long as the quantities are not larger than given in the Forecast as described in Section 3.1. 8.3 In case of the discontinuance of COMPONENTS S.A.T. shall inform PURCHASER in writing 3 months prior to the discontinuance, at the latest, and PURCHASER shall place a last order for COMPONENTS within 90 days following the notice of discontinuance for the then applicable prices. PURCHASER shall have the right to ask for delivery of such last order in drop shipments over a period of 18 months. 9. Proprietary Rights, Non-Disclosure PURCHASER shall keep confidential all information, including the specification received from S.A.T. hereunder. This obligation shall be valid for a period of 5 years following termination of this Agreement. S.A.T. shall keep confidential all information received from PURCHASER hereunder for a period of 5 years following the termination of this Agreement. The confidentiality obligation shall not apply, however, to any information which: (a) the receiving party can demonstrate, is already in the public domain or becomes available to the public through no breach by the receiving party of this Agreement; (b) was rightfully in the receiving party's possession without confidentiality obligation prior to receipt from the disclosing party as proven by its written records; (c) can be proven to have been rightfully received by the receiving party from a third party without confidentiality obligation; (d) is independently developed by the receiving party as proven by its written records. (e) is approved for release by written agreement of the disclosing party; (f) is required to be disclosed in order to comply with an administrative or judicial order or decree. 10. Warranty 10.1 S.A.T. shall warrant that COMPONENTS are free of defects, i.e. that they demonstrate the specifications laid down in Exhibit 1 hereto. --------- 10.2 Depending on which occurs first, the warranty period shall run the lesser of either 3 (three) months as of delivery of COMPONENTS ("ex works" Erlangen, or Singapore INCOTERMS 1990 as amended) or the processing of COMPONENTS in the production of Middle Ear Hearing Devices by PURCHASER. 10.3 Defects in COMPONENTS notified during the warranty period, shall be rectified by S.A.T. upon request by PURCHASER without delay and free of charge by sending non-defective COMPONENTS to PURCHASER. 10.4 Further claims on the part of PURCHASER against S.A.T. due to defective COMPONENTS shall be excluded, other than in cases of cogent liability due to intent, gross negligence or the absence of warranted characteristics. No change in the burden of proof to the detriment of PURCHASER shall attach to this provision. 11. Third-party intellectual property rights 11.1 If a third party enforces claims on account of infringement of intellectual property rights or copyright (hereinafter referred to as IPR) by COMPONENTS against PURCHASER or his customers, and if the supply and/or use of COMPONENTS is adversely affected or forbidden as a result, S.A.T. shall at its discretion and at its expense either modify or replace COMPONENTS in such a manner that they do not infringe the property rights yet still to a substantial extent comply with the agreed specifications, or indemnify PURCHASER from royalties claimed by third parties for supply and/or use of COMPONENTS. If this is not possible for S.A.T. under reasonable conditions, S.A.T. shall take back COMPONENTS against reimbursement of the purchase price paid. S.A.T. shall be entitled to demand appropriate remuneration from PURCHASER for the use of COMPONENTS returned. The above does not apply to infringements derived specifically from the incorporation of COMPONENTS in the Middle Ear Devices. 11.2 Preconditions for liability on the part of S.A. T. under the terms of 11.1 shall be that PURCHASER shall notify S.A. T. of any third-party claims on account of infringement of IPR in writing and without delay, that the alleged infringement shall be not admitted, and that PURCHASER shall conduct no dispute, including any out-of-court settlement, other than in agreement with the S.A. T.. 11.3 Insofar as PURCHASER is responsible himself for infringement of IPR, claims against S.A.T. under the terms of 11.1 shall be excluded. The same shall apply insofar as the infringement of IPR is based on particular specifications by PURCHASER, or is caused by use not foreseen by S.A.T., or is caused by COMPONENTS having been modified by PURCHASER, or is caused by COMPONENTS having been used by a customer according to PURCHASER 's instructions, or is caused by COMPONENTS having been used with products not provided by S.A.T., unless COMPONENTS were obtained expressly for this purpose. 11.4 Further claims on the part of PURCHASER on account of infringement of third-party IPR shall be excluded. The right of PURCHASER to cancel the order concerned and the provisions of Sections 12.3 through 12.4 shall apply. 12. Delay, other liabilities 12.1 If S.A.T. is in delay with delivery of COMPONENTS and if PURCHASER can prove that it has suffered damage in consequence thereof, PURCHASER shall be entitled to claim liquidated damages. Such liquidated damages shall amount to 0.5 % for each full week of delay of the purchase price of COMPONENTS supplied late, up to a maximum total of 5 % of this purchase price. 12.2 Claims for damages on the part of PURCHASER going beyond the scope described in Section 12.1 shall be excluded in all cases of delayed delivery, even following expiry of a period of grace allowed to S.A.T. with the threat of rejection, other than in cases of cogent liability due to intent or gross negligence. The rights of PURCHASER to cancel the order concerned in whole or in part and the provisions of Sections 12.3 and 12.4 shall remain unaffected. 12.3 S.A.T. shall be liable without limit for any personal injury for which it is responsible and shall pay the costs of replacement in any case of property damage for which it is responsible up to an amount of DM 1,000,000 per event, yet up to a maximum total of DM 3,000,000. To the extent, PURCHASER is held responsible for such liability by third parties, S.A.T. shall indemnify and hold harmless PURCHASER from such third parties' claims. 12.4 All other warranty claims and claims for compensation on the part of PURCHASER other than those expressly specified in this Agreement, regardless of legal grounds, in particular claims on account of production stoppage, loss of profits, loss of information and data or on indirect or consequential damages shall be excluded, other than in cases of cogent liability, e.g. under the terms of the product liability law or in cases of intent, gross negligence, absence of warranted characteristics or infringement of major contractual obligations. Compensation for infringement of major contractual obligations shall however be limited to damage of a contractually typical, predictable nature, other than in cases of intent or gross negligence. 12.5 A change in the burden of proof to the detriment of PURCHASER shall not attach to the above provisions in Sections 12.2 through 12.4. 13. Arbitration 13.1 All disputes arising out of or in connection with the present Agreement, including any question regarding its existence, validity or termination, shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce, Paris by three arbitrators in accordance with the said Rules. 13.2 Each party shall nominate one arbitrator for confirmation by the competent authority under the applicable Rules (Appointing Authority). Both arbitrators shall agree on the third arbitrator within 30 days. Should the two arbitrators fail, within the above time-limit, to reach agreement on the third arbitrator, he shall be appointed by the Appointing Authority. If there are two or more defendants, any nomination of an arbitrator by or on behalf of such defendants must be by joint agreement between them. If such defendants fail, within the time-limit fixed by the Appointing Authority, to agree on such joint nomination, the proceedings against each of them must be separated. 13.3 The seat of arbitration shall be Munich, Germany. The procedural law of this place shall apply where the Rules are silent. 13.4 The language to be used in the arbitration proceeding shall be English. 14. Substantive Law All disputes shall be settled in accordance with the provisions of this Agreement and all other agreements regarding its performance, otherwise in accordance with the substantive law applicable in Germany without reference to other laws. The application of the United Nations Convention on Contracts for the International Sale of Goods of April 11, 1980 shall be excluded. 15. Term and Termination 15.1 This Agreement shall enter into force upon signature by both parties. 15.2 This Agreement may be terminated by either party upon the end of each fiscal year (i.e. years ended September 30) - however on September 30, 2004, at the earliest, provided that at least 3 months' prior written notice is given to the other party. Such termination shall be subject to the provisions in Section 8.3. 15.3 This Agreement may be terminated by either party upon 30 days' prior written notice if the other party has materially breached this Agreement and has not cured such breach within such notice period. 15.4 As the SOFTWARE is making use of the HI-PRO system this Exhibit becomes only valid under the assumption that PURCHASER has entered into a HI-PRO Agreement with Madsen Electronics. 16. Miscellaneous 16.1 Supplemental agreements and amendments to this Agreement must be made in writing. 16.2 Neither party may assign its rights or obligations under this Agreement without the prior written consent of the other party, except to a successor of all or substantially all of its business and / or properties. 16.3 If not otherwise expressly agreed to herein, the General Terms and Conditions for Delivery of S.A.T. shall apply. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as set forth below. Symphonix Devices, Inc. Siemens Audiologische Technik GmbH Date: ______________________ Date:_____________________________ ____________________________ __________________________________ Erlangen, June 4, 1999 SAT, AVO, Me Exhibit 1 to OEM and Supply Agreement between Symphonix Devices Inc. and Siemens Audiologische Technik GmbH dated June 4, 1999 -------------------------------------------------------------------------- List and Prices of COMPONENTS COMPONENT Price US $ ---------- [*] [*] Symphonix Devices, Inc. Siemens Audiologische Technik GmbH Date: ______________________ Date:_____________________________ ____________________________ __________________________________ __ CONFIDENTIAL TREATMENT REQUESTED CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE PORTIONS OF THIS AGREEMENT MARKED [*]. THE OMITTED PORTIONS OF THIS AGREEMENT HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-27.1 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 7,816 5,954 93 0 971 15,174 3,871 2,198 16,926 3,445 0 0 0 12 11,820 16,926 224 224 2,771 13,048 0 0 76 (12,246) 0 (12,246) 0 0 0 (12,246) (1.00) (1.00)
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