<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 12, 1998
REGISTRATION NO. 333-40339
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------------
SYMPHONIX DEVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------
<TABLE>
<S> <C> <C>
DELAWARE 3998 77-0376250
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
SYMPHONIX DEVICES, INC.
3047 ORCHARD PARKWAY
SAN JOSE, CA 95134
(408) 232-0710
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------
HARRY S. ROBBINS
CHIEF EXECUTIVE OFFICER
SYMPHONIX DEVICES, INC.
3047 ORCHARD PARKWAY
SAN JOSE, CA 95134
(408) 232-0710
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
-------------------
Copies to:
<TABLE>
<S> <C>
J. CASEY MCGLYNN ALAN C. MENDELSON
JOHN T. SHERIDAN PATRICK A. POHLEN
ISSAC J. VAUGHN COOLEY GODWARD LLP
DAVID J. SAUL FIVE PALO ALTO SQUARE
WILSON SONSINI GOODRICH & ROSATI 3000 EL CAMINO REAL
PROFESSIONAL CORPORATION PALO ALTO, CALIFORNIA 94306-2155
650 PAGE MILL ROAD (650) 843-5000
PALO ALTO, CA 94304
(650) 493-9300
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
-------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
-------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED(1) REGISTERED PER SHARE OFFERING PRICE FEE(2)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $0.001 par
value per share....... 2,645,000 $13.00 $34,385,000 $10,144
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 345,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Previously paid. Estimated solely for the purpose of computing the amount
of the registration fee pursuant to Rule 457 under the Securities Act of
1933.
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
January 12, 1998
2,300,000 Shares
[LOGO OF SYMPHONIX]
COMMON STOCK
--------------
All of the 2,300,000 shares of Common Stock, $0.001 par value per share (the
"Common Stock"), offered hereby are being sold by Symphonix Devices, Inc.
("Symphonix" or the "Company"). Prior to this offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $11.00 and $13.00 per
share. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Company has applied for
quotation of the Common Stock on the Nasdaq National Market under the symbol
"SMPX."
--------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total(3).................................... $ $ $
================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
to be $800,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days after the date hereof, to purchase an aggregate of up to 345,000
additional shares at the Price to Public less Underwriting Discounts and
Commissions to cover over-allotments, if any. If all such additional shares
are purchased, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
--------------
The Common Stock is offered by the several Underwriters named herein when, as
and if received and accepted by them, subject to their right to reject orders
in whole or in part and subject to certain other conditions. It is expected
that delivery of certificates for the shares will be made at the offices of
Cowen & Company, New York, New York on or about , 1998.
--------------
COWEN & COMPANY UBS SECURITIES
, 1998
<PAGE>
The Company's family of products under development, vibrant soundbridges, are
designed to work in the middle ear.
[Illustration of Vibrant soundbridge in place and illustration of Floating
Mass Transducer in middle ear]
The Floating Mass Transducer (FMT) is attached to one ossicle.
The patented FMT, Symphonix's core technology, mimics and amplifies the
movement of the ear's vibratory structure.
The Company's implantable hearing devices have not been approved for
marketing by the United States Food and Drug Administration or any
international regulatory authorities.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
Vibrant and Symphonix are registered trademarks and Floating Mass
Transducer, FMT, Vibrating Ossicular Prosthesis, VORP and Audio Processor are
trademarks of Symphonix Devices, Inc.
2
<PAGE>
The external audio processor is magnetically held in place behind the ear and
covered by the user's hair.
[PHOTOGRAPH OF MAN WITH AUDIO PROCESSOR IN PLACE]
The Vibrant TI, a totally implantable soundbridge with no external components,
is in the early stages of development. The product is designed to incorporate
the Company's proprietary microphone technology.
[PHOTOGRAPH OF VIBRANT TI MODEL]
[Symphonix Logo Appears Here]
[PHOTOGRAPH OF THE VIBRANT P, WITH PROGRAMMING UNIT]
The Vibrant P, a second generation programmable soundbridge (pictured above),
is currently being implanted in clinical trials in Europe. The Vibrant D, a
third generation programmable digital soundbridge, is under development.
Hearing Management
The first generation Vibrant soundbridge is currently being implanted in
clinical trials in the United States and Europe.
[PHOTOGRAPH OF VIBRANT SOUNDBRIDGE]
The Company's implantable hearing devices
have not been approved for marketing by
the United States Food and Drug Adminis-
tration or any international regulatory
authorities.
Vibrant and Symphonix are registered trademarks and Floating Mass Transducer,
FMT, Vibrating Ossicular Prosthesis, VORP and Audio Processor are trademarks of
Symphonix Devices, Inc.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. Except as set forth in the Consolidated
Financial Statements or as otherwise indicated herein, information in this
Prospectus gives effect to (i) the reincorporation of the Company from
California to Delaware effected in January 1998, (ii) the one-for-1.376 reverse
split of the outstanding Common Stock effected in January 1998 and (iii) the
conversion of all outstanding shares of Preferred Stock into shares of Common
Stock, which will occur automatically upon the closing of this offering, and
assumes that the Underwriters' over-allotment option is not exercised. See
"Certain Transactions," "Description of Capital Stock" and "Underwriting." This
Prospectus contains certain statements of a forward-looking nature relating to
future events or the future financial performance of the Company. Prospective
investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider the various factors
identified in this Prospectus, including the matters set forth under the
caption "Risk Factors," which would cause actual results to differ materially
from those indicated by such forward-looking statements.
THE COMPANY
Symphonix is a leader in the development of proprietary semi-implantable and
implantable products, or soundbridges, for the management of moderate to severe
hearing impairment. In 1994, mild to severe hearing impairment affected
approximately 26 million people in the United States, or 10% of the population,
of whom approximately 17 million people were classified as moderately or
severely hearing impaired. The Company believes that its family of Vibrant
soundbridges, designed to overcome the inherent limitations of traditional
hearing devices, represent a novel approach in the management of hearing
impairment. The Company's initial product under development, the Vibrant
soundbridge, is a semi-implantable device which mechanically drives the three
small bones of the middle ear to overcome the user's hearing impairment. The
Company's second generation product, the Vibrant P programmable soundbridge,
provides a greater degree of customization to address the specific needs of a
particular user's hearing loss and expands the types of hearing loss that can
be managed by the Company's products.
The Vibrant soundbridge is designed for the management of moderate to severe
sensorineural hearing impairment. Sensorineural hearing impairment accounts for
the vast majority of adults who are hearing impaired and occurs typically as a
result of aging or exposure to loud noise over a protracted period of time. The
traditional approach to the management of mild to severe sensorineural hearing
impairment has been the use of hearing aids, which were first introduced a
hundred years ago. Hearing aids are acoustic drive devices that amplify sound
to increase the movement of the ear drum, thereby indirectly vibrating the
bones of the middle ear in an attempt to overcome the decreased sensitivity of
the delicate sensory hair cells of the inner ear. Although there have been
continued advancements in hearing aid technology, for optimal performance, all
or part of the device must fit tightly in the ear canal which results in
significant drawbacks, including distorted sound quality, acoustic feedback,
poor localization, social stigma, discomfort and poor reliability. Despite the
inherent limitations of hearing aids, in 1995, approximately 1.7 million
hearing aids were sold in the United States, representing a retail market of
approximately $1.2 billion. The United States market represents approximately
38% of the worldwide hearing aid market. The Company estimates that the
worldwide retail market for hearing aids exceeded $3.0 billion in 1995.
Rather than indirectly driving the ear's vibratory structure, the Vibrant
soundbridge is a direct drive device which incorporates the Company's patented
core technology, the Floating Mass Transducer ("FMT"). The FMT is a tiny
transducer, smaller than a grain of rice, that is attached directly to the
incus bone of the middle ear. The FMT converts sound into mechanical vibrations
and enhances the natural movement of the bones of the middle ear, which in turn
generate enhanced stimulation of the delicate
3
<PAGE>
sensory hair cells of the inner ear. The Company believes that its direct drive
soundbridges offer significant benefits, including improved sound quality and
speech intelligibility, elimination of acoustic feedback, improved sound
localization, minimized social stigma and improved reliability. The Company has
three patents issued in the United States and 21 patents pending in both the
United States and internationally covering a number of fundamental aspects of
the FMT and related technologies.
The Company is currently developing a family of Vibrant soundbridges,
including the Vibrant D soundbridge, which is designed to permit an even
greater degree of customization along with the additional benefit of digital
signal processing, and the Vibrant HF soundbridge, which is designed to provide
hearing correction to those individuals who have noise-induced hearing loss at
high frequencies but relatively normal hearing at lower frequencies. In
addition, the Company is in the early stage of developing versions of the
Vibrant soundbridge that are totally implantable with no external components.
The Company's soundbridges are designed to be implanted in a single ear in a
two-hour, outpatient procedure which requires surgical techniques similar to
those employed in common middle ear surgical procedures. The Company's strategy
is to market its soundbridges initially to those specialists in otology who are
currently most active in ear surgery and thereafter, to the general population
of Ear, Nose and Throat ("ENT") surgeons. Because the surgical procedure for
implanting the Vibrant soundbridge utilizes many of the same techniques
employed by surgeons trained and experienced in otological procedures, the
Company believes that surgeon training will not be a significant impediment to
market acceptance.
In September 1996, the Company initiated clinical trials of the Vibrant
soundbridge in both the United States and Europe, and in July 1997 the Company
initiated clinical trials of the Vibrant P soundbridge in Europe. As of January
5, 1998, 48 patients have been implanted with the Company's soundbridges of
whom 44 have had the Audio Processor fitted and the soundbridge's performance
evaluated. In 1996, the Company received United States Food and Drug
Administration ("FDA") approval of an Investigational Device Exemption ("IDE")
to commence clinical testing of the Vibrant soundbridge. In the United States,
Phase I testing limited to two sites and five patients has been completed. On
November 14, 1997, the Company filed an IDE supplement summarizing the Phase I
results, finalizing the study protocol and labeling claims, providing technical
information regarding the Vibrant P soundbridge, and requested permission to
proceed to the pivotal study. On December 11, 1997, the FDA approved the multi-
center pivotal study in 55 subjects at up to 12 sites with the second
generation Vibrant P soundbridge.
The Company has completed its European clinical trial and has submitted the
technical, preclinical and clinical data that it believes will be necessary,
together with the previously obtained certifications, to satisfy the applicable
regulatory requirements for commercial sales in the European Union ("EU").
The Company's objectives are to establish its family of Vibrant soundbridges
as the standard of care worldwide for the management of moderate to severe
hearing impairment and to establish Symphonix as the leader in the hearing
management market. Key elements of the Company's strategy include:
demonstrating improved quality of life, developing surgeon endorsement of the
Company's family of soundbridges, leveraging the Company's patented core
technology and protecting and enhancing the Company's proprietary position.
The Company was incorporated under the laws of California in May 1994 and was
reincorporated under the laws of Delaware in January 1998. The Company's
principal executive offices are located at 3047 Orchard Parkway, San Jose, CA
95134. Its telephone number is (408) 232-0710.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock to be offered by the Company.... 2,300,000 shares
Common Stock to be outstanding after the
offering(1)................................. 11,766,742 shares(1)
Use of proceeds.............................. For research and development,
including clinical trials;
development of a sales and
marketing organization; making
leasehold improvements and
other capital expenditures;
working capital and general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... SMPX
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MAY 17, 1994 MAY 17, 1994
(DATE OF (DATE OF
INCEPTION) YEARS ENDED DECEMBER INCEPTION)
TO 31, TO
DECEMBER 31, ------------------------- DECEMBER 31,
1994 1995 1996 1997 1997
------------ ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Costs and expenses:
Research and
development............ $ 707 $ 3,307 $ 5,399 $ 6,359 $ 15,772
General and
administrative......... 141 625 1,047 2,023 3,836
----- ------- ------- ------- --------
Loss from operations..... (848) (3,932) (6,446) (8,382) (19,608)
Interest income, net..... 96 280 337 475 1,188
----- ------- ------- ------- --------
Net loss................. $(752) $(3,652) $(6,109) $(7,907) $(18,420)
===== ======= ======= ======= ========
Pro forma net loss per
common share and per
common share--assuming
dilution(2)............. $ (0.83) $ (2.24)
======= ========
Shares used in
calculation of pro forma
net loss per common
share and per common
share--assuming
dilution(2)............. 9,565 8,232
======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $11,457 $36,325
Total assets............................................ 13,141 38,009
Long-term liabilities................................... 2,325 2,325
Deficit accumulated during the development stage........ (18,420) (18,420)
Total stockholders' equity.............................. 8,463 33,331
</TABLE>
- --------
(1) Based upon the number of shares outstanding as of December 31, 1997.
Excludes (i) 566,531 shares of Common Stock subject to outstanding options
at a weighted average exercise price of $1.30 per share under the Company's
1994 Stock Option Plan and 403,159 shares reserved for future issuance
thereunder (the "1994 Option Plan") and (ii) 33,611 shares issuable upon
exercise of outstanding warrants to purchase Common Stock at a weighted
average exercise price of $2.20 per share. See "Management--Incentive Stock
Plans" and "Description of Capital Stock--Warrants."
(2) See Note 11 of Notes to Consolidated Financial Statements for an
explanation for the computation of pro forma net loss per share.
(3) Adjusted to reflect the sale of 2,300,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $12.00 per share
after deducting estimated underwriting discounts and commissions and
estimated offering expenses and the receipt of the net proceeds therefrom.
See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. 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 in the following risk factors and elsewhere
in this Prospectus. The following principal factors should be carefully
considered in evaluating the Company and its business before purchasing the
Common Stock offered hereby.
DEVELOPMENT STAGE COMPANY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES
Since the Company's inception in 1994, substantially all of the Company's
resources have been dedicated to research and development, and the Company has
not generated any revenue from product sales. All of the Company's products
are in development and will require additional clinical trials and, in some
cases, additional development and preclinical testing prior to the submission
of a regulatory application for commercial use. Since the Company's products
are currently in development, significant product revenues will not be
realized for at least several years, if ever. The Company is a development
stage company and, at December 31, 1997, had an accumulated deficit of $18.4
million. The Company expects its operating losses to continue at least through
1999 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. Any commercialization of the Company's products will
require substantial development, clinical, regulatory, manufacturing, sales
and marketing and other expenditures. There can be no assurance that the
Company's soundbridges will be successfully commercialized or that the Company
will achieve significant revenues from either international or domestic 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
LIMITED CLINICAL TESTING EXPERIENCE
The Company has conducted only limited clinical trials of its Vibrant and
Vibrant P soundbridges. The Company has received approval of an IDE to conduct
a clinical trial of the Vibrant and Vibrant P soundbridges, and the Vibrant
soundbridge has been the subject of limited clinical testing in the United
States. The Vibrant and the Vibrant P soundbridges have both been the subject
of limited clinical testing in Europe. None of the Company's other
soundbridges under development have been tested in human clinical trials. The
Company's soundbridges will require additional development, clinical trials
and regulatory approval prior to commercialization. The results from
preclinical studies and early clinical trials may not be indicative of results
obtained in later clinical trials, and there can be no assurance that clinical
trials conducted by the Company will demonstrate sufficient safety and
efficacy to obtain requisite approvals.
The rate of completion of the Company's clinical trials may be delayed by
many factors, including slower than anticipated patient enrollment or adverse
events occurring during clinical trials. Completion of preclinical and
clinical activities may take several years, and the length of time for
completion of the required studies is unpredictable. In addition, data
obtained from preclinical and clinical activities are susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval. No
assurance can be given that any of the Company's clinical trials will be
successfully completed on a timely basis, or at all, that additional clinical
trials will be allowed by the FDA or other regulatory authorities or that such
clinical trials will commence as planned.
6
<PAGE>
The Company has submitted clinical data on 28 patients to the Company's
Notified Body, a certification body authorized to test and certify medical
devices for sale in the EU, to demonstrate the safety and performance of the
Vibrant and Vibrant P soundbridges. As of January 5, 1998, 43 patients in the
European clinical trial have been implanted with the Company's soundbridges,
of whom 39 have had the Audio Processor fitted and the soundbridge's
performance evaluated. There can be no assurance that such data will be
accepted by the Company's Notified Body, or that the Notified Body will not
require the Company to obtain additional data from additional clinical trials
involving more patients in order to demonstrate the safety and performance of
the Vibrant and Vibrant P soundbridges. If the Notified Body requires the
Company to submit additional data, the timing of regulatory approval and
commercialization of the Company's products in Europe could be delayed. See
"Business--Government Regulation."
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, and will be
dependent upon the successful development of its soundbridges to generate
revenues. 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 reasonable cost or successfully
commercialized. See "Business--Products Under Development."
NO ASSURANCE OF PRODUCT APPROVAL; GOVERNMENT REGULATION
The research, preclinical and clinical activities, manufacturing, labeling,
distribution, sale, marketing, advertising and promotion of the Company's
proposed products are subject to extensive and rigorous government regulation
in the United States and certain other countries. In the United States and
certain other countries, the process of obtaining and maintaining required
regulatory clearances or approvals is lengthy, expensive and uncertain. The
Company's future success will be significantly dependent upon commercial sales
of its products under development. The Company will also not be able to market
such products domestically or overseas until it meets the safety and quality
regulations of each jurisdiction in which the Company, its agents or
distributors seek to sell such products. Noncompliance with applicable FDA
requirements can result in administrative sanctions or judicially imposed
sanctions such as civil penalties, criminal prosecution, injunctions, product
seizure or detention, product recalls, or total or partial suspension of
production. In addition, noncompliance may result in the FDA's refusal to
approve pending applications for marketing approval or clearance or
supplements to approved marketing approvals, or in the withdrawal of marketing
approval.
Before the Company's products can be commercialized in the United States,
the Company must submit, in a premarket approval ("PMA") application,
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. On November 14, 1997,
the Company filed an IDE supplement summarizing the Phase I results,
finalizing the study protocol and labeling claims, providing technical
information regarding the Vibrant P soundbridge, and requested permission to
proceed to the pivotal study. On December 11, 1997, the FDA approved the
multi-center pivotal study in 55 subjects at up to 12 sites with the second
generation Vibrant P soundbridge. There can be no assurance that the Company's
clinical trial effort will progress as expected, will not be delayed or that
such effort will lead to the successful development of any product. No
assurance can be given that any of the Company's clinical trials will continue
to be allowed by the FDA or other regulatory agencies.
7
<PAGE>
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.
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 Quality System regulation ("QS regulation")
compliance (which includes elaborate testing, control, documentation and other
quality assurance procedures). The Company's manufacturing facility must be
registered with the FDA and the California Food and Drug Branch and will be
subject to periodic inspections by the FDA and by the California Food and Drug
Branch. The timing and requirements of obtaining approval for sale in foreign
countries may differ from that required for FDA approval. In addition, there
may be foreign regulatory barriers other than pre-market approval.
The EU consists of 15 countries encompassing most of the major countries in
Europe. The EU has adopted numerous directives and standards regulating the
design, manufacture, clinical trial, labeling, and adverse event reporting for
medical devices. The principal directives prescribing the laws and regulations
pertaining to medical devices in the EU are the Medical Devices Directive,
93/42/EEC ("MDD") and the Active Implantable Medical Devices Directive,
90/385/EEC ("AIMDD"). In the EU, the Company's soundbridges will be regulated
as active implantables and therefore be governed by the AIMDD. Certain other
countries, such as Switzerland, have voluntarily adopted laws and regulations
that mirror those of the EU with respect to medical devices.
The Company's facilities have been inspected by the Notified Body and its
quality system has been certified by the Notified Body as being in compliance
with the required standards. The Company has submitted the technical,
preclinical and clinical data that it believes will be necessary, together
with the previously obtained certifications, to satisfy the applicable
regulatory requirements for commercial sales in the EU. The Company has
submitted clinical data to its Notified Body on 28 patients to demonstrate the
safety and performance of the Vibrant and Vibrant P soundbridges. As of
January 5, 1998, a total of 43 patients in the European clinical trial have
been implanted (19 with the Vibrant and 24 with the Vibrant P soundbridge) of
whom 39 have had the Audio Processor fitted and the soundbridge's performance
evaluated. There can be no assurance that such data will be accepted by the
Company's Notified Body, or that the Notified Body will not require the
Company to obtain additional data from additional clinical trials involving
more patients in order to demonstrate the safety and performance of the
Vibrant soundbridge and the Vibrant P soundbridge. If the Notified Body
requires the Company to submit additional data, the timing of regulatory
approval and commercialization of the Company's products in Europe could be
delayed.
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.
See "Business--Products Under Development" and "--Government Regulation."
NO ASSURANCE OF MARKET ACCEPTANCE
The market acceptance of the Company's soundbridges will depend upon their
acceptance by the medical community and patients as clinically useful,
reliable and cost-effective compared to other
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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 internationally and the
Company's ability to adequately train ear surgeons on the techniques for
implanting the Company's soundbridges. In addition, there can be no assurance
that the Company's soundbridges will be preferable alternatives to existing
devices, some of which, such as the acoustic hearing aid, do not require
surgery, or that the Company's soundbridges will not be rendered obsolete or
noncompetitive by products under development by other companies. Patient
acceptance of the Company's soundbridges will depend in part upon physician
and surgeon recommendations as well as other factors, including the
effectiveness, safety, reliability and invasiveness of the procedure as
compared to established approaches. Even if the Company's soundbridges are
adopted by the medical community, a significant market may not develop for the
Company's products unless acceptable reimbursement from health care payors is
available. There can be no assurance that the Company's soundbridges under
development will be accepted by the medical community or consumers or that
market demand for such products will be sufficient to allow the Company to
achieve profitable operations. Failure of the Company's soundbridges, for
whatever reason, to achieve significant adoption by the medical community or
consumers or failure of the Company's products to achieve any significant
market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Government Regulation" and "--Third-Party Reimbursement."
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
Hearing Instruments, Inc., Philips Medical Systems North America Co., Starkey
Laboratories Inc., Beltone Electronics Corp., Dahlberg Inc., ReSound Corp.,
Oticon, Inc., Widex Hearing Aid Co., Inc. and Phonak Inc. There can be no
assurance that the Company's soundbridges will be able to successfully compete
with established hearing aid products. In addition, 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. 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. See
"Business--Competition."
LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK; DEPENDENCE ON KEY SUPPLIERS
The Company currently manufactures its products in limited quantities for
laboratory testing and for its United States and European clinical trials. The
manufacture of the Vibrant soundbridge 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
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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.
If the Company receives regulatory approval to commercialize its products, it
will need to expend significant capital resources and develop manufacturing
expertise to establish large-scale manufacturing capabilities. The Company
intends to expand its manufacturing capacity into a new facility in the first
quarter of 1998, before it commences large-scale commercial manufacturing
activities. 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 its products in a
timely manner or at a reasonable cost 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. A number of components and
subassemblies, such as silicone, control electronics and implant packaging are
provided by single source suppliers. One component, the signal processing
microcircuit, is provided by a sole source supplier, Gennum Corporation. None
of the Company's vendors is contractually obligated to continue to supply the
Company nor is the Company contractually obligated to buy from a particular
vendor. For certain of these components and subassemblies, there are
relatively few alternative sources of supply, and establishing additional or
replacement suppliers for such components and subassemblies could not be
accomplished quickly. In addition, if the Company wishes to significantly
modify its manufacturing processes or change the supplier of a critical
component, additional approvals will be required from the FDA before the
change can be implemented. Because of the long lead time for some components
and subassemblies that are currently available from a single source, a
supplier's inability or failure to supply such components or subassemblies in
a timely manner or the Company's decision to change its suppliers could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Manufacturing."
DEPENDENCE UPON PATENTS AND PROPRIETARY TECHNOLOGY
In the United States, the Company holds three issued patents and 11 pending
patent applications. Additionally, the Company has ten 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
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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. In certain other countries outside the United
States, patent coverage relating to the performance of surgical or medical
procedures is not available. Therefore, patent coverage in such countries will
be limited to the FMT or to narrower aspects of the FMT.
The medical device industry in general has been characterized by substantial
litigation. Litigation regarding patent and other intellectual property
rights, whether with or without merit, could be time-consuming and expensive
to respond to and could distract the Company's technical and management
personnel. The Company may become involved in litigation to defend against
claims of infringement by the Company, to enforce patents issued to the
Company or to protect trade secrets of the Company. If any relevant claims of
third-party patents are held as infringed and not invalid in any litigation or
administrative proceeding, the Company could be prevented from practicing the
subject
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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. See "Business--Patents and Proprietary
Technology."
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 if approved for marketing and other factors not within the
Company's control. While the Company believes that the net proceeds of this
offering, together with its existing capital resources and projected interest
income, will be sufficient to fund its operations and its capital investments
for at least the next 18 months, there can be no assurance that the Company
will not require additional financing prior to that time. There can be no
assurance that such additional financing will be available on a timely basis
on terms acceptable to the Company, or at all, or that such financing will not
be dilutive to stockholders. If adequate funds are not available, the Company
could be required to delay development or commercialization of certain of its
products, to license to third parties the rights to commercialize certain
products or technologies that the Company would otherwise seek to
commercialize for itself, or to reduce the marketing, customer support or
other resources devoted to certain of its products, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Use of Proceeds," "Dilution" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
LACK OF SALES, MARKETING AND DISTRIBUTION EXPERIENCE
The Company will have to establish an effective internal sales and marketing
organization prior to commercial introduction of its products. The Company is
in the process of establishing a sales and marketing organization in Europe.
An office has been established in Basel, Switzerland, where the Company's
Director of European Sales and Marketing and European Clinical Manager are
based. The Company has recruited sales personnel to provide direct sales
coverage in Germany, France and the United Kingdom, who will commence their
employment during the first quarter of 1998. In other international markets,
including Japan, the Company will seek to establish a network of distributors.
By the end of the first quarter of 1998, the Company intends to establish
distributors in Italy, Spain and the Benelux countries. There can be no
assurance that the Company will be able to build a direct sales force or
marketing organization in any country, that establishing a direct sales force
or marketing organization will be cost-effective or that the Company's sales
and marketing efforts will be successful. In addition, the Company has had
discussions with only a limited number of potential
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international distributors and has not yet entered into any agreements with
distributors. There can be no assurance that the Company will be able to enter
into agreements with 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 a
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. See "Business--Sales, Marketing and Training."
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, 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 are the subject of 510(k) clearance and do not involve
surgery, are generally not reimbursed, although a modest reimbursement is
provided under certain insurance plans. Traditionally, hearing aid users have
paid for these devices directly. 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. During
clinical trials, the Company does not anticipate that there will be any
reimbursement for the Vibrant soundbridge implant or procedure.
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 products are currently under
development and have not received FDA clearance or approval, uncertainty
exists regarding the availability of third-party reimbursement for procedures
that would use the Company's soundbridges. Failure by physicians, hospitals
and other potential users of the Company's soundbridges to obtain sufficient
reimbursement from third-party payors for the procedures in which the
Company's soundbridges are intended to be used could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Third-party payors that do not use prospectively fixed payments increasingly
use other cost-containment processes or require various outcomes data that may
pose administrative hurdles to the use 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.
If the Company obtains the necessary foreign regulatory approvals, market
acceptance of the Company's products and products currently under development
in international markets would 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. There can be no assurance 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 international markets in
which such approvals are sought. See "Business--Third-Party Reimbursement."
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DEPENDENCE UPON KEY PERSONNEL
The Company's future success depends in significant part upon the continued
service of certain key scientific, technical and management personnel.
Competition for such personnel is intense and there can be no assurance that
the Company can retain its key scientific, technical and managerial personnel
or that it can attract, assimilate or retain other highly qualified
scientific, technical and managerial personnel in the future. The loss of key
personnel, especially if without advance notice, or the inability to hire or
retain qualified personnel could have a material adverse effect upon the
Company's business, financial condition and results of operations. The Company
has not entered into employment agreements with any of its key personnel. The
Company is the beneficiary under a $1.0 million key man insurance policy on
Harry S. Robbins, its President and Chief Executive Officer.
PRODUCT LIABILITY RISK; POSSIBLE INSUFFICIENCY OF INSURANCE
The manufacture, sale and implantation of the Company's products involve the
risk of product liability claims. The Company currently has limited product
liability insurance. There can be no assurance that such insurance will be
available on commercially reasonable terms or that the coverage limits will be
adequate. The Company intends to evaluate its coverage on a regular basis and
in connection with the introduction of products currently under development.
Such insurance is expensive and may not be available on acceptable terms, in
sufficient amount of coverage or at all. A successful claim brought against
the Company in excess of its insurance coverage would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Product Liability."
CONTROL BY EXISTING STOCKHOLDERS
After the completion of this offering, current stockholders, including
certain executive officers and directors of the Company and their affiliates,
will own approximately 81.4% of the outstanding Common Stock (assuming the
exercise of all outstanding options and warrants). As a result, these
stockholders will, to the extent they act together, continue to have the
ability to exert significant influence and control over matters requiring the
approval of the Company's stockholders, including the election of a majority
of the Company's Board of Directors. See "Principal Stockholders."
POTENTIAL ADVERSE IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of Common Stock (including shares issued upon the exercise of
outstanding options) in the public market after this offering could materially
and adversely affect the market price of the Common Stock. Such sales also
might make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
deems appropriate. Upon the completion of this offering, the Company will have
11,766,742 shares of Common Stock outstanding (assuming no exercise of options
after December 31, 1997), of which the 2,300,000 shares offered hereby will be
freely tradeable (unless held by affiliates of the Company) without
restriction. The remaining 9,466,742 shares will be restricted securities
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"). The Company and its directors, executive officers and all other holders
of such restricted securities, have entered into lock-up agreements with the
Company or Cowen & Company (the "Lock-up Agreements") under which they have
agreed not to offer, sell, contract to sell, grant any options to purchase or
otherwise dispose of, directly or indirectly, any shares of Common Stock or
options to acquire shares of Common Stock, or securities exchangeable or
convertible into shares of Common Stock, owned by them for a period of 180
days following the day on which the Registration Statement becomes effective
without the prior written consent of Cowen & Company or the Company, as the
case may be except that, without such consent, the Company may issue Common
Stock and grant options pursuant to the 1994 Option Plan and issue Common
Stock pursuant to the exercise of outstanding warrants and the current
stockholders
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of the Company who are not executive officers or directors of the Company may
sell Common Stock acquired in the offering or in the open market. The Company
has agreed not to release any stockholders from the terms of the Lock-up
Agreements with the Company. Cowen & Company may, in its sole discretion and
at any time without notice, release all or any portion of the shares subject
to such Lock-up Agreements. As a result of the Lock-up Agreements and the
provisions of Rules 144 and 701 promulgated under the Securities Act, upon
consummation of this offering, such restricted securities will be available
for public resale in the public market as follows: (i) no shares will be
available for immediate sale on the date of this Prospectus and (ii)
approximately 9,778,368 shares will be available for public resale 180 days
after the date of this Prospectus, upon expiration of the Lock-up Agreements
(including approximately 311,615 shares subject to outstanding vested options
and outstanding warrants), subject in some cases to volume limitations
pursuant to Rule 144. In addition, 6,715,689 of the shares outstanding
immediately following the completion of this offering (including up to 33,611
shares of Common Stock issuable upon exercise of certain outstanding warrants)
will be entitled to registration rights with respect to such shares upon
termination of the Lock-up Agreements. The number of shares sold in the public
market could increase if such registration rights are exercised and such sales
may have an adverse effect on the market price of the Common Stock. See
"Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK
Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or
be sustained or that the market price of the Common Stock will not decline
below the initial public offering price. The initial public offering price of
the Common Stock is determined by negotiations between the Company and the
Underwriters. As such, the initial public offering price is not necessarily
related to the Company's net worth or any other established criteria of value
and may not bear any relationship to the market price of the Common Stock
following the completion of the offering. The market prices for securities of
medical device companies have historically been highly volatile. Announcements
of technological innovations or new products by the Company or its
competitors, developments concerning proprietary rights, including patents and
litigation matters, publicity regarding actual or potential results with
respect to products under development by the Company or others, regulatory
developments in both the United States and foreign countries and public
concern as to the safety of new technologies, changes in financial estimates
by securities analysts or failure of the Company to meet such estimates and
other factors may have a significant impact on the market price of the Common
Stock. In addition, the Company believes that fluctuations in its operating
results may cause the market price of its Common Stock to fluctuate, perhaps
substantially. See "Underwriting."
DILUTION; ABSENCE OF DIVIDENDS
Purchasers of shares of Common Stock offered hereby will experience an
immediate dilution of $9.17 in the pro forma net tangible book value per share
of their Common Stock from the assumed initial public offering price of $12.00
per share. The Company has never paid dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. See
"Dividend Policy" and "Dilution."
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER, BYLAWS AND
CONTRACTUAL PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws may have the effect of making it more difficult for a third party
to acquire, or discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common
Stock. Certain of these provisions eliminate the right of stockholders to act
by written consent without a meeting and specify procedures for director
nominations by stockholders and submission of other proposals
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for consideration at stockholder meetings. In addition, the Company's Board of
Directors has the authority to issue up to 5,000,000 shares of Preferred Stock
and to determine the price, rights, preferences, privileges and restrictions
of those shares without any further vote or action by the stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be
issued in the future. The issuance of Preferred Stock could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no present plans to
issue shares of Preferred Stock. Certain provisions of Delaware law applicable
to the Company could also delay or make more difficult a merger, tender offer
or proxy contest involving the Company, including Section 203 of the Delaware
General Corporation Law, which prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder for a period of
three years unless certain conditions are met. The existence of a classified
Board of Directors, the inability of stockholders to act by written consent
without a meeting, the procedures required for director nominations and
stockholder proposals and Delaware law could have the effect of delaying,
deferring or preventing a change in control of the Company, including without
limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of the Company's Common Stock. These
provisions could also limit the price that investors might be willing to pay
in the future for shares of the Company's Common Stock. In addition, the
Company has granted one of its existing stockholders, Johnson & Johnson
Development Corporation ("JJDC"), first negotiation rights with regard to
certain proposed transactions, which may have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
attempting to acquire, control of the Company. See "Certain Transactions" and
"Description of Capital Stock."
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including without
limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import, constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of Symphonix to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include the following: uncertainties
related to the early stage of the Company's development; limited clinical
testing experience; uncertainties related to the reliance on the Company's FMT
technology; existing government regulations and changes in, or the failure to
comply with, government regulations; the Company's limited manufacturing
experience, the risk associated with manufacturing scale-up, and the Company's
dependence on key suppliers; uncertainty of market acceptance; history of
operating losses and expectations of future losses; the highly competitive
market and the risk of competing hearing management approaches; dependence on
patents and proprietary technology and uncertainty of patent protection;
future capital needs and uncertainty of additional funding; dependence on key
personnel; the Company's lack of sales, marketing and distribution experience
and reliance on third parties to perform such functions; uncertain
availability of third-party reimbursement and other factors referenced in this
Prospectus. Certain of these factors are discussed in more detail elsewhere in
this Prospectus, including, without limitation, under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. Symphonix disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future
events or developments.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,300,000 shares of Common
Stock offered hereby are estimated to be approximately $24,868,000
($28,718,200 if the Underwriters' over-allotment option is exercised in full),
at an assumed initial public offering price of $12.00 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The Company anticipates that it will use approximately $10.0 million of the
net proceeds of this offering to fund the Company's research and development
efforts, including clinical trials, approximately $3.0 million to develop a
sales and marketing organization and initiate commercial sales of its
products, when and if approved for marketing by regulatory authorities, and
approximately $1.0 million for making leasehold improvements and other capital
expenditures. The Company will use the remaining net proceeds for working
capital and general corporate purposes. Although the Company believes the
proceeds of this offering, together with its existing resources and projected
interest income will be adequate to fund its operations and its capital
investments for at least the next 18 months, the timing and amount of spending
of such capital resources cannot be accurately determined at this time and
will depend upon several factors, including the timing and cost of obtaining
regulatory approvals, progress of its research and development efforts and
preclinical and clinical activities, competing technological and market
developments, commercialization of products currently under development, and
market acceptance and demand for the Company's products if approved for
marketing. The Company's management will retain broad discretion in the
allocation of a substantial portion of the net proceeds. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Business--Facilities."
Pending such uses, the Company intends to invest the net proceeds in short-
term, interest-bearing, investment grade securities.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its capital
stock. The Company currently expects to retain its future earnings for use in
the operation and expansion of its business and does not anticipate paying any
cash dividends in the foreseeable future. Additionally, under the Company's
line of credit agreement, the Company is prohibited from paying cash dividends
without the bank's prior approval.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, (i) on an actual basis, (ii) on a pro forma basis after
giving effect to the conversion of all outstanding shares of Preferred Stock
into Common Stock upon the closing of the offering made hereby and the
restatement of the Company's Certificate of Incorporation to provide for
authorized capital stock consisting of 50,000,000 shares of Common Stock and
5,000,000 shares of undesignated Preferred Stock, and (iii) as adjusted to
reflect the application of the estimated net proceeds from the sale of
2,300,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $12.00 per share:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------
PRO AS
ACTUAL FORMA ADJUSTED
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligation, less current
portion(1)...................................... $ 325 $ 325 $ 325
Bank borrowings(2)............................... 2,000 2,000 2,000
-------- -------- --------
Stockholders' equity:
Preferred Stock; $0.001 par value; 9,750,000
shares authorized; 9,194,631 shares issued and
outstanding, actual; 5,000,000 shares
authorized, none issued and outstanding, pro
forma and as adjusted......................... 9 -- --
Common Stock; $0.001 par value; 20,000,000
shares authorized; 2,784,664 shares issued and
outstanding, actual; 50,000,000 shares
authorized, 9,466,742 shares issued and
outstanding, pro forma; 50,000,000 shares
authorized, 11,766,742 shares issued and
outstanding, as adjusted(3)................... 3 10 12
Notes receivable from stockholders............... (499) (499) (499)
Deferred compensation............................ (1,465) (1,465) (1,465)
Unrealized losses on short-term investments...... (1) (1) (1)
Additional paid-in capital....................... 28,835 28,837 53,703
Cumulative translation adjustments............... 1 1 1
Deficit accumulated during the development stage. (18,420) (18,420) (18,420)
-------- -------- --------
Total stockholders' equity................... 8,463 8,463 33,331
-------- -------- --------
Total capitalization......................... $ 10,788 $ 10,788 $ 35,656
======== ======== ========
</TABLE>
- --------
(1) See Note 5 of Notes to Consolidated Financial Statements.
(2) See Note 6 of Notes to Consolidated Financial Statements.
(3) Based upon shares outstanding as of December 31, 1997. Excludes (i)
566,531 shares issuable upon exercise of options outstanding at a weighted
average exercise price of $1.30 per share under the 1994 Option Plan and
403,159 shares reserved for future issuance thereunder and (ii) 33,611
shares issuable upon exercise of outstanding warrants to purchase Common
Stock at a weighted average exercise price of $2.20 per share. See
"Management--Incentive Stock Plans" and "Description of Capital Stock--
Warrants."
19
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of December 31, 1997
was $8.5 million or $0.89 per share of Common Stock. Pro forma net tangible
book value per share represents the Company's total tangible assets less total
liabilities, divided by the pro forma number of outstanding shares of Common
Stock (after giving effect to the conversion of the Preferred Stock into
Common Stock). Dilution per share represents the difference between the amount
per share paid by investors in this offering and the pro forma net tangible
book value per share after the offering. After giving effect to the sale of
2,300,000 shares in this offering at an assumed initial public offering price
of $12.00 per share and after deducting the estimated underwriting discounts
and commissions and estimated offering expenses, the pro forma net tangible
book value of the Company as of December 31, 1997 would have been $33.3
million or $2.83 per share. This represents an immediate increase of pro forma
net tangible book value of $1.94 per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $9.17 per share to
new investors purchasing shares of Common Stock in this offering, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $12.00
Pro forma net tangible book value per share before the
offering.................................................... $0.89
Increase attributable to new investors....................... 1.94
-----
Pro forma net tangible book value per share after the offering. 2.83
------
Dilution per share to new investors............................ $ 9.17
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1997, the difference between existing stockholders and new investors with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 9,466,742 80.5% $27,389,883 49.8% $ 2.89
New investors.............. 2,300,000 19.5 27,600,000 50.2% 12.00
---------- ----- ----------- -----
Total.................... 11,766,742 100.0% $54,989,883 100.0%
========== ===== =========== =====
</TABLE>
The computations in the above tables assume (i) no exercise of outstanding
stock options or warrants and (ii) the conversion of all outstanding shares of
Preferred Stock into Common Stock upon the closing of this offering. As of
December 31, 1997, there were options outstanding to purchase up to 566,531
shares of Common Stock at a weighted average exercise price of $1.30 per share
under the 1994 Option Plan and warrants outstanding to purchase up to
33,611 shares of Common Stock at a weighted average exercise price of $2.20
per share. To the extent outstanding options are exercised or warrants are
further exercised, there will be further dilution to new investors. See
"Management--Incentive Stock Plans," "Description of Capital Stock--Warrants"
and "Underwriting."
20
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial data is qualified in its entirety by and
should be read in conjunction with the Company's Consolidated Financial
Statements and the related Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus. The statement of operations data for the period from May
17, 1994 (date of inception) to December 31, 1994 and for the years ended
December 31, 1995, 1996 and 1997, and the balance sheet data as of December
31, 1996 and 1997 are derived from audited financial statements included
elsewhere in this Prospectus. The balance sheet data at December 31, 1994 and
1995 is derived from financial statements that have been audited by Coopers &
Lybrand L.L.P. that are not included in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MAY 17, 1994 MAY 17, 1994
(DATE OF YEARS ENDED (DATE OF
INCEPTION) TO DECEMBER 31, INCEPTION) TO
DECEMBER 31, ------------------------- DECEMBER 31,
1994 1995 1996 1997 1997
------------- ------- ------- ------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Costs and expenses:
Research and
development........... $ 707 $ 3,307 $ 5,399 $ 6,359 $ 15,772
General and
administrative........ 141 625 1,047 2,023 3,836
----- ------- ------- ------- --------
Loss from operations.... (848) (3,932) (6,446) (8,382) (19,608)
Interest income, net.... 96 280 337 475 1,188
----- ------- ------- ------- --------
Net loss................ $(752) $(3,652) $(6,109) $(7,907) $(18,420)
===== ======= ======= ======= ========
Pro forma net loss per
common share and per
common share--assuming
dilution(1)............ $ (0.83) $ (2.24)
======= ========
Shares used in
calculation of pro
forma net loss per
common share and per
common share--assuming
dilution(1)............ 9,565 8,232
======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1994 1995 1996 1997
------ ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................. $4,552 $6,803 $11,110 $11,457
Total assets................................. 4,910 7,685 11,951 13,141
Long-term liabilities........................ 99 423 596 2,325
Deficit accumulated during the development
stage....................................... (752) (4,404) (10,513) (18,420)
Total stockholders' equity................... 4,568 6,593 10,238 8,463
</TABLE>
- --------
(1) See Note 11 of Notes to Consolidated Financial Statements for an
explanation of the computation of pro forma net loss per share.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve
risks and uncertainties. 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 under "Risk Factors" and elsewhere
in this Prospectus.
OVERVIEW
Since its inception in May 1994, Symphonix has been a development stage
company. The Company is developing a family of proprietary semi-implantable
and implantable soundbridges for the management of moderate to severe hearing
impairment. The Company's family of Vibrant soundbridges are based on its
patented core FMT technology. The Company has not generated any revenue from
sales of products and as of December 31, 1997, had an accumulated deficit of
$18.4 million. To date, the Company's principal sources of funding have been
private equity financings, equipment leases and bank borrowings.
In September 1996, the Company initiated clinical trials of the Vibrant
soundbridge in both the United States and Europe, and in July 1997, the
Company initiated clinical trials of the Vibrant P soundbridge in Europe. The
Company will be required to conduct further research, development, testing and
regulatory activities. The costs of these activities, together with the costs
of establishing commercial-scale manufacturing and sales and marketing
capabilities, and general and administrative expenses, are expected to result
in substantial losses through at least 1999.
RESULTS OF OPERATIONS
Research and Development Expenses. Research and development expenses were
$707,000 in the period ended December 31, 1994, and $3.3 million, $5.4 million
and $6.4 million in the years ended December 31, 1995, 1996 and 1997,
respectively. Research and development expenses consist primarily of personnel
costs, professional services, materials, supplies and equipment in support of
product development, clinical trials, regulatory submissions and patent
applications. Expenses increased from the period ended December 31, 1994 to
the year ended December 31, 1995, due to the inclusion of a full year of
expenses in 1995, and to increases in the level of staffing, professional
services, and other costs as the Company established a research and
development organization and initiated its product development effort.
Expenses increased from 1995 to 1996 and from 1996 to 1997, due to increases
in the level of staffing and increased spending on supplies, professional
services and equipment as the Company increased its product development
efforts, developed its clinical research and regulatory functions, initiated
clinical trials of its products and established a pilot manufacturing
capability.
General and Administrative Expenses. General and administrative expenses
were $141,000 in the period ended December 31, 1994, and $625,000, $1.0
million and $2.0 million in the years ended December 31, 1995, 1996 and 1997,
respectively. General and administrative expenses consist primarily of
personnel costs and professional services. Expenses increased from the period
ended December 31, 1994 to the year ended December 31, 1995, due to the
inclusion of a full year of expenses in 1995, and to increases in the level of
staffing as the Company increased its product development activities. Expenses
increased from 1995 to 1996 and from 1996 to 1997, due to further increases in
the level of staffing and spending on professional services.
22
<PAGE>
Deferred compensation of $1.6 million was recorded in 1997, representing the
difference between the exercise prices of certain options granted and the
deemed fair value of the Company's Common Stock on the grant dates. Deferred
compensation expense of $107,000 attributed to such options was amortized
during the year ended December 31, 1997. The remaining deferred compensation
will be amortized over the vesting period of the options (generally four
years).
Interest Income, Net. Interest income, net was $96,000 in the period ended
December 31, 1994, and $280,000, $337,000 and $475,000 in the years ended
December 31, 1995, 1996 and 1997, respectively. The increases in interest
income over these periods were primarily due to the Company's increasing
average cash and short-term investment balances, which have been the result of
the timing of the Company's private equity financings.
Income Taxes. As a result of the net losses incurred, the Company has not
incurred any income tax obligations. At December 31, 1997, the Company had net
operating loss carryforwards of $13.2 million for federal and $13.1 million for
state income tax purposes, which will expire at various dates through 2012 if
not utilized. The principal differences between losses for financial and tax
reporting purposes are the result of the capitalization of research and
development and start-up expenses for tax purposes. United States and state tax
laws contain provisions that may limit the net operating loss carryforwards
that can be used in any given year, should certain changes in the beneficial
ownership of the Company's 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 the private sale of equity securities, totaling $26.7 million,
from equipment lease financing totaling $1.3 million and from bank borrowings
totaling $2.0 million. At December 31, 1997, the Company had $9.6 million in
working capital, and its primary source of liquidity was $11.5 million in cash,
cash equivalents and short-term investments.
Capital expenditures, primarily related to the Company's research and
development and manufacturing activities, were $294,000 in the period ended
December 31, 1994, and $691,000, $409,000 and $898,000 in the years ended
December 31, 1995, 1996 and 1997, respectively. At December 31, 1997, the
Company did not have any material commitments for capital expenditures, except
as set forth below.
In October 1997, the Company entered into a five-year lease commencing in
January 1998 for a new facility (see Note 7 of Notes to Consolidated Financial
Statements). The Company anticipates that it will incur capital expenditures of
approximately $1.0 million for leasehold improvements with respect to this
facility. Through December 31, 1997, approximately $350,000 has been incurred
and the balance is expected to be incurred in the first quarter of 1998.
The Company has a loan agreement with a bank providing for borrowings of up
to $2.0 million and for the issuance of letters of credit up to $250,000. At
December 31, 1997 the Company had borrowings of $2.0 million and an outstanding
letter of credit in the amount of $243,680 under the loan agreement (see Note 6
of Notes to Consolidated Financial Statements).
Cash used in operating activities was $519,000 in the period ended December
31, 1994 and $3.1 million, $5.4 million and $6.5 million in the years ended
December 31, 1995, 1996 and 1997, respectively. The increases in cash used in
operating activities over these periods reflect the increased net losses
incurred, primarily as a result of higher research and development expenses.
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
23
<PAGE>
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 if approved for marketing and other
factors not within the Company's control. While the Company believes that the
net proceeds of this offering, together with its existing capital resources
and projected interest income, will be sufficient to fund its operations and
its capital investments for at least the next 18 months, there can be no
assurance that the Company will not require additional financing prior to that
time. There can be no assurance that such additional financing will be
available on a timely basis on terms acceptable to the Company, or at all, or
that such financing will not be dilutive to stockholders. If adequate funds
are not available, the Company could be required to delay development or
commercialization of certain of its products, to license to third parties the
rights to commercialize certain products or technologies that the Company
would otherwise seek to commercialize for itself, or to reduce the marketing,
customer support or other resources devoted to certain of its products, any of
which could have a material adverse effect on the Company's business,
financial condition and results of operations.
24
<PAGE>
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. 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 under "Risk Factors," and
elsewhere in this Prospectus.
OVERVIEW
Symphonix is a leader in the development of proprietary semi-implantable and
implantable products, or soundbridges, for the management of moderate to
severe hearing impairment. In 1994, mild to severe hearing impairment affected
approximately 26 million people in the United States, or 10% of the
population, of whom approximately 17 million people were classified as
moderately or severely hearing impaired. The Company believes that its family
of Vibrant soundbridges, designed to overcome the inherent limitations of
traditional hearing devices, represent a novel approach in the management of
hearing impairment. The Company's initial product under development, the
Vibrant soundbridge, is a semi-implantable device which mechanically drives
the three small bones of the middle ear to overcome the user's hearing
impairment. The Company's second generation product, the Vibrant P
soundbridge, provides a greater degree of customization to address the
specific needs of a particular user's hearing loss and expands the types of
hearing loss that can be managed by the Company's products. In September 1996,
the Company initiated clinical trials of the Vibrant soundbridge in both the
United States and Europe, and in July 1997 the Company initiated clinical
trials of the Vibrant P soundbridge in Europe. As of January 5, 1998, 48
patients have been implanted with the Company's soundbridges, of whom 44 have
had the Audio Processor fitted and the soundbridge's performance evaluated.
THE HEARING IMPAIRMENT MARKET
Background
The human ear consists of three regions: the outer ear, the middle ear and
the inner ear. The outer ear consists of the external auricle and the ear
canal. The ear canal is a passageway through which sound waves reach the
middle ear. The outer ear is separated from the middle ear by the tympanic
membrane, commonly referred to as the eardrum. The middle ear is a chamber
that contains three tiny bones, the malleus, the incus, and the stapes, that
together are known as the ossicles. The ossicles form a chain from the
tympanic membrane to the inner ear. The inner ear includes the cochlea, which
is a fluid-filled structure that contains a large number of delicate sensory
hair cells that are connected to the auditory nerve.
Sound, which is a wave-like vibration of the air, enters the ear canal and
is slightly amplified by the natural resonant characteristics of the ear
canal. These sound waves cause vibration of the tympanic membrane and are
amplified and transmitted to the fluid filling the inner ear by the motion of
the ossicles. The waves created in the fluid pass through the snail-shaped
cochlea and stimulate the delicate sensory hair cells. These hair cells
generate electrochemical signals that are detected by the auditory nerve and
are then subsequently interpreted by the brain as sound.
The signals that are interpreted by the brain as sound are distinguished by
frequency and intensity. The frequency of sound is perceived as pitch and is
measured in cycles per second, or Hertz ("Hz"). The normal human ear perceives
sounds in the range of 20 to 18,000 Hz, although most components of human
speech are generally in the range of 400 to 4,000 Hz. A more subtle aspect of
frequency is that certain letters of the alphabet are spoken at a different
frequency than others. For example, certain consonants such as "m," "n" and
"g" and all vowels are spoken at relatively low frequencies while other
consonants and sounds such as "t," "s," "f" and "sch" are spoken at higher
frequencies. Accordingly, at a given volume, certain letters may be more
audible than others.
25
<PAGE>
The intensity of sound is perceived as loudness and is measured in decibels
("dB"). The lowest level of intensity at which an individual perceives sound
is known as the threshold of hearing. The range in decibels from a person's
threshold of hearing to the level at which the person perceives sound to be
uncomfortably loud is known as the dynamic range. Both the threshold of
hearing and the dynamic range vary with the frequency of sound. An individual
with normal hearing can comfortably hear sounds ranging in intensity from
approximately 30 dB to 100 dB.
[ILLUSTRATION OF EAR ANATOMY]
Hearing Impairment
Hearing impairment can adversely effect a person's quality of life and
psychological well-being. Hearing impaired people often withdraw from
discussions and other social interactions to avoid frustration and
embarrassment from not being able to fully participate in and understand
conversations. Difficulty in communicating effectively can lead to negative
emotions and attitudes, increased stress levels, reduced self-confidence,
reduced sociability and reduced effectiveness in the workplace. In addition,
recent studies suggest that hearing impairment may also contribute to
physiological complications, such as heart disease.
Audiologists typically classify the hearing impaired population into four
categories: mild, moderate, severe and profound. In 1994, the total hearing
impaired population in the United States was approximately 26 million people,
of whom approximately 17 million were classified as either moderately or
severely hearing impaired.
While the exact causes of hearing impairment are varied and unclear, hearing
impairment can be characterized according to its physiological source. There
are two general categories of hearing impairment, conductive and
sensorineural, although sometimes a combination of the two may arise.
Conductive hearing impairment results from diseases or disorders that limit
the transmission of sound through the outer and/or middle ear. Conductive
hearing impairment is often treated surgically with an implanted prosthesis to
replace part or all of the ossicles. The Company believes that people with a
conductive hearing loss represent a small portion of the total hearing
impaired population.
26
<PAGE>
Sensorineural hearing impairment occurs in the inner ear and/or neural
pathways and, the Company believes, accounts for the vast majority of hearing
impairment. In patients with sensorineural hearing impairment, the external
and middle ear function normally. The sound vibrations pass undisturbed
through the eardrum and ossicles, and fluid waves are created in the cochlea.
However, because some or many of the delicate sensory hair cells inside the
cochlea have degenerated or been damaged, the inner ear cannot detect the full
intensity and quality of the sound. Sensorineural hearing impairment typically
occurs as a result of aging or exposure to loud noise over a protracted period
of time.
As people age, their level of hearing deteriorates and the dynamic range of
audible frequencies is compressed, especially at the higher frequencies. While
approximately 10% of the United States population is hearing impaired, based
on 1994 data, this percentage increases to an average of approximately 25% for
individuals over 55 years of age. The Company believes that with the growth
and aging of the population, the hearing impaired population will continue to
increase throughout the industrialized world. With the increasing exposure to
noise in modern society, it has been observed that people may experience noise
induced hearing loss from aircraft, automobiles, lawn mowers and high powered
stereo equipment as well as military service and machinery within the
workplace.
Existing Therapies
The traditional approaches to management of sensorineural hearing impairment
have been the use of hearing aids and cochlear implants. Hearing aids are the
most common devices used to manage mild to severe sensorineural hearing
impairment. Cochlear implants have been used for the narrow segment of the
sensorineural market represented by profound hearing impairment. However, both
approaches have significant limitations in addressing their respective
markets.
Hearing Aids. The following table, based upon 1996 and 1997 articles in the
Hearing Journal, illustrates the ownership of traditional hearing aids by the
hearing impaired population in 1994. Approximately 18% of the hearing aid
owners did not use their device.
<TABLE>
<CAPTION>
TYPE OF HEARING IMPAIRED HEARING AID MARKET
HEARING POPULATION OWNERS PENETRATION OF
IMPAIRMENT (MILLIONS) (MILLIONS) HEARING AIDS
------------------------------------------------------------
<S> <C> <C> <C>
Mild 8.0 0.3 4%
Moderate 13.2 2.9 22%
Severe 3.9 2.0 51%
Profound 1.1 0.4 36%
---- ---
Total 26.2 5.6 21%
</TABLE>
Hearing aids are acoustic drive devices that amplify sound to increase the
movement of the tympanic membrane and thereby indirectly vibrate the ossicles
in an attempt to overcome the decrease in sensitivity of the delicate sensory
hair cells inside the cochlea. The first electrically enhanced hearing aid was
invented about a hundred years ago and consisted of a microphone, amplifier,
battery and speaker. More recently, hearing aid manufacturers have increased
the sophistication of sound processing, often using digital technology, to
provide features such as programmability and multi-band compression, allowing
different degrees of amplification at different frequencies. Hand-held
programmers have also been developed to compensate for the inability of
hearing aids to adequately process sound in a variety of acoustic
environments. In addition, as technology has enabled greater miniaturization,
less obtrusive hearing aids have become available. Although there have been
continued advancements in hearing aid device technology, for optimal
27
<PAGE>
performance all or part of the device must fit tightly in the ear canal, which
results in significant drawbacks, including the following:
Distorted sound quality. Obstructing the ear canal with either all or part
of the hearing aid creates an effect known as occlusion, where outside
sounds such as music are overwhelmed by internal sounds such as breathing
or talking. Because the ear canal's natural resonance is significantly
altered, the resulting sound can be unnatural and highly distorted.
Acoustic feedback. Feedback is a high pitched squeal which results when a
speaker and microphone are placed in close proximity and the sound from the
speaker is loud enough to be picked up by the microphone. The problem of
feedback is magnified since the volume of these devices must be turned up
to not only compensate for the patient's hearing impairment but to overcome
the reduction in sound caused by the blockage of the ear canal by the
hearing aid. In addition, as hearing aids have been manufactured in smaller
configurations, the problem of feedback has become inherently greater due
to the closer proximity of the speaker to the microphone.
Poor localization. Occlusion also results in the inability to differentiate
the direction of sounds, as well as the inability to adequately
differentiate between background noise and more important sounds, such as
conversation.
Social stigma. Many hearing aid users and potential users perceive a strong
social stigma related to wearing a hearing aid.
Discomfort. Hearing aids have been manufactured in smaller configurations
in an attempt to address the perceived social stigma associated with
wearing these devices. Since a tight fitting ear piece is required for
optimal performance, the smaller versions of these devices must be placed
deeper in the ear canal, which can cause substantial discomfort.
Reliability. Hearing aids require frequent maintenance, in part due to
their placement in the ear canal, where ear wax can cause problems with the
speaker or dampen the sound produced by the hearing aid. Hearing aids
generally have to be replaced every three or four years, either because of
loss, damage or obsolescence. The need for periodic replacement increases
the lifetime cost of wearing a hearing aid. Traditionally, most hearing aid
users have paid for these devices directly.
As a result of these problems, the benefits perceived by hearing aid users
are generally very low. An article in the 1996 Hearing Journal reported that
only approximately 53% of all hearing aid users are satisfied. Reflecting this
low level of user satisfaction, in 1996 hearing aid manufacturers experienced
product return rates ranging from 14% to 26%. Despite the inherent limitations
of hearing aids, in 1995, approximately 1.7 million hearing aids were sold in
the United States, representing a retail market of approximately $1.2 billion.
The United States market represents approximately 38% of the worldwide hearing
aid market. The Company estimates that the worldwide retail market for hearing
aids exceeded $3.0 billion in 1995.
Cochlear Implants. Cochlear implants have been developed for people who have
a profound hearing loss and are essentially deaf. The cochlear implant is
inserted into the inner ear in a highly invasive and non-reversible surgery.
The implant electrically stimulates the auditory nerve through an electrode
array that provides audible cues to the user which are not interpreted by the
brain as normal sound. Instead, these cues have to be interpreted by the user,
and primarily aid in lipreading and alerting the user to very loud or
dangerous sounds. Users generally require intensive and extended counseling
and training following surgery to achieve any benefit. Best results are
achieved with adults whose hearing loss develops later in life or with
children. Cochlear implants have been controversial both because of strong
resistance from portions of the deaf community and because of the irreversible
nature of the surgery in which the cochlea is invaded and any residual hearing
is destroyed. Accordingly, the Company does not believe that cochlear implants
will achieve significant market penetration beyond their initial indication of
profound hearing impairment. The Company estimates that, in 1996, the
worldwide market for cochlear implants was under $100 million.
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<PAGE>
THE SYMPHONIX SOLUTION
The Company is developing a family of proprietary semi-implantable and
implantable products, or soundbridges, for the management of moderate to
severe hearing impairment. The Company's family of Vibrant soundbridges is
based on its patented core technology, the Floating Mass Transducer ("FMT").
The FMT is a tiny transducer that is designed to enhance hearing by precisely
mimicking and amplifying the movements of the ossicles by converting sound
into mechanical vibrations. While conventional approaches have indirectly
driven the ossicles by amplifying sound to increase the vibrations of the
tympanic membrane, the FMT is attached directly to the ossicles and enhances
the natural movement of these vibratory structures. This in turn generates
enhanced stimulation of the delicate sensory hair cells in the inner ear. The
FMT receives electrical signals from an Audio Processor, which picks up sound
from the environment and converts these sounds into electrical signals. The
Audio Processor transmits the signals to an implant under the skin. As a
result, the ear canal is not obstructed, the natural resonance of the ear is
maintained and an amplified, natural sound quality is achieved.
The Company's soundbridges are implanted in a two hour surgery that can be
performed on an outpatient basis utilizing the techniques which are similar to
those employed in routine otologic procedures. Based on preclinical studies,
the Company believes that the surgical procedure can be reversed without
clinically meaningful damage to the patient's residual hearing. The Company
believes that its family of Vibrant soundbridges offers a number of
significant benefits, including:
Improved sound quality and speech intelligibility. By leaving the ear canal
unobstructed and the natural resonance undisturbed, a more natural sound
quality is obtained over a broader range of frequencies, and the user's
ability to understand speech is expected to be greater.
Elimination of acoustic feedback. Since the Vibrant soundbridge
mechanically drives the ossicles, it does not generate any acoustic
feedback.
Improved sound localization. Users are able to comprehend the acoustic
sound environment, identify specific sounds and their source and
differentiate sounds from background noise.
Minimized social stigma. In the semi-implantable versions of the Company's
soundbridges, the only external component is located behind the ear and
generally hidden by the user's hair. As a result, social stigma is
minimized. The totally implantable versions of the Company's soundbridges
are being designed with no external components, and aesthetic
considerations would be completely eliminated.
Improved comfort. No part of the Vibrant soundbridge is inserted in the ear
canal, resulting in increased comfort for users of the Vibrant soundbridge.
Improved reliability. Since no components of the Vibrant soundbridge will
be within the ear canal, the reliability problems caused by wax and
moisture are eliminated.
Since the Company has not yet commercialized its products and since there
are no comparable direct drive devices currently available commercially, the
price that will be charged for the Vibrant soundbridge has not yet been
determined. However, the Company anticipates that the Vibrant soundbridge will
cost more than a sophisticated hearing aid (which can cost as much as $3,500),
but substantially less than a cochlear implant (the cost of which ranges from
approximately $17,000 to $30,000). The Company anticipates that surgical
procedure utilized in implanting the Vibrant soundbridge will cost
approximately $5,000 and will vary by geographic region.
STRATEGY
The Company's objectives are to establish its family of Vibrant soundbridges
as the standard of care worldwide for the management of moderate to severe
hearing impairment and to establish Symphonix as the leading company in the
hearing management market. The following are key elements of the Company's
strategy:
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<PAGE>
Demonstrate improved quality of life. The Company intends to promote the
potential benefits of its products to the hearing impaired population in
order to expand the market to include not only current dissatisfied hearing
aid users but also former users who have abandoned hearing aids due to
either previous dissatisfaction or perceived social stigma. The Company
believes that achieving real patient benefit in the form of improved
quality of life will be an important factor in differentiating its products
from the traditional approaches to hearing management.
Develop surgeon endorsement of the Company's family of soundbridges. The
Company intends to position the family of Vibrant soundbridges as
technologically advanced implants that address an unmet patient need and
add to the products and services that surgeons can offer. The Company's
strategy is to market its soundbridges initially to those specialists in
otology who are currently most active in ear surgery and, thereafter, to
the general population of ENT surgeons. Because the surgical procedure for
implementing the Vibrant soundbridge utilizes many of the same techniques
employed by surgeons trained and experienced in cochlear implant surgery,
the Company believes that surgeon training will not be a significant
impediment to market acceptance.
Leverage the Company's patented core technology. The Company intends to
leverage its patented core FMT technology to develop new soundbridges and
enhancements to its current technology. The Company intends to continue to
dedicate significant resources to research and development to further
develop its technology base and to expand the market it addresses through
development of a family of alternate configurations of soundbridges. The
Company is developing the Vibrant P soundbridge to permit a greater degree
of customization to address the specific needs of a particular patient, the
Vibrant D soundbridge to permit an even greater degree of customization
along with the additional benefit of digital signal processing, and the
Vibrant HF soundbridge to provide a benefit suited to those individuals who
have a noise-induced hearing loss at high frequencies but relatively normal
hearing at lower frequencies.
Protect and enhance the Company's proprietary position. The Company intends
to continue to aggressively pursue proprietary protection for its
technologies and products. The Company has three patents issued in the
United States and 21 patents pending both in the United States and
internationally covering a number of fundamental aspects of the FMT and
related technologies.
PRODUCTS UNDER DEVELOPMENT
Symphonix is developing proprietary semi-implantable and implantable
soundbridges, utilizing the Company's core FMT technology to manage hearing
impairment. The Company believes that the Vibrant soundbridge, Vibrant P
soundbridge, Vibrant HF soundbridge and Vibrant D soundbridge will enable the
Company to address a significant portion of the moderate to severe hearing
impairment market currently not satisfied with traditional hearing aid
devices. The Vibrant XP soundbridge has the potential to enable the Company to
address a portion of the profound hearing impairment market currently served
by cochlear implants. In addition, the Company is in the early stage of
developing the Vibrant TI which is being designed to be totally implantable
with no external components.
The Vibrant soundbridge, Vibrant P soundbridge, Vibrant HF soundbridge and
Vibrant D soundbridge are designed to utilize the same implant, with the
differences in function being provided by modifications to the external Audio
Processor, its software and programming unit. Utilization of a common implant
will allow a user to upgrade the Audio Processor if a user's hearing changes
over time.
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The following table sets out the soundbridges under development by the
Company and their development status:
<TABLE>
<CAPTION>
SOUNDBRIDGE Description HEARING LOSS ADDRESSED STATUS(1)(2)
- ---------------------------------------------------------------------------------------
<C> <S> <C> <C>
Vibrant First generation semi- Moderate to IDE approved for
implantable hearing moderately severe pivotal trial in the
device. United States; EN 540
clinical trial
complete in Europe
- ---------------------------------------------------------------------------------------
Vibrant P Second generation semi- Moderate to severe
implantable hearing IDE approved for
device, with pivotal trial in the
programmable dual-band United States; EN 540
analog signal clinical trial
processing. complete in Europe
- ---------------------------------------------------------------------------------------
Vibrant HF Second generation semi- Noise-induced high IDE expected to be
implantable hearing frequency loss submitted in 1998
device designed to
address noise induced
high frequency hearing
loss, by using modified
signal processing.
- ---------------------------------------------------------------------------------------
Vibrant D Third generation semi- Moderate to severe
implantable hearing IDE supplement
device, with expected to be
programmable 3-band submitted in the
digital signal fourth quarter of
processing. 1998
- ---------------------------------------------------------------------------------------
Vibrant XP Second generation semi- Severe to profound Limited feasibility
implantable hearing study expected to be
device designed to performed in 1998
address more severe
hearing impairment by
using modified signal
processing and an
external battery in a
body-worn pack, coupled
with a modified implant.
- ---------------------------------------------------------------------------------------
Vibrant TI A second family of Moderate to severe Early stage of
Vibrant soundbridges development
which are being designed
to be totally
implantable with no
external components.
</TABLE>
(1) Regulatory filing dates reflect the Company's plans and are subject to
delay or cancellation depending upon contingencies that may arise in the
development process. See "Risk Factors--Limited Clinical Testing
Experience" and "--Limited Manufacturing Experience; Scale-Up Risk;
Dependence on Key Suppliers."
(2) "EN 540" indicates European clinical trial standards to determine the
safety and performance of products.
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<PAGE>
Vibrant soundbridge
The Company's initial product under development, the Vibrant soundbridge,
has both external and implantable components. The external Audio Processor
consists of (i) a microphone that picks up sound from the environment, (ii)
sound processing circuitry that converts the sound to an electronic signal and
modulates the signal to reduce potential noise interference from broad band
electromagnetic fields and (iii) a small 1.5 volt battery that powers the
device. The Audio Processor is placed on the skull behind the ear and is held
in place by magnetic attraction to an implanted receiver, the VORP (Vibrating
Ossicular Prosthesis). The Audio Processor is small enough to be concealed by
the user's hair.
[ILLUSTRATION OF VIBRANT SOUNDBRIDGE IN PLACE]
The VORP converts the electronic signal to a mechanical vibration of the
ossicles in the middle ear. The VORP consists of (i) a receiver unit that
receives the electromagnetic signal through the skin from the external Audio
Processor and breaks down the electrical signal to the appropriate drive
signal for the FMT, (ii) a conductor link that connects the implanted receiver
unit to the FMT and (iii) the FMT itself, which is attached to the incus using
a titanium clip. All of these components are insulated from body chemistry
using well established implantable device materials used in pacemaker and
implantable defibrillator systems.
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The FMT is a tiny transducer, smaller than a grain of rice, that comprises a
floating magnet contained within a titanium housing. A coil surrounding the
housing generates a small electromagnetic field based on a signal received
from the VORP's receiver unit. The electromagnetic interaction of the magnet
and the coil creates a mechanical vibration of the entire FMT. This vibration
enhances the natural movement of the ossicles, which in turn generates
enhanced stimulation of the delicate sensory hair cells in the inner ear. A
critical element of the proprietary FMT design is the proximity of the magnet
to the electromagnetic field that causes the magnet to vibrate. By keeping the
magnet and the coil close together, the FMT maximizes electromagnetic coupling
while minimizing power consumption.
[LOGO OF PRODUCT ILLUSTRATION APPEARS HERE]
The surgical procedure for the implantation of the Vibrant soundbridge
involves techniques which are similar to those employed in other common
otologic procedures. The internal receiver unit is implanted below the skin
and muscle behind the ear. The conductor link connecting the receiver unit to
the FMT is placed through the excavated mastoid bone. These steps are similar
to those required for the surgical placement of a cochlear implant receiver.
In the middle ear, the FMT is attached to the ossicles in a manner similar to
the way otologists have traditionally attached ossicular prostheses for
management of conductive hearing loss. Because the surgery involves surgical
techniques that are familiar to ear surgeons, the Company believes that
surgeon training will not be a significant impediment to market acceptance.
The procedure may be performed on an outpatient basis, and initial clinical
experience has indicated that the procedure can be performed in about two
hours. Approximately eight weeks following the surgery, the Audio Processor is
fitted by an audiologist with the appropriate sound processing settings. The
Company's approved IDE only permits implantation in one ear. This will
generally be the ear with the poorest unaided functional hearing. Based on
preclinical studies, the Company believes that the surgical procedure can be
reversed without damage to the patient's residual hearing.
Limited clinical trials of the Vibrant soundbridge were initiated in late
1996 in the United States. Also in late 1996, an EN 540 clinical trial was
initiated in Europe, which trial has subsequently been completed. The Company
has since submitted the technical, preclinical and clinical data that it
believes will be necessary, together with the previously obtained
certifications, to satisfy the applicable regulatory requirements for
commercial sales in the EU. As of January 5, 1998, five patients in the United
States have been implanted with the Vibrant soundbridge, all of whom have had
the Audio Processor fitted and the soundbridge's performance evaluated.
Additionally, 19 patients in Europe have been implanted with the Company's
Vibrant soundbridge, all of whom have had the Audio Processor fitted and the
soundbridge's performance evaluated.
Vibrant P soundbridge
The Vibrant P soundbridge under development is similar to the Vibrant
soundbridge but is designed to permit a greater degree of customization to
address the specific needs of a particular
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<PAGE>
user's hearing loss and expand the types of hearing loss that can be managed
by the Company's products. At the time of fitting, the Audio Processor is
connected to a hand-held programming unit which allows the audiologist to
adjust separately the low and high frequencies. This permits a greater degree
of customization in either the high or low frequency band.
The Company received approval to incorporate the Vibrant P soundbridge into
its current European clinical trial of the Vibrant soundbridge and this trial
was initiated in July 1997. In the United States, the Company filed an IDE
supplement on November 14, 1997 summarizing the Phase I results, finalizing
the study protocol and labeling claims, providing technical information
regarding the Vibrant P soundbridge, and requested permission to proceed to
the pivotal study. On December 11, 1997, the FDA approved the multi-center
pivotal study in 55 subjects at up to 12 sites with the Vibrant P soundbridge.
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. As of January 5, 1998, 24 patients have
been implanted with the Vibrant P soundbridge in Europe, of whom 20 have had
the Audio Processor fitted and the soundbridge's performance evaluated.
Vibrant HF soundbridge
The Vibrant HF soundbridge is being developed to provide a benefit for those
individuals who have a hearing loss at high frequencies but relatively normal
hearing at lower frequencies. Hearing aids usually are limited in
effectiveness at higher frequencies due to acoustic feedback and internal
speaker response. With the increasing exposure to noise in modern society, it
has been observed that people may experience noise-induced hearing loss from
aircraft, automobiles, lawn mowers and high powered stereo equipment as well
as military service and machinery within the workplace. The Vibrant HF
soundbridge will be configured through selective signal processing. The
Company intends to submit an IDE in 1998 for FDA approval to commence clinical
trials of the Vibrant HF soundbridge and intends to initiate European clinical
trials in 1998.
Vibrant D soundbridge
The Vibrant D soundbridge under development is similar to the Vibrant P
soundbridge, but is designed to permit an even greater degree of customization
to address the specific needs of a particular user's hearing loss. The Vibrant
D soundbridge features digital signal processing. Fully automatic and
independent sound processing in three separate frequency bands is provided. At
the time of fitting, the Audio Processor is connected to a programming unit
which allows the audiologist to adjust separately the low, mid and high
frequencies. This sophisticated system will be capable of analyzing sound and
automatically adjusting the soundbridge's response.
The Company intends to seek approval of an IDE supplement for the Vibrant D
soundbridge during 1998 and to initiate European clinical trials in 1998.
There can be no assurance, however, that the Company will not be required to
submit a separate IDE for the Vibrant D soundbridge, which would result in a
delay in regulatory approval.
Vibrant XP soundbridge
The Vibrant XP soundbridge is being developed to provide a benefit for those
individuals who have a severe to profound hearing loss with speech recognition
above 30%. Currently, there are only limited treatment options for such
individuals.
The Vibrant XP soundbridge will be configured to provide modified signal
processing and higher output from the FMT, thereby providing additional
benefit for certain people with a severe to profound hearing impairment.
Generating this higher output will require an external body-worn
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<PAGE>
battery pack, similar to those used for cochlear implants. However, unlike
cochlear implants, the Vibrant XP soundbridge will not require penetration of
the inner ear with its attendant damage to residual hearing.
The Company intends to conduct a feasibility study in 1998 on a limited
number of patients in Europe to assess the viability of this product concept.
Based on the results of this feasibility study, the Company may seek approval
to initiate U.S. clinical trials of the Vibrant XP soundbridge by submitting
an IDE during 1998 and may initiate European clinical trials in 1998.
Vibrant TI soundbridge
The Company is in the early stages of developing versions of the Vibrant
soundbridge for the management of moderate to severe hearing impairment that
are totally implantable with no external components. The essential functions
of the core FMT technology of these products will be the same as in the semi-
implantable products. However, all the functions currently performed by the
external Audio Processor are being designed to be performed by implanted
components. The Company believes that the Vibrant TI soundbridge, if
successfully developed, will be applicable especially for people who are
particularly physically active or who are concerned about aesthetics.
Two critical elements of producing the Vibrant TI soundbridge are the
development of an implantable microphone that can adequately pick up sound
from the external environment, and the development of a transcutaneously
rechargeable battery to power the device. The microphone is being developed
internally by the Company and the battery is being developed under a
cooperative development project with a specialized battery manufacturer.
However, there can be no assurance that such components will be successfully
developed in a timely manner, if ever.
Since all of the Company's products are in development, significant revenues
from product sales will not be realized for at least several years, if ever.
There can be no assurance that any of the Company's product development
efforts will be successfully completed, that any of the Company's products
will be proven to be safe and effective, that regulatory approvals will be
obtained or labeling claims will be as broad as sought, that the Company's
products will be capable of being produced in commercial quantities with
acceptable yields at reasonable costs, or that any products, if introduced,
will achieve market acceptance.
CLINICAL TRIAL ACTIVITIES
United States
On February 23, 1996, the Company received approval of an IDE for the
Vibrant soundbridge from the FDA. The Company has completed a Phase I trial
under the IDE and submitted the interim report to the FDA. This trial was
limited to five subjects, including Geoffrey R. Ball, a founder of the
Company, at two investigational sites and was intended to test the safety and
provide preliminary evidence of efficacy of the device and the surgical
procedures used to implant the device. Due to the limited number of subjects
evaluated, no statistically valid conclusions can be made from the results
reported to the FDA.
The Company observed the following performance characteristics: increased
functional gain at higher frequencies (i.e., >2000 Hz); elimination of
occlusion effect; elimination of acoustic feedback; elimination of placement
loss; reduction of maintenance issues; and elimination of ear mold issues. A
standardized hearing test was also administered to evaluate each subject's
ability to comprehend speech in a noisy environment. Three of the five
subjects demonstrated a 50% improvement with the Vibrant soundbridge compared
to their hearing aid. The trial included a self-assessment questionnaire of
improvement for the following seven categories of device performance as
compared to a hearing aid: communication, reverberation, familiar talker,
reduced cues, background noise, aversion to sounds and distortion of sounds.
Subjects reported an improvement greater than 20% in six of the seven
categories with the Vibrant soundbridge when compared to their current hearing
aid.
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<PAGE>
On November 14, 1997, the Company filed an IDE supplement summarizing the
Phase I results, finalizing the study protocol and labeling claims, providing
technical information regarding the Vibrant P soundbridge, and requested
permission to proceed to the pivotal study. On December 11, 1997, the FDA
approved the multi-center pivotal study in 55 subjects at up to 12 sites with
the second generation Vibrant P soundbridge.
Europe
The Company has conducted a multi-center EN 540 clinical trial in Europe at
seven institutions. Clinical sites were located in Germany, Italy, the
Netherlands, the United Kingdom, Switzerland and France. The EN 540 protocol
investigated the safety and performance of the Vibrant soundbridge and the
Vibrant P soundbridge. As of January 5, 1998, 43 subjects have been implanted
with the Company's soundbridges, 19 with the Vibrant soundbridge and 24 with
the Vibrant P soundbridge. With the Vibrant soundbridge, performance was only
evaluated for functional gain and the results were comparable to those
achieved by the subjects in the United States trial. With the Vibrant P
soundbridge, the subjects demonstrated functional gains as high as 50 dB at
1000 Hz, 55 dB at 1500 Hz, 60 dB at 2000 Hz, 40 dB at 3000 Hz, 50 dB at
4000 Hz, 40 dB at 6000 Hz, and 35 dB at 8000 Hz. These functional gain values
reported were at "user settings" and did not necessarily reflect the maximum
functional gains attainable with the device.
There can be no assurance that the Company's clinical trial efforts will
progress as expected, not be delayed or that such efforts will lead to the
successful development of any product. No assurance can be given that any of
the Company's proposed clinical trials will continue to be allowed by the FDA
or other regulatory agencies or that clinical trials will commence as planned.
Any delays in the Company's clinical trials would have a material adverse
effect on the Company's business, financial condition and results of
operations. Success in preclinical studies or early stage clinical trials does
not assure success in later stage clinical trials. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations
which could delay, limit or prevent regulatory approval. Further, there can be
no assurance that if such testing of products under development is completed,
any such devices will be accepted for formal review by the FDA or approved by
the FDA for marketing in the United States.
RESEARCH AND DEVELOPMENT
The Company had 23 employees engaged in research and development, including
regulatory and clinical affairs, as of December 31, 1997. The Company's
research and development has focused on developing its patented core FMT
technology, developing the Vibrant soundbridge and conducting appropriate
preclinical and clinical testing. The Company expended approximately $5.4
million and $6.4 million for the years ended December 31, 1996 and 1997,
respectively, on research and development, and anticipates that it will
continue to expend substantial resources on completion of the clinical testing
of the Vibrant and Vibrant P soundbridges, development and clinical testing of
the Vibrant HF and Vibrant D soundbridges, and supporting manufacturing scale-
up. In addition, the Company expects to devote substantial resources to the
development of the Vibrant XP soundbridge and of the Vibrant TI soundbridge
family of totally implantable versions of the Vibrant soundbridge. In
addition, the Company may devote resources for the development of products for
the treatment of conductive hearing loss. Product development involves a high
degree of risk and there can be no assurance that the Company's product
development efforts will result in any commercially successful products.
MANUFACTURING
The Company currently manufactures its products in limited quantities for
laboratory testing and for its United States and European clinical trials. The
manufacture of the Company's soundbridges is
36
<PAGE>
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. If the Company receives
regulatory approval to commercialize its products, it 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, control electronics and implant packaging are
provided by single source suppliers. One component, the signal processing
microcircuit, is provided by a sole source supplier, Gennum Corporation. None
of the Company's suppliers is contractually obligated to continue to supply
the Company nor is the Company contractually obligated to buy from a
particular supplier. For certain of these components and subassemblies, there
are relatively few alternative sources of supply, and establishing additional
or replacement suppliers for such components and subassemblies could not be
accomplished quickly. In addition, if the Company wishes to significantly
modify its manufacturing processes or change the supplier of a critical
component, additional approvals will be required from the FDA before the
change can be implemented. Because of the long lead time for some components
and subassemblies that are currently available from a single source, a
supplier's inability or failure to supply such components or subassemblies in
a timely manner or the Company's decision to change suppliers could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Although the Company believes that its current facilities are sufficient to
meet its clinical manufacturing needs, before the Company commences
commercial-scale manufacturing operations, it intends to move to a new
facility. The Company has signed a lease on a new facility and is in the
process of constructing an evironmentally controlled area and other leasehold
improvements in this building and expects to occupy the building in the first
quarter of 1998. This new facility, which will replace the current facility,
is necessary for the establishment of commercial-scale manufacturing.
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 California Department of Health Services ("CDHS") and a
Device Manufacturing License has been issued to the Company. The Company will
be required to comply with the QS regulation requirements in order to produce
products for sale in the United States and with applicable quality system
standards and directives in order to produce products for sale in the EU. Any
failure of the Company to comply with the QS regulation or applicable
standards and directives may result in the Company being required to take
corrective actions, such as modification of its policies and
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<PAGE>
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.
SALES, MARKETING AND TRAINING
The primary market for the Vibrant soundbridge 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'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 Vibrant soundbridge utilizes many of the same techniques employed by
surgeons trained and experienced in cochlear implant surgery, the Company
believes that surgeon training will not be a significant impediment to market
acceptance.
The Company intends to position the 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.
Because the target market is quite concentrated, the Company believes that
it can address the market in the United States with a small direct sales
force. The Company is in the process of establishing a sales and marketing
organization in Europe. An office has been established in Basel, Switzerland,
where the Company's Director of European Sales and Marketing and European
Clinical Manager are based. The Company has recruited sales personnel to
provide direct sales coverage in Germany, France and the United Kingdom, who
will commence their employment during the first quarter of 1998. By the end of
the first quarter of 1998, the Company intends to establish distributors in
Italy, Spain and the Benelux countries. 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 a direct
sales force or marketing organization in any country, that establishing a
direct sales force or marketing organization will be cost-effective or that
the Company's sales and marketing efforts will be successful. In addition, the
Company has had discussions with only a limited number of potential
international distributors and has not yet entered into any agreements with
distributors. There can be no assurance that the Company will be able to enter
into agreements with 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.
COMPETITION
The medical device industry is subject to intense competition in the United
States and abroad. The Company believes its products will compete primarily
with the traditional approaches to managing hearing impairment, principally
hearing aids. Principal manufacturers of acoustic hearing aids include Siemens
Hearing Instruments, Inc., Philips Medical Systems North America Co., Starkey
Laboratories Inc., Beltone Electronics Corp., Dahlberg Inc., ReSound Corp.,
Oticon, Inc., Widex Hearing Aid Co., Inc. and Phonak Inc. There can be no
assurance that the Company's soundbridges will be able to successfully compete
with established hearing aid products. Although, to the Company's knowledge,
none of these acoustic hearing aid manufacturers are currently developing
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direct drive devices, there can be no assurance that these potential
competitors will not succeed in developing technologies and products in the
future that are more effective, less expensive than those being developed by
the Company or that do not require surgery. The Company is aware of several
university research groups and development-stage companies that have active
research or development programs related to direct drive sensorineural hearing
devices. Research of this type has been conducted at various sites for over 20
years. In addition, some large medical device companies, some of which are
currently marketing implantable medical devices, may develop programs in
hearing management. Certain of these companies have substantially greater
financial, technical, manufacturing, marketing and other resources than the
Company. In addition, there can be no assurance that certain of the Company's
competitors will not develop technologies and products that may be more
effective in managing hearing impairment than the Company's products or that
render the Company's products obsolete.
The Company believes that the primary competitive factors in the hearing
management market will be the quality of the hearing enhancement, safety,
whether surgery is required, reliability, endorsement by the surgeon and
audiology communities, patient comfort, cosmetic result and price. The Company
believes that it will be competitive with respect to these factors.
Nonetheless, because the Company's products are still under development, the
relative competitive position of the Company in the future is difficult to
predict.
The medical device industry is characterized by rapid and significant
technological change. Accordingly, the Company's success will depend in part
on its ability to respond quickly to medical and technological change and user
preference through the development and introduction of new products that are
of high quality and that address patient and surgeon requirements.
PATENTS AND PROPRIETARY TECHNOLOGY
In the United States, the Company holds three issued patents and 11 pending
patent applications. Additionally, the Company has ten 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 he Company's ability to make, use or sell its
products either in the United States or in international markets. Although the
Company has conducted searches of patents issued to other companies,
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<PAGE>
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.
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
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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.
GOVERNMENT REGULATION
The Company's medical products, such as the Vibrant soundbridge, are
regulated as medical devices. Accordingly, clinical trials, product
development, labeling, manufacturing processes and promotional activities are
subject to extensive review and rigorous regulation by government agencies in
most countries in which the Company will seek to commercialize its products.
United States
In the United States, the Company's products are subject to applicable
provisions of the United States Federal Food, Drug, and Cosmetic Act ("FDC
Act"), and other federal statutes and regulations governing, among other
things, the design, manufacture, testing, safety, labeling, storage, record
keeping, reporting, approval, advertising and promotion of medical devices.
Noncompliance with applicable requirements can result in warning letters,
fines, recalls or seizure of products, civil penalties, injunctions, total or
partial suspension of production, withdrawal of approval or refusal to approve
new marketing applications and criminal prosecution. Changes in existing
requirements or adoption of new requirements could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Pursuant to the FDC Act, the FDA regulates the design, manufacture,
distribution, preclinical and clinical study and approval of medical devices
in the United States. Medical devices are classified in one of three classes
(Class I, Class II or Class III) on the basis of the controls necessary to
reasonably assure their safety and effectiveness. Safety and effectiveness is
considered to be reasonably assured for Class I devices through general
controls (e.g., labeling, premarket notification and adherence to current QS
regulations) and for Class II devices through the use of additional special
controls (e.g., performance standards, post-market surveillance, patient
registries and FDA guidelines).
Generally, Class III devices are those which must receive premarket approval
by the FDA to reasonably assure their safety and effectiveness (e.g., life-
sustaining, life-supporting and implantable devices, or new devices which have
been found not to be substantially equivalent to legally marketed devices, or
devices whose safety and effectiveness cannot be reasonably assured through
general controls, even if supplemented by additional special controls). Active
implantable devices, such as the Company's implantable hearing devices, are
considered Class III devices.
Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through a 510(k) Premarket Notification or
FDA approval through a PMA application. While the Company has no products for
which it expects to seek 510(k) clearance, it may file 510(k) submissions with
respect to future products. A 510(k) clearance will generally only be granted
if the information submitted to the FDA establishes that the device is
"substantially equivalent" to a legally marketed predicate medical device.
Frequently, the FDA will require clinical data in support of a 510(k)
submission, and the 510(k) process can become time-consuming and expensive.
Significant modifications of the labeling, manufacturing and design of any
product that has been cleared through
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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.
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. On November 14, 1997, the Company filed an IDE supplement
summarizing the Phase I results, finalizing the study protocol and labeling
claims, providing technical information regarding the Vibrant P soundbridge,
and requested permission to proceed to the pivotal study. On December 11,
1997, the FDA approved the multi-center pivotal study in 55 subjects at up to
12 sites with the second generation Vibrant P soundbridge. There can be no
assurance that the Company's clinical trial effort will progress as expected,
will not be delayed or that such effort will lead to the successful
development of any product. No assurance can be given that any of the
Company's clinical trials will continue to be allowed by the FDA or other
regulatory agencies or that clinical trials will commence as planned.
Any delays in the Company's clinical trials would have a material adverse
effect on the Company's business, financial condition and results of
operations. Success in preclinical studies or early stage clinical trials does
not assure success in later stage clinical trials. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations
which could delay, limit or prevent regulatory approval. Further, there can be
no assurance that if such testing of products under development is completed,
any such devices will be accepted for formal review by the FDA, or approved by
the FDA for marketing in the United States.
After a PMA is filed, the FDA begins its review of the submitted
information, which generally takes between one and two years, but may take
significantly longer. During this review period, the FDA may request
additional information or clarification of information already provided. Also
during the review period, an advisory panel of experts from outside the FDA
will be convened to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the device. In addition,
the FDA will conduct a preapproval inspection of the manufacturing facility to
ensure compliance with QS regulation requirements. There can be no assurance
that the Company will be able to meet the FDA's requirements or that any
necessary approval will be granted in a reasonable time frame, or at all.
New PMAs or PMA supplements are required for significant modifications to
the manufacture, labeling and design of a device that is approved through the
PMA process. Supplements to a PMA often require submission of the same type of
information as a PMA, except that the supplement is limited to information
needed to support any changes from the device covered by the original PMA and
may not require as extensive clinical data or the convening of an advisory
panel.
The PMA process can be expensive, uncertain and can frequently require
several years. Even when a PMA is approved, the FDA may impose restrictions on
the indications for which the device
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can be marketed. There can be no assurance that the Company will be able to
obtain necessary approvals on a timely basis, or at all, and delays in
obtaining or failure to obtain such approvals, the loss of previously obtained
approvals, or failure to comply with existing or future regulatory
requirements could have an adverse effect on the Company's business, financial
condition and results of operations.
Subsequent to the receipt of an FDA approval, the Company will continue to
be regulated by the FDA with regard to the reporting of adverse events related
to its products, and ongoing compliance with QS regulation. The Company's
manufacturing facility must be registered with the FDA and the CDHS and will
be subject to periodic inspections by the FDA and by the CDHS. A Device
Manufacturing License has been issued by the State of California and this
license must be renewed annually for the Company to continue manufacture of
medical devices in California.
Europe
The primary regulatory environment in Europe is that of the EU which
consists of 15 countries encompassing most of the major countries in Europe.
The EU has adopted numerous directives and standards regulating the design,
manufacture, clinical trial, labeling, and adverse event reporting for medical
devices. The principal directives prescribing the laws and regulations
pertaining to medical devices in the EU are the 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.
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 submitted the technical, preclinical and
clinical data that its Notified Body has indicated will be required to satisfy
the essential requirements of the AIMDD. To satisfy these requirements, the
Company must complete a clinical trial conducted under European clinical trial
standards (EN 540)
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to determine the safety and performance of the products. The Company must
continue to pass annual EN ISO 9001, EN 46001 and AIMDD 2.3 quality system
audits in order to retain international approvals. As of January 5, 1998, a
total of 43 patients in the European clinical trial have been implanted with
the Company's soundbridges (19 with the Vibrant and 24 with the Vibrant P) of
whom 39 have had the Audio Processor fitted and the soundbridge's performance
evaluated. There can be no assurance that such data will be accepted by the
Company's Notified Body, or that the Notified Body will not require the
Company to obtain additional data from additional clinical trials involving
more patients in order to demonstrate the safety and performance of the
Vibrant and the Vibrant P soundbridges.
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.
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 are the subject of 510(k) and do not involve surgery,
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 Vibrant
soundbridge, 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.
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Certain third-party payors are moving toward a managed care system in which
they contract to provide comprehensive health care for a fixed cost per
person. The fixed cost per person established by these third-party payors may
be independent of the hospital's cost incurred for the specific case and the
specific devices used. Medicare and other third-party payors are increasingly
scrutinizing whether to cover new products and the level of reimbursement for
covered products. Because the Company's hearing prostheses are currently under
development and have not received FDA clearance or approval, uncertainty
exists regarding the availability of third-party reimbursement for procedures
that would use the Company's soundbridges. Failure by physicians, hospitals
and other potential users of the Company's soundbridges to obtain sufficient
reimbursement from third-party payors for the procedures in which the
Company's soundbridges are intended to be used could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Third-party payors that do not use prospectively fixed payments increasingly
use other cost-containment processes or require various outcomes data that may
pose administrative hurdles to the use 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.
If the Company obtains the necessary foreign regulatory approvals, market
acceptance of the Company's products and products currently under development
in international markets would 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. There can be no assurance 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 international markets in
which such approvals are sought.
The Company believes that in the future reimbursement will be subject to
increased restrictions both in the United States and in international markets.
The Company believes that the overall escalating cost of medical products and
services will continue to lead to increased pressures on the health care
industry, both foreign and domestic, to reduce the cost of products and
services, including the Company's products and products currently under
development. There can be no assurance in either United States or
international markets that third-party reimbursement and coverage will be
available or adequate, that future legislation, regulation or reimbursement
policies of third-party payors will not otherwise adversely affect the demand
for the Company's products or products currently under development or its
ability to sell its products on a profitable basis. The unavailability of
third-party payor coverage or the inadequacy of reimbursement could have a
material adverse effect on the Company's business, financial condition and
results of operations.
PRODUCT LIABILITY
The Company's business involves the inherent risk of product liability
claims. The Company maintains limited product liability insurance at coverage
levels which the Company believes to be commercially reasonable and adequate
given the Company's current operations. However, there can be no assurance
that such insurance will continue to be available on commercially reasonable
terms, or at all, or that such insurance will be adequate to cover liabilities
that may arise. Any claims that are brought against the Company could, if
successful, have an adverse effect on the Company's business, financial
condition and results of operations.
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EMPLOYEES
At December 31, 1997, the Company had 45 employees. Of these employees, 23
were in research and development, including regulatory and clinical affairs,
16 were in manufacturing and quality assurance and six were in administration,
sales and marketing. None of the Company's employees is covered by a
collective bargaining agreement and the Company believes that it maintains
good relations with its employees.
FACILITIES
The Company's principal administrative, manufacturing and research and
development facility occupies approximately 11,500 square feet in San Jose,
California, pursuant to a lease that expires in August 1998. The Company has
signed a lease on a facility of approximately 30,500 square feet in San Jose,
California that expires in December 2002. The Company is in the process of
making leasehold improvements in this building and expects to occupy the
facility in the first quarter of 1998. This new facility, which will replace
the current facility, is necessary for the establishment of commercial-scale
manufacturing, and will house all of the Company's U.S. operations. The
Company has established an office in Basel, Switzerland for the headquarters
of its European sales and marketing organization.
LEGAL PROCEEDINGS
The Company is not currently engaged in any legal proceedings.
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SCIENTIFIC ADVISORY BOARD
The Company has established a Scientific Advisory Board consisting of
leading professionals in the fields of otology, otolaryngology and audiology.
Each member of the Board has received options for stock, pursuant to the 1994
Option Plan, for participation on the Board. The Board meets periodically and
reviews the Company's clinical progress and product development plans. In
addition, members of the Scientific Advisory Board are available on an
individual basis to consult with the Company. The members of the Scientific
Advisory Board are as follows:
BYRON J. BAILEY, MD. has been a member of the Company's Scientific Advisory
Board since March 1995. Dr. Bailey is an otolaryngologist. He is Chairman of
the Department of Otolaryngology at the University of Texas Medical Branch at
Galveston, Texas. Dr. Bailey has served on numerous committees with the
American Academy of Otolaryngology-Head and Neck Surgery as well as advisory
committees for the FDA. He is a past president of the American Academy of
Otolaryngology-Head and Neck Surgery.
CHARLES I. BERLIN, PH.D. has been a member of the Company's Scientific
Advisory Board since March 1995. Dr. Berlin is a clinical audiologist. He is
Director of the Kresge Hearing Research Laboratory of the South, part of
Louisiana State University Medical Center ("LSUMC") in New Orleans, Louisiana.
At LSUMC, Dr. Berlin is also a Professor in the Department of
Otorhinolaryngology and Biocommunication, in the Department of Physiology and
in the School of Allied Health's Department of Communication Disorders.
DERALD E. BRACKMANN, MD. has been a member of the Company's Scientific
Advisory Board since March 1995. Dr. Brackmann is an otologist and
neurotologist. He is President of the House Ear Clinic, and Chief of the
Otology Service at St. Vincent Medical Center in Los Angeles, California and
at the University of Southern California/Los Angeles County Medical Center.
Dr. Brackmann has published more than 200 papers and has three textbooks to
his credit. He is a past president of the American Academy of Otolaryngology-
Head and Neck Surgery, the American Otological Society and the North American
Skull Base Society.
RICHARD A. CHOLE, MD, PH.D. has been a member of the Company's Scientific
Advisory Board since April 1995. Dr. Chole is an otologist and neurotologist.
He is Chairman of the Department of Otolaryngology at the University of
California, Davis School of Medicine. Dr. Chole's research has been supported
by the National Institutes of Health, The Deafness Research Foundation, the
American Otologic Society and the University of California. He serves on the
Expert Panel on Hearing and Hearing Impairment for the National Institute of
Deafness and Communication Disorders.
CHARLES M. LUETJE, MD. has been a member of the Company's Scientific
Advisory Board since March 1995. Dr. Luetje is an otologist and neurotologist
in private practice. Additionally, Dr. Luetje serves as a Clinical Assistant
Professor in the Department of Surgery/Otolaryngology at the University of
Missouri Medical Center and as a preceptor and instructor in the Department of
Otolaryngology at the University of Kansas Medical Center. He has over 100
presentations and papers to his credit and serves as the President Elect of
the American Otological Society.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company, their
positions with the Company and ages as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Name AGE POSITION
---- --- --------
<C> <C> <S>
Harry S. Robbins............ 50 Chairman of the Board of Directors,
President and Chief Executive Officer
Geoffrey R. Ball............ 33 Vice President, Chief Technical Officer and
Director
R. Michael Crompton......... 39 Vice President of Regulatory and Clinical
Affairs and Quality Assurance
Peter Hertzmann............. 49 Vice President of Marketing
Bob H. Katz................. 37 Vice President of Research and Development
Alfred G. Merriweather...... 43 Vice President of Finance and Chief
Financial Officer
Patrick J. Rimroth.......... 42 Vice President of Operations
John de Mora-Mieszkowski.... 53 Director of European Sales and Marketing
B.J. Cassin(1)(2)........... 64 Director
Terry Gould................. 40 Director
Michael J. Levinthal(1)(2).. 43 Director
Petri T. Vainio(1)(2)....... 38 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
HARRY S. ROBBINS co-founded the Company and has served as Chairman of the
Board of Directors, President and Chief Executive Officer of the Company since
its founding in May 1994. From January 1991 to December 1993, Mr. Robbins was
President and Chief Executive Officer of CardioRhythm, Inc., a medical device
company that, from May 1992, was a subsidiary of Medtronic, Inc. Previously,
Mr. Robbins held executive sales and marketing positions with Laserscope and
Diasonics, Inc., medical device companies. Mr. Robbins is a director of
Business Resource Group, a distributor of office furniture and systems. Mr.
Robbins holds a B.A. degree in arts and sciences from Pennsylvania State
University.
GEOFFREY R. BALL invented the FMT, co-founded the Company and has served as
Vice President and Chief Technical Officer and a director since May 1994. From
1987 to March 1994, Mr. Ball was a biomedical engineer in the hearing research
laboratory at the Veterans Hospital in Palo Alto, California, affiliated with
Stanford University. Mr. Ball holds an M.S. degree in systems management from
the University of Southern California and a B.S. degree in human development
and performance from the University of Oregon.
R. MICHAEL CROMPTON has been Vice President of Regulatory Affairs and
Quality Assurance of the Company since June 1996 and Vice President of
Regulatory and Clinical Affairs and Quality Assurance since January 1998. From
June 1995 to May 1996, from October 1993 to January 1994 and from February
1992 to August 1992, Mr. Crompton was employed by Advanced Bioresearch
Associates, a medical device consulting company, where he specialized in
regulatory consultation for FDA-regulated products. From February 1994 to May
1995, Mr. Crompton was an attorney with Hyman, Phelps & McNamara, a
Washington, D.C. law firm specializing in FDA matters. From September 1992 to
September 1993, Mr. Crompton was Manager of Regulatory Affairs at Tosoh
Medics, Inc., a medical device company. Mr. Crompton has a J.D. degree from
the University of San Francisco, and a B.A. degree in biochemistry and an
M.P.H. degree in biomedical sciences from the University of California at
Berkeley.
48
<PAGE>
PETER HERTZMANN served as Vice President of Marketing and Clinical Affairs
of the Company from October 1994 until January 1998 and has since served as
Vice President of Marketing. From July 1990 to October 1994, Mr. Hertzmann was
the president of Peter Hertzmann, Inc., a marketing consulting firm to the
medical device and surgical community. Mr. Hertzmann holds a B.S. degree in
photographic science and instrumentation from the Rochester Institute of
Technology.
BOB H. KATZ has been Vice President of Research and Development of the
Company since October 1994. From April 1990 to October 1994, Mr. Katz was
employed by Telectronics Pacing Systems, a manufacturer of implantable medical
devices. At Telectronics Pacing Systems, he served as Program Manager,
Bradycardia Product Development, from 1990 to September 1993 and as Director
of Strategic Planning, Instrument Systems, from September 1993 to October
1994. Mr. Katz holds a B.A. degree in business administration and a B.S.
degree in electrical engineering from Rutgers University, an M.S. degree in
biomedical engineering from Boston University and an M.B.A. from Nova
Southeastern University.
ALFRED G. MERRIWEATHER has been Vice President of Finance and Chief
Financial Officer of the Company since March 1996. From September 1993 to
March 1996, Mr. Merriweather was Senior Vice President of Finance and
Administration and Chief Financial Officer of LipoMatrix Inc., a medical
device company. From 1983 to August 1993, Mr. Merriweather held executive
management positions with Laserscope, including serving as Vice President of
Finance and Chief Financial Officer from 1988. Mr. Merriweather holds a B.A.
degree in economics from the University of Cambridge, England.
PATRICK J. RIMROTH has served as Vice President of Operations of the Company
since March 1996 and as Vice President of Manufacturing, from November 1995 to
March 1996. From June 1994 to October 1995, Mr. Rimroth was Vice President of
Research and Development for Camino Neurocare, a medical device company. From
December 1988 to June 1994, Mr. Rimroth held multiple research and development
management positions with divisions of C.R. Bard, Inc., a medical device
company. Mr. Rimroth has a B.S. degree in biology and a B.S.E.E. degree in
electronic engineering from Purdue University.
JOHN DE MORA-MIESZKOWSKI has been Director of European Sales and Marketing
since September 1997. From September 1994 to August 1997, Mr. de Mora-
Mieszkowski was Marketing and Sales Manager, Europe, for Cochlear AG, a
distributor of cochlear implants. From March 1992 to September 1994, Mr. de
Mora-Mieszkowski was Divisional Sales Manager for Cilag International AG, a
pharmaceutical company. Mr. de Mora-Mieszkowski holds a B.S. degree in
biochemistry from the University of London, England.
B.J. CASSIN has served as a director of the Company since July 1994. Mr.
Cassin has been a private venture capital investor since 1979. Previously, he
co-founded Xidex Corporation, a manufacturer of data storage media, and served
as Vice President of Marketing. Mr. Cassin is a director of Advanced Fiber
Communications, Inc. and Cerus Corporation (of which he is Chairman). Mr.
Cassin holds an A.B. degree from Holy Cross College.
TERRY GOULD has served as a director of the Company since May 1996. Mr.
Gould has been a partner in the Private Markets Group of Brinson Partners,
Inc. since January 1994. From November 1989 to December 1993, Mr. Gould was
employed by Trinity Ventures Ltd., a venture capital firm. Mr. Gould holds a
B.A. degree in engineering science from Dartmouth College and an M.B.A. degree
from Stanford University.
MICHAEL J. LEVINTHAL has served as a director of the Company since July
1994. Mr. Levinthal has been a General Partner of several venture capital
funds affiliated with Mayfield Fund since 1984. He currently serves as a
director of InControl, Inc., Focal, Inc. and Heartstream, Inc., medical device
companies. Mr. Levinthal holds a B.S., an M.S. and an M.B.A. degree from
Stanford University.
49
<PAGE>
PETRI T. VAINIO has served as a director of the Company since July 1994. Dr.
Vainio is a general partner of Sierra Ventures, a venture capital firm he
joined in 1988. He currently serves as a director of Heartport, Inc., a
medical device company. Dr. Vainio holds M.D. and Ph.D. degrees from the
University of Helsinki, Finland, and an M.B.A. degree from Stanford
University.
BOARD COMPOSITION
The Company currently has authorized six directors. In accordance with the
terms of the Company's Restated Certificate of Incorporation, to be filed
after the closing of this offering, the terms of office of the Board of
Directors will be divided into three classes: Class I, whose term will expire
at the annual meeting of stockholders to be held in 1999; Class II, whose term
will expire at the annual meeting of stockholders to be held in 2000; and
Class III, whose term will expire at the annual meeting of stockholders to be
held in 2001. The Class I directors will be Terry Gould and Geoffrey R. Ball,
the Class II directors will be Petri T. Vainio and Michael J. Levinthal and
the Class III directors will be B.J. Cassin and Harry S. Robbins. At each
annual meeting of stockholders after the initial classification of the Board
of Directors, the successors to directors whose term will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following such election. In addition, the Company's Restated
Certificate of Incorporation provides that the authorized number of directors
may be changed only by resolution of the Board of Directors. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the Board
of Directors may have the effect of delaying or preventing changes in control
or management of the Company.
Each officer is elected by and serves at the discretion of the Board of
Directors. Each of the Company's officers, directors and key employees, other
than nonemployee directors, devote substantially full time to the affairs of
the Company. The Company's nonemployee directors devote such time to the
affairs of the Company as is necessary to discharge their duties. There are no
family relationships among any of the directors, officers or key employees of
the Company.
BOARD COMMITTEES
The Audit Committee of the Board of Directors reviews the internal
accounting procedures of the Company and consults with and reviews the
services provided by the Company's independent accountants. The members of the
Audit Committee are B.J. Cassin, Michael J. Levinthal and Petri T. Vainio. The
Compensation Committee of the Board of Directors reviews and recommends to the
Board the compensation and benefits of all officers of the Company and
establishes and reviews general policies relating to compensation and benefits
of employees of the Company. The members of the Compensation Committee are
B.J. Cassin, Michael J. Levinthal and Petri T. Vainio.
DIRECTOR COMPENSATION
The Company does not compensate the directors for the services they provide
as directors other than reasonable expenses in connection with attendance at
Board Meetings, for which directors may receive reimbursement. However, in the
past, stock options have been granted to individuals who serve as directors.
50
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the summary of the compensation paid by the
Company during the fiscal year ended December 31, 1997 to the Company's Chief
Executive Officer and each of the Company's other most highly compensated
executive officers (collectively the "Named Executive Officers"), whose total
annual salary and bonus for such fiscal year were in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- SECURITIES
NAME AND PRINCIPAL OTHER UNDERLYING
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS
- ------------------ ---- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Harry S. Robbins.......... 1997 $224,327 $105,750 -- --
President and Chief
Executive Officer
R. Michael Crompton....... 1997 122,627 33,865 -- 29,069
Vice President of
Regulatory and Clinical
Affairs and Quality
Assurance
Bob H. Katz............... 1997 121,706 32,533 -- 43,603
Vice President of
Research and Development
Alfred G. Merriweather.... 1997 138,832 39,389 -- 14,534
Vice President of Finance
and Chief Financial
Officer
Patrick J. Rimroth........ 1997 120,665 33,347 -- 29,068
Vice President of
Operations
</TABLE>
51
<PAGE>
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1997 to each of the Named Executive Officers:
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1997
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENTAGE OF VALUE AT ASSUMED
TOTAL OPTIONS ANNUAL RATE OF STOCK
GRANTED TO EXERCISE PRICE APPRECIATION
OPTIONS EMPLOYEES IN OR BASE FOR OPTION TERM(4)
GRANTED FISCAL YEAR PRICE EXPIRATION ---------------------
NAME (#)(1) (%)(2) ($/Sh)(3) DATE 5% ($) 10% ($)
- ---- ------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Harry S. Robbins........ -- -- -- -- -- --
R. Michael Crompton..... 29,069 7.4 2.20 10/6/2007 409,552 690,023
Bob H. Katz............. 14,534 3.7 1.10 6/20/2007 220,756 360,987
29,069 7.4 2.20 10/6/2007 409,552 690,023
Alfred G. Merriweather.. 14,534 3.7 2.20 10/6/2007 204,769 345,000
Patrick J. Rimroth...... 14,534 3.7 1.10 6/20/2007 220,756 360,987
14,534 3.7 2.20 10/6/2007 204,769 345,000
</TABLE>
- --------
(1) Each of the options listed above vests as follows: The options were
immediately exercisable, conditioned upon the optionee entering into a
restricted stock purchase agreement with the Company with respect to any
unvested shares. The options vest or are released from the repurchase
option at the rate of one forty-eighth ( 1/48) at the end of each full
month beginning on the grant date for each option.
(2) Based on an aggregate of 395,681 options granted by the Company in the
year ended December 31, 1997 to employees of and consultants to the
Company, including the Named Executive Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
of Directors.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of
the Company's securities that the actual stock price appreciation over the
option term will be at the assumed 5% or 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates
over the option term, no value will be realized from the option grants
made to the executive officers. The potential realizable value is
calculated by assuming that the initial public offering price of $12.00
per share appreciates at the indicated rate for the entire term of the
option and that the option is exercised at the exercise price and sold on
the last day of its term at the appreciated price.
52
<PAGE>
The following table sets forth the information with respect to stock option
exercises during the year ended December 31, 1997 by each of the Named
Executive Officers, and the number and value of securities underlying
unexercised options held by the Named Executive Officers at December 31, 1997:
AGGREGATE OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 1997 AND
OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE FISCAL YEAR-END (#)(1) FISCAL YEAR-END ($)(2)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE (#)(1) ($)(2) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- --------------- --------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Harry S. Robbins........ 250,600 2,806,720 --/-- --/--
R. Michael Crompton..... -- -- 94,475/-- 1,021,993/--
Bob H. Katz............. 14,534 158,421 --/-- --/--
29,069 284,876 --/-- --/--
Alfred G. Merriweather.. 14,534 142,433 --/-- --/--
Patrick J. Rimroth...... 14,534 158,421 --/-- --/--
14,534 142,433 --/-- --/--
</TABLE>
- --------
(1) Shares and options held by the above Named Executive Officers are subject
to vesting over a four year period.
(2) Based on the assumed initial public offering price of $12.00 per share,
minus the per share exercise price, multiplied by the number of shares
underlying the option.
OPTION VESTING AGREEMENTS
The Company has entered into an option vesting agreement with each of its
officers with whom it has entered into a stock option agreement, to provide
for accelerated vesting of all shares subject to such option (i) 12 months
after a change in control or (ii) in the event such officer is involuntarily
terminated within the 12 month period following a change in control. For
purposes of the option vesting agreement, "change in control" is defined as
(i) the closing of a merger, reorganization, sale of shares or sale of
substantially all of the assets of the Company in which the stockholders of
the Company immediately prior to the closing of the transaction own less than
50% of the voting power of the surviving or controlling entity (or its parent)
immediately after the transaction, or (ii) the date of the approval by the
stockholders of the Company of a plan of complete liquidation of the Company.
The following officers were granted the following options to purchase shares
of Common Stock through December 31, 1997, which options vest over four years:
R. Michael Crompton (109,009 shares); Peter Hertzmann (94,474 shares); Bob H.
Katz (188,950 shares); Alfred G. Merriweather (112,643 shares); Patrick J.
Rimroth (109,008 shares); and Harry S. Robbins (250,600 shares).
INCENTIVE STOCK PLANS
1994 Option Plan. The 1994 Option Plan was adopted by the Board of Directors
and approved by the stockholders in July 1994. As of December 31, 1997,
566,531 shares were subject to outstanding options at exercise prices ranging
from $0.14 to $8.81 per share and 403,159 shares were available for future
grant under the 1994 Option Plan. The purposes of the 1994 Option Plan are to
attract and retain qualified personnel, to provide additional incentives to
employees, officers and consultants of the Company and to promote the success
of the Company's business. Pursuant to the 1994 Option Plan, the Company may
grant options which qualify as incentive stock options under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), to employees
(including officers and directors who are employees) and nonqualified stock
options to employees, officers, directors and consultants.
53
<PAGE>
The Compensation Committee is authorized to administer the 1994 Option Plan,
including the selection of the employees, directors and consultants of the
Company to whom stock options may be granted and the interpretation and
adoption of rules for the operation of the 1994 Option Plan. Options granted
under the 1994 Option Plan generally vest incrementally over a four-year
period. However, the vesting schedule is subject to modification by the Board
of Directors. The maximum term for options granted under the 1994 Option Plan
is ten years, except that, if at the time of the grant the optionee possesses
more than 10% of the combined voting power of the Company (a "10%
Stockholder"), the maximum term of an option is five years. The exercise price
of incentive stock options granted to a 10% stockholder must be at least 110%
of the fair market value of the stock subject to the option on the date of
grant. Except pursuant to a merger or other corporate transaction, the
exercise price of nonqualified stock options granted under the 1994 Option
Plan must be at least 100% of the fair market value of the stock subject to
the option on the date of grant. Payment of the exercise price may be made by
cash, check, promissory note, other shares of Common Stock of the Company
owned by the optionee for a sufficient period, cancellation of indebtedness
pursuant to a cashless exercise program, if one is implemented by the Company,
and any other method permitted by law. The 1994 Option Plan may be amended at
any time by the Board of Directors, although certain amendments would require
stockholder approval. The 1994 Option Plan will terminate in 2004, unless
earlier terminated by the Board of Directors.
Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan
(the "Purchase Plan") was adopted by the Company's Board of Directors in
November 1997 and approved by the stockholders in January 1998. The Purchase
Plan is intended to qualify under Section 423 of the Code. The Company has
reserved 75,000 shares of Common Stock for issuance under the Purchase Plan.
Under the Purchase Plan, an eligible employee may purchase shares of Common
Stock from the Company through payroll deductions of up to 10% of his or her
compensation, at a price per share equal to 85% of the lower of (i) the fair
market value of the Company's Common Stock on the first day of an offering
period under the Purchase Plan or (ii) the fair market value of the Common
Stock on the last day of a purchase period. Each offering period will last for
24 months and will commence the first day on which the national stock
exchanges and The Nasdaq Stock Market are open for trading on or after May 1
and November 1 of each year. The first offering period will begin upon the
effective date of this offering and will end on October 31, 1998. Any employee
who is customarily employed for at least 20 hours per week and more than five
months per calendar year is eligible to participate in the Purchase Plan. No
shares have been purchased under the Purchase Plan to date.
EMPLOYEE RETIREMENT PLANS
In April 1996, the Company implemented a Retirement Savings and Investment
Plan that is intended to qualify under Section 401(k) of the Code (the "401(k)
Plan") covering all of the Company's employees who have attained age 18. An
employee may elect to defer, in the form of contributions to the 401(k) Plan
on his or her behalf, up to 20% of the total compensation that would otherwise
be paid to the employee, not to exceed the amount allowed by applicable
Internal Revenue Service guidelines. The Company may in its discretion make
matching contributions to the 401(k) Plan, but has not yet done so.
Contributions by employees or by the Company to the 401(k) Plan, and income
earned on plan contributions, are not taxable to employees until withdrawn
from the 401(k) Plan. Contributions by the Company are deductible by the
Company when made.
54
<PAGE>
CERTAIN TRANSACTIONS
In July, August and October 1994 and January 1995, the Company issued and
sold 5,463,000 shares of Series A Preferred Stock at a purchase price of $1.00
per share to a total of 40 investors. The directors, officers and 5%
stockholders that purchased shares of Series A Preferred Stock and the number
of shares that each purchased are (i) B.J. Cassin and affiliates, 295,000
shares, (ii) Coral Partners IV, Limited Partnership, 1,000,000 shares, (iii)
Mayfield VII and affiliates, 1,500,000 shares, (iv) Peter Hertzmann, Inc.,
15,000 shares and (v) Sierra Ventures IV and affiliates, 1,750,000 shares.
Upon completion of this offering at an assumed initial public offering price
of $12.00 per share, all outstanding shares of Preferred Stock will convert
into shares of Common Stock at a 1.376-to-one ratio.
In June 1995, the Company issued and sold 1,378,500 shares of Series B
Preferred Stock at a purchase price of $4.00 per share to a total of 31
investors. The directors, officers and 5% stockholders that purchased shares
of Series B Preferred Stock and the number of shares that each purchased are
(i) B.J. Cassin and affiliates, 111,188 shares, (ii) Coral Partners IV,
Limited Partnership, 250,000 shares, (iii) Mayfield VII and affiliates,
375,000 shares, (iv) Peter Hertzmann, Inc., 3,750 shares and (v) Sierra
Ventures IV and affiliates, 437,500 shares.
In May and June 1996, the Company issued and sold 1,162,451 shares of Series
C Preferred Stock at a purchase price of $5.35 per share to a total of 20
investors pursuant to the terms of the Series C Preferred Stock Purchase
Agreement. The directors, officers and 5% stockholders that purchased or
beneficially held shares of Series C Preferred Stock and the number of shares
that each purchased or beneficially held are (i) B.J. Cassin, 18,690 shares,
(ii) Brinson Venture Capital Fund III, L.P. and affiliates, 373,832 shares,
(iii) Coral Partners IV, Limited Partnership, 170,841 shares, (iv) Mayfield
VII and affiliates, 256,262 shares, (v) Peter Hertzmann, Inc., 2,804 shares
and (vi) Sierra Ventures IV and affiliates, 299,065 shares.
In November and December 1996 and June 1997, the Company issued and sold
1,190,680 shares of Series D Preferred Stock at a purchase price of $8.00 per
share to a total of 14 investors. The 5% stockholders that purchased or
beneficially held shares of Series D Preferred Stock and the number of shares
that each purchased or beneficially held are (i) B.J. Cassin, 23,125 shares,
(ii) Coral Partners IV, Limited Partnership, 92,706 shares, (iii) Mayfield VII
and affiliates, 139,036 shares, (iv) Sierra Ventures and affiliates, 162,238
shares and (v) JJDC, 750,000 shares.
In connection with the Company's Series D Preferred Stock issuances, the
Company granted one of the investors, JJDC, first negotiation rights, whereby
the Company agreed that it will not (i) transfer, dispose of, sell, lease or
license (exclusively or nonexclusively) to any third party, any of certain
defined intellectual property rights that are or may be used or may have
application in the field of implantable and semi-implantable hearing aid
devices or (ii) transfer or dispose of all or substantially all of the assets
or voting securities of the Company to any third party until it provides JJDC
the opportunity to consummate a similar transaction. JJDC's first negotiation
rights survive for a period of 18 months from the date of the June 1997 Series
D Preferred Stock financing or 12 months from the effective date of the
Company's registration statement relating to its initial public offering,
whichever first occurs. Notwithstanding the foregoing, JJDC's first
negotiation rights terminate in the event that JJDC, either directly or
through an affiliate, does not participate as an investor in this offering.
On March 14, 1997, the Company entered into an assignment agreement with
VibRx, Inc., a Delaware corporation ("VibRx"), whereby the Company assigned to
VibRx all of the right, title and interest of the Company in and to any and
all existing inventions, original works of authorship, developments,
improvements, trade secrets, patents and patent applications relating to (i)
an apparatus and method for sonically enhanced drug delivery and (ii) an
apparatus and method for
55
<PAGE>
sonically enhanced drug delivery with micro electromechanical machining. Harry
S. Robbins, the Company's President, is the President, sole director and sole
stockholder of VibRx. Independent and disinterested members of the Company's
Board of Directors negotiated the terms of such transfer with Mr. Robbins, who
negotiated on behalf of VibRx. Such terms provide that immediately prior to
the closing of an initial financing in which VibRx receives at least $500,000,
VibRx will issue to Symphonix that number of shares of common stock equal to
20% of the then outstanding capital stock of VibRx (including reserved
shares).
The Company has granted certain officers options to purchase shares of the
Company's Common Stock, which options were early exercised and paid for by
delivery of promissory notes to the Company by the following officers in the
following aggregate amounts (including accrued interest): Bob H. Katz
($92,882), Alfred G. Merriweather ($94,473), Patrick J. Rimroth ($99,764) and
Harry S. Robbins ($226,852). The notes have terms of five years and accrue
interest at an annual rate of approximately 6.5%.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to the Company with respect
to the beneficial ownership of its Common Stock as of December 31, 1997, and
as adjusted to reflect the sale of Common Stock offered by the Company hereby
for (i) each person who is known by the Company to own beneficially more than
5% of the Common Stock, (ii) each of the Company's directors, (iii) each Named
Executive Officer and (iv) all directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY
OWNED
SHARES -----------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Entities Affiliated with Sierra Ventures(2)..... 1,954,294 20.6% 16.6%
3000 Sand Hill Road
Building 4, Suite 210
Menlo Park, CA 94025
Entities Affiliated with Mayfield(3)............ 1,682,638 17.8% 14.3%
2800 Sand Hill Road, 2nd Floor
Menlo Park, CA 94025
Harry S. Robbins(4)............................. 1,326,181 14.0% 11.3%
Symphonix Devices, Inc.
3047 Orchard Parkway
San Jose, CA 95134
Coral Partners IV, Limited Partnership.......... 1,099,960 11.6% 9.4%
60 South Sixth Street, Suite 3510
Minneapolis, MN 55402
Geoffrey R. Ball................................ 672,238 7.1% 5.7%
Symphonix Devices, Inc.
3047 Orchard Parkway
San Jose, CA 95134
Petri T. Vainio(2).............................. 1,954,294 20.6% 16.6%
Michael J. Levinthal(3)......................... 1,682,638 17.8% 14.3%
Johnson & Johnson Development Corporation....... 545,058 5.8% 4.6%
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
B.J. Cassin(5).................................. 354,875 3.7% 3.0%
Terry Gould(6).................................. 286,486 3.0% 2.4%
Bob H. Katz..................................... 162,788 1.7% 1.4%
Alred G. Merriweather(7)........................ 112,643 1.2% *
Patrick J. Rimroth(8)........................... 109,009 1.2% *
R. Michael Crompton(9).......................... 109,008 1.2% *
All directors and executive officers as a group
(11 persons)
(2)(3)(4)(5)(6)(7)(8)(9)....................... 6,880,297 71.5% 57.7%
</TABLE>
- --------
* Represents beneficial ownership of less than one percent.
(1) Except as otherwise noted in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
57
<PAGE>
(2) Consists of 1,850,887 shares held by Sierra Ventures IV, 74,111 shares
held by Sierra Ventures IV International and an option to purchase up to
29,296 shares exercisable within 60 days after December 31, 1997 held by
Petri T. Vainio. Dr. Vainio, a director of the Company, is a General
Partner of the Sierra entities and disclaims beneficial ownership of the
shares held by such entities except to the extent of his proportionate
partnership interest therein.
(3) Consists of 1,567,441 shares held by Mayfield VII, 82,494 shares held by
Mayfield Associates Fund II and 32,703 shares held by Mayfield VII
Management Partners. Mr. Levinthal is a General Partner of Mayfield VII
Management Partners, which is General Partner of Mayfield VII and Mayfield
Associates Fund II, and disclaims beneficial ownership of the shares held
by such entities except to the extent of his proportionate partnership
interest.
(4) All such shares are held in the name of the Robbins Family Trust. Mr.
Robbins holds voting and dispositive power over all such shares.
(5) Consists of (i) 230,195 shares held in the name of the Cassin Family
Trust, over which Mr. Cassin holds voting and dispositive power, (ii)
95,384 shares held by Cassin Family Partners, a California Limited
Partnership, over which Mr. Cassin holds voting and dispositive power and
(iii) an option to purchase up to 29,296 shares exercisable within 60 days
after December 31, 1997.
(6) Consists of 246,316 shares held by Brinson Venture Capital Fund III, L.P.
("Brinson L.P.") and 40,170 shares held by Brinson Trust Company as
Trustee of the Brinson MAP Venture Capital Fund III ("Brinson MAP"). Mr.
Gould, a director of the Company, is a partner in the Private Markets
Group of Brinson Partners, Inc. Brinson Partners, Inc. is the General
Partner of Brinson L.P. and the manager of Brinson MAP. Mr. Gould
disclaims beneficial ownership of the shares held by such entities.
(7) All such shares are held in the name of the Merriweather Family Trust. Mr.
Merriweather holds voting and dispositive power over all such shares.
(8) All such shares are held in the name of the Rimroth Family Trust. Mr.
Rimroth holds voting and dispositive power over all such shares.
(9) Includes options to purchase up to 94,475 shares exercisable within 60
days after December 31, 1997.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company will consist of 50,000,000
shares of Common Stock and 5,000,000 shares of Preferred Stock after giving
effect to the conversion of all outstanding shares of Preferred Stock into
Common Stock and the restatement of the Company's Certificate of Incorporation
after the closing of this offering.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Company's Restated
Certificate of Incorporation which is included as an exhibit to the
Registration Statement of which this Prospectus is a part, and by the
provisions of applicable law.
COMMON STOCK
As of December 31, 1997, there were 9,466,742 shares of Common Stock
outstanding which were held of record by 101 stockholders, on a pro forma
basis to reflect the conversion of all outstanding shares of Preferred Stock
which will occur upon the closing of this offering.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available for
that purpose. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are
fully paid and non-assessable, and the shares of Common Stock to be issued
upon the closing of this offering will be fully paid and non-assessable.
PREFERRED STOCK
After the closing of this offering, the Company will be authorized to issue
5,000,000 shares of undesignated Preferred Stock, none of which will be
outstanding. The Board of Directors will have the authority, without further
action by the stockholders, to issue the undesignated Preferred Stock in one
or more series, to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued shares of undesignated
Preferred Stock and to fix the number of shares constituting any series and
the designation of such series.
The issuance of Preferred Stock may have the effect of delaying, deferring
or preventing a change in control of the Company without further action by the
stockholders, may discourage bids for the Company's Common Stock at a premium
over the market price of the Common Stock and may adversely affect the market
price of and the voting and other rights of the holders of Common Stock. At
present, the Company has no plans to issue any of the Preferred Stock.
WARRANTS
As of December 31, 1997, the Company had outstanding a warrant to purchase
26,889 shares of Common Stock at $1.38 per share expiring in October 2004 and
two warrants to purchase an aggregate of 6,722 shares of Common Stock at $5.50
per share expiring in October 2004. The shares underlying these warrants are
entitled to registration rights. See "--Registration Rights of Certain
Holders."
59
<PAGE>
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 6,682,078 shares of Common Stock and warrants to purchase
33,611 shares of Common Stock (the "Registrable Securities") or their
transferees are entitled to certain rights with respect to the registration of
such shares under the Securities Act. These rights are provided under the
terms of an agreement between the Company and the holders of Registrable
Securities. Subject to certain limitations in the agreement, the holders of at
least a majority of the Registrable Securities may require, on two occasions
beginning three months after the date of this Prospectus, that the Company use
its best efforts to register the Registrable Securities for public resale. If
the Company registers any of its Common Stock either for its own account or
for the account of other security holders, the holders of Registrable
Securities are entitled to include their shares of Common Stock in the
registration, subject to the ability of the underwriters to limit the number
of shares included in the offering. The holders of at least 20% of the
Registrable Securities may also require the Company to register all or a
portion of their Registrable Securities on Form S-3 when use of such form
becomes available to the Company, provided, among other limitations, that the
proposed aggregate selling price (net of any underwriters' discounts or
commissions) is at least $1.0 million. All registration expenses must be borne
by the Company and all selling expenses relating to Registrable Securities
must be borne by the holders of the securities being registered.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws to be effective upon completion of this offering may have the
effect of preventing, discouraging or delaying a change in the control of the
Company and may maintain the incumbency of the Board of Directors and
management. The authorization of undesignated Preferred Stock makes it
possible for the Board of Directors to issue Preferred Stock with voting or
other rights or preferences that could impede the success of any attempt to
change control of the Company. In addition, the Company's Bylaws limit the
ability of stockholders of the Company to raise matters at a meeting of
stockholders without giving advance notice.
The Restated Certificate of Incorporation provides that stockholder action
can be taken only at an annual or special meeting of stockholders and cannot
be taken by written consent in lieu of a meeting. The Restated Certificate of
Incorporation and the Bylaws provide that, except as otherwise required by
law, special meetings of the stockholders can only be called pursuant to a
resolution adopted by a majority of the Board of Directors, by the Chairman of
the Board or by the President of the Company.
The Bylaws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company,
including proposed nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and
who has given to the Company's Secretary timely written notice, in proper
form, of the stockholder's intention to bring that business before the
meeting. Although the Bylaws do not give the Board the power to approve or
disapprove stockholder nominations of candidates or proposals regarding other
business to be conducted at a special or annual meeting, the Bylaws may have
the effect of precluding the conduct of certain business at a meeting if the
proper procedures are not followed or may discourage or defer a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company.
60
<PAGE>
CERTAIN PROVISIONS OF DELAWARE LAW
Following the consummation of the offering, the Company will be subject to
the "Business Combination" provisions of the Delaware General Corporation Law.
In general, such provisions prohibit a publicly held Delaware corporation form
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder," unless (i) the
transaction is approved by the Board of Directors prior to the date the
interested stockholder obtained such status, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding excluding those shares owned by (a)
persons who are directors and also officers and (b) employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer, or (iii) on or subsequent to such date the "business
combination" is approved by the board of directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which is not owned by the "interested
stockholder." A "business combination" is defined to include mergers, asset
sales and other transactions resulting in a financial benefit to a
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years, did own) 15% or
more of a corporation's voting stock. The statute could prohibit or delay
mergers or other takeover or change in control attempts with respect to the
Company and, accordingly, may discourage attempts to acquire the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is BankBoston, N.A.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could materially and adversely affect market prices prevailing from
time to time. Sales of substantial amounts of Common Stock of the Company in
the public market after the restrictions lapse could materially and adversely
affect the prevailing market price and the ability of the Company to raise
equity capital in the future.
Upon the completion of this offering, the Company will have 11,766,742
shares of Common Stock outstanding, assuming no exercise of options after
December 31, 1997. Of these shares, all of the 2,300,000 shares sold in this
offering will be freely tradeable without restriction under the Securities
Act, unless held by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act. The remaining 9,466,742 shares of Common
Stock held by existing stockholders were issued and sold by the Company in
reliance on exemptions from the registration requirements of the Securities
Act. These shares may be sold in the public market only if registered, or
pursuant to an exemption from registration such as Rule 144, 144(k) or 701
under the Securities Act. Such restricted shares will be available for sale in
the public market as follows: (i) no shares will be eligible for immediate
sale on the date of this Prospectus and (ii) approximately 9,778,368
additional shares (including approximately 311,615 shares subject to
outstanding vested options and outstanding warrants) will be available for
sale 180 days after the date of this Prospectus upon expiration of the Lock-up
Agreements, subject to certain volume and other limitations under Rule 144.
The Company and its directors, executive officers and all of its stockholders
have entered into the Lock-up Agreements, under which they have agreed not to
offer, sell, contract to sell, grant any option to purchase or otherwise
dispose of, or agree to dispose of, directly or indirectly, any shares of
Common Stock or options, rights or warrants to acquire shares of Common Stock,
or securities exchangeable for or convertible into shares of Common Stock,
owned by them for a period of 180 days following the day on which the
Registration Statement becomes effective (the "Effective Date"), without the
prior written consent of Cowen & Company or the Company, as the case may be,
except that, without such consent, the Company may issue Common Stock and
grant options pursuant to the 1994 Option Plan and issue Common Stock pursuant
to the exercise of outstanding warrants, and the current stockholders of the
Company who are not executive officers or directors of the Company may sell
Common Stock acquired in the offering or in the open market. The Company has
agreed not to release any stockholders from the terms of the Lock-up
Agreements with the Company. Cowen & Company may, in its sole discretion and
at any time without notice, release all or a portion of the shares subject to
Lock-up Agreements.
As of December 31, 1997, 566,531 shares were subject to outstanding options.
All of these shares are subject to the Lock-up Agreements. In addition,
6,719,689 of the shares outstanding immediately following the completion of
this offering (including up to 33,611 shares of Common Stock subject to
outstanding warrants) will be entitled to registration rights with respect to
such shares upon the release of the Lock-up Agreements. The number of shares
sold in the public market could increase if such rights are exercised.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
one year (including the holding period of any prior owner, except an
affiliate) is entitled to sell in "broker's transactions" or to market makers,
within any three-month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of (i) one
percent of the number of shares of Common Stock then outstanding
(approximately 118,000 shares immediately after this offering) or (ii) the
average weekly trading volume of the Common Stock during the four calendar
weeks preceding the required filing of a Form 144 with respect to such sale.
Sales under Rule 144 are generally subject to certain manner of sale
provisions and notice requirements and to the availability of current public
62
<PAGE>
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years (including the holding period of any prior owner,
except an affiliate), is entitled to sell such shares without having to comply
with the manner
of sale, public information, volume limitation or notice provisions of Rule
144. Under Rule 701 promulgated under the Securities Act, persons who purchase
shares upon exercise of options granted prior to the effective date of this
offering are entitled to sell such shares 90 days after the effective date of
this offering in reliance on Rule 144, without having to comply with the
holding period requirements of Rule 144 and, in the case of non-affiliates,
without having to comply with the public information, volume limitation or
notice provisions of Rule 144.
63
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Underwriters named below (the "Underwriters"), through their
representatives, Cowen & Company and UBS Securities LLC (the
"Representatives"), have severally agreed to purchase from the Company the
following respective number of shares at the initial public offering price
less the underwriting discounts and commissions set forth on the cover page of
this Prospectus:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Cowen & Company..................................................
UBS Securities LLC...............................................
---------
Total.......................................................... 2,300,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may re-
allow a concession not in excess of $ per share to certain other dealers.
The Underwriters have informed the Company that they do not intend to confirm
sales to any accounts over which they exercise discretionary authority. After
the initial public offering of the shares, the offering price and other
selling terms may from time to time be varied by the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the Effective Date, to purchase up to 345,000 additional
shares of Common Stock at the initial public offering price, less the
underwriting discounts and commissions, set forth on the cover page of this
Prospectus, to cover over-allotments, if any. If the Underwriters exercise
such over-allotment option, the Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage thereof that
the number of shares of Common Stock to be purchased by each of them shown in
the foregoing table bears to the total number of shares of Common Stock
offered hereby. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of shares of Common Stock offered
hereby.
The Company and its directors, executive officers and all of its
stockholders (holding in the aggregate approximately 9,466,742 shares of
Common Stock) have agreed with the Company or Cowen & Company that they will
not, without the prior written consent of the Company or Cowen & Company, as
the case may be, offer, sell, contract to sell, grant any option to purchase
or otherwise dispose of or otherwise agree to dispose of, directly or
indirectly any shares of Common Stock,
64
<PAGE>
options, rights or warrants to acquire shares of Common Stock, or securities
exchangeable for or convertible into shares of Common Stock, owned by them for
a period of 180 days following the day on which the Registration Statement
becomes effective, except that, without such consent, the Company may issue
Common Stock and grant options pursuant to the 1994 Option Plan and issue
Common Stock pursuant to the exercise of outstanding warrants, and the current
stockholders of the Company who are not executive officers or directors of the
Company may sell Common Stock acquired in the offering or in the open market.
The Company has agreed not to release any stockholders from the terms of Lock-
up Agreements with the Company. See "Shares Eligible for Future Sale." In
addition, the Company has agreed that it will not, without the prior written
consent of Cowen & Company, offer, sell or otherwise dispose of any shares of
Common Stock options, rights or warrants to acquire shares of Common Stock, or
securities exchangeable for or convertible into shares of Common Stock during
such 180-day period except in certain limited circumstances.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock has been
determined by negotiation among the Company and the Representatives. Among the
factors considered in determining the initial public offering price were
prevailing market and economic conditions, market valuations of other
companies engaged in activities similar to the Company, estimates of the
business potential and prospects of the Company, the present state of the
Company's business operations, the Company's management and other factors
deemed relevant.
The Representatives have advised the Company that certain persons
participating in this offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids which may have the effect of stabilizing or maintaining the market price
of the Common Stock at a level above that which might otherwise prevail in the
open market. A "stabilizing bid" is a bid for or the purchase of the Common
Stock on behalf of the Underwriters for the purpose of fixing or maintaining
the price of the Common Stock. A "syndicate covering transaction" is the bid
or the purchase of the Common Stock on behalf of the Underwriters to reduce a
short position incurred by the Underwriters in connection with this offering.
A "penalty bid" is an arrangement permitting the Representatives to reclaim
the selling concession otherwise accruing to an Underwriter or syndicate
member in connection with the offering if the Common Stock originally sold by
such Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed
by such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Cooley Godward, LLP, Palo Alto, California is acting as
counsel for the Underwriters in connection with certain legal matters relating
to the shares of Common Stock offered hereby. As of December 31, 1997, a
certain investment partnership of Wilson Sonsini Goodrich & Rosati,
Professional Corporation beneficially owned an aggregate of 18,168 shares of
the Company's Common Stock.
65
<PAGE>
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and 1997 and for each of the three years in the period ended December 31, 1997
and the period from May 17, 1994 (date of inception) to December 31, 1994 and
for the cumulative period from May 17, 1994 to December 31, 1997, included in
this Prospectus, have been included herein in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), in Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which is part of the Registration Statement, does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and Common Stock offered hereby, reference is made to the Registration
Statement and such exhibits and schedules filed therewith, which may be
inspected without charge at, or copies of such material may be obtained at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Registration Statement and such exhibits and schedules are also available on
the Commissions's Web site (http://www.sec.gov). Statements contained in this
Prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
66
<PAGE>
SYMPHONIX DEVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-7
Notes to Consolidated Financial Statements................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Symphonix Devices, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Symphonix
Devices, Inc. and Subsidiary (a company in the development stage) as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the period from May 17,
1994 (date of inception) to December 31, 1994, for each of the three years in
the period ended December 31, 1997, and for the cumulative period from May 17,
1994 (date of inception) to December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Symphonix
Devices, Inc. and Subsidiary (a company in the development stage) as of
December 31, 1996 and 1997, and the results of its operations and its cash
flows for the period from May 17, 1994 (date of inception) to December 31,
1994, for each of the three years in the period ended December 31, 1997, and
for the cumulative period from May 17, 1994 (date of inception) to December
31, 1997, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
San Jose, California
January 9, 1998
F-2
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
------------------------- 1997
1996 1997 (SEE NOTE 11)
------------ ----------- -------------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........... $ 6,539,156 $ 4,908,097
Short-term investments.............. 4,570,723 6,548,952
Prepaid expenses and other current
assets............................. 76,694 451,109
------------ -----------
Total current assets.............. 11,186,573 11,908,158
Property and equipment, net........... 757,111 1,156,773
Other assets.......................... 7,720 76,155
------------ -----------
Total assets...................... $ 11,951,404 $13,141,086
============ ===========
LIABILITIES
-----------
Current liabilities:
Accounts payable.................... $ 42,487 $ 366,390
Accrued compensation................ 675,429 887,976
Other accrued liabilities........... 115,002 776,517
Current portion of capital lease ob-
ligation........................... 284,644 322,562
------------ -----------
Total current liabilities......... 1,117,562 2,353,445
Capital lease obligation, less current
portion.............................. 595,572 325,056
Bank borrowings....................... -- 2,000,000
------------ -----------
Total liabilities................. 1,713,134 4,678,501
------------ -----------
Commitments (Note 7)
STOCKHOLDERS' EQUITY
--------------------
Convertible preferred stock, $.001 par
value:
Authorized: 9,750,000 shares .......
Issued and outstanding: 8,444,631
shares in 1996, 9,194,631 shares in
1997, no shares pro forma
(Liquidation value: $26,721,553 at
December 31, 1997)................. 8,445 9,195
Common stock, $.001 par value:
Authorized: 20,000,000 shares ......
Issued and outstanding: 2,384,329
shares in 1996, 2,784,664 shares in
1997 and 9,466,742 shares pro
forma.............................. 2,384 2,785 $ 9,467
Notes receivable from stockholders.... (139,200) (499,199) (499,199)
Deferred compensation................. -- (1,465,115) (1,465,115)
Unrealized losses on short-term
investments.......................... -- (1,218) (1,218)
Additional paid-in capital............ 20,879,232 28,834,489 28,837,002
Cumulative translation adjustments.... -- 1,616 1,616
Deficit accumulated during the
development stage.................... (10,512,591) (18,419,968) (18,419,968)
------------ ----------- -----------
Total stockholders' equity........ 10,238,270 8,462,585 $ 8,462,585
------------ ----------- ===========
Total liabilities and
stockholders' equity........... $ 11,951,404 $13,141,086
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SYMPHONIX DEVICES INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM PERIOD FROM
MAY 17, 1994 MAY 17, 1994
(DATE OF (DATE OF
INCEPTION) INCEPTION)
TO YEAR ENDED DECEMBER 31, TO
DECEMBER 31, ------------------------------------- DECEMBER 31,
1994 1995 1996 1997 1997
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Costs and expenses:
Research and
development.......... $ 706,607 $ 3,306,994 $ 5,399,056 $ 6,359,130 $ 15,771,787
General and
administrative....... 140,961 624,685 1,047,076 2,022,613 3,835,335
--------- ----------- ----------- ----------- ------------
Operating loss...... (847,568) (3,931,679) (6,446,132) (8,381,743) (19,607,122)
Interest income......... 95,344 340,818 423,689 580,569 1,440,420
Interest expense........ (60,950) (86,113) (106,203) (253,266)
--------- ----------- ----------- ----------- ------------
Net loss............ $(752,224) $(3,651,811) $(6,108,556) $(7,907,377) $(18,419,968)
========= =========== =========== =========== ============
Net loss per common
share and per common
share-assuming
dilution............... $ (0.29) $ (1.30) $ (2.01) $ (2.30) $ (6.07)
========= =========== =========== =========== ============
Shares used in computing
net loss per common
share and per common
share-assuming
dilution............... 2,622,167 2,812,992 3,041,481 3,430,618 3,035,750
========= =========== =========== =========== ============
Pro forma net loss per
common share and per
common share-assuming
dilution............... $ (0.83) $ (2.24)
=========== ============
Shares used in computing
pro forma net loss per
common share and per
common share-assuming
dilution............... 9,565,394 8,232,410
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SYMPHONIX DEVICES INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MAY 17, 1994
(DATE OF INCEPTION) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
DEFICIT
NOTES UNREALIZED ACCUMULATED
PREFERRED STOCK COMMON STOCK RECEIVABLE GAINS (LOSSES) ADDITIONAL DURING THE
---------------- ---------------- FROM DEFERRED ON SHORT-TERM PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION INVESTMENTS CAPITAL STAGE
--------- ------ --------- ------ ------------ ------------ -------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock
issued in June
1994 to founder
at $.03 per
share in
exchange for
promissory note. 1,075,581 $1,076 $(29,600) $28,524
Common stock
issued in June
1994 to founder
at $.03 per
share in
exchange for
services and
cash............ 679,501 679 18,021
Common stock
issued in
December 1994 in
connection with
stock option
exercises....... 145,348 145 19,855
Partial
repayment on
promissory note
from
stockholder..... 14,800
Series A
preferred stock
issued in July
1994 to
investors at
$1.00 per share,
net of issuance
costs of
$27,089......... 5,270,000 $5,270 5,237,641
Series A
preferred stock
issued in July
1994 at $1.00
per share in
exchange for
services........ 24,000 24 23,976
Net loss........ $ (752,224)
--------- ------ --------- ------ -------- --- --- ---------- ----------
Balances,
December 31,
1994............. 5,294,000 5,294 1,900,430 1,900 (14,800) 5,328,017 (752,224)
Series A
preferred stock
issued in
January 1995 at
$1.00 per share
in exchange for
services........ 30,000 30 29,970
Series A
preferred stock
issued in
January 1995 to
investors at
$1.00 per share,
net of issuance
costs of $470... 139,000 139 138,391
Series B
preferred stock
issued in June
1995 to
investors at
$4.00 per share,
net of issuance
costs of
$16,622......... 1,378,500 1,379 5,495,999
Common stock
issued in
January and
December 1995 in
connection with
stock option
exercises....... 79,712 80 10,888
Net loss........ (3,651,811)
--------- ------ --------- ------ -------- --- --- ---------- ----------
Balances,
December 31,
1995............. 6,841,500 6,842 1,980,142 1,980 (14,800) 11,003,265 (4,404,035)
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Common stock
issued in June
1994 to founder
at $.03 per
share in
exchange for
promissory note. $ --
Common stock
issued in June
1994 to founder
at $.03 per
share in
exchange for
services and
cash............ 18,700
Common stock
issued in
December 1994 in
connection with
stock option
exercises....... 20,000
Partial
repayment on
promissory note
from
stockholder..... 14,800
Series A
preferred stock
issued in July
1994 to
investors at
$1.00 per share,
net of issuance
costs of
$27,089......... 5,242,911
Series A
preferred stock
issued in July
1994 at $1.00
per share in
exchange for
services........ 24,000
Net loss........ (752,224)
-------------
Balances,
December 31,
1994............. 4,568,187
Series A
preferred stock
issued in
January 1995 at
$1.00 per share
in exchange for
services........ 30,000
Series A
preferred stock
issued in
January 1995 to
investors at
$1.00 per share,
net of issuance
costs of $470... 138,530
Series B
preferred stock
issued in June
1995 to
investors at
$4.00 per share,
net of issuance
costs of
$16,622......... 5,497,378
Common stock
issued in
January and
December 1995 in
connection with
stock option
exercises....... 10,968
Net loss........ (3,651,811)
-------------
Balances,
December 31,
1995............. 6,593,252
</TABLE>
F-5
<PAGE>
SYMPHONIX DEVICES INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY, CONTINUED
FOR THE PERIOD FROM MAY 17, 1994
(DATE OF INCEPTION) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
DEFICIT
NOTES UNREALIZED ACCUMULATED
PREFERRED STOCK COMMON STOCK RECEIVABLE LOSSES ON ADDITIONAL CUMULATIVE DURING THE
---------------- ---------------- FROM DEFERRED SHORT-TERM PAID-IN TRANSLATION DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION INVESTMENTS CAPITAL ADJUSTMENTS STAGE
--------- ------ --------- ------ ------------ ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31,
1995............. 6,841,500 $6,842 1,980,142 $1,980 $ (14,800) $11,003,265 $ (4,404,035)
Series C
preferred stock
issued in June
1996 to
investors at
$5.35 per share,
net of issuance
costs of
$55,864......... 1,162,451 1,162 6,162,087
Series D
preferred stock
issued in
December 1996 to
investors at
$8.00 per share,
net of issuance
costs $5,865.... 440,680 441 3,519,134
Common stock
issued in
connection with
stock option
exercise in
exchange for
$70,750 in cash
and $124,400 of
notes receivable
from
stockholders,
net of
repurchase of
72,674 shares... 404,187 404 (124,400) 194,746
Net loss........ (6,108,556)
--------- ------ --------- ------ --------- ----------- ------------
Balances,
December 31,
1996............. 8,444,631 8,445 2,384,329 2,384 (139,200) 20,879,232 (10,512,591)
Series D
preferred stock
issued in June
1997 to
investors at
$8.00 per share,
net of issuance
costs $10,100... 750,000 750 5,989,150
Common stock
issued in
connection with
stock option
exercise in
exchange for
$33,913 in cash
and $359,999 of
notes receivable
from
stockholders.... 400,335 401 (359,999) 393,511
Deferred
compensation
related to grant
of stock
options......... $(1,572,596) 1,572,596
Amortization of
deferred
compensation.... 107,481
Unrealized
losses on short-
term
investments..... $(1,218)
Translation
adjustments..... $1,616
Net loss........ (7,907,377)
--------- ------ --------- ------ --------- ----------- ------- ----------- ------ ------------
Balances,
December 31,
1997............. 9,194,631 $9,195 2,784,664 $2,785 $(499,199) $(1,465,115) $(1,218) $28,834,489 $1,616 $(18,419,968)
========= ====== ========= ====== ========= =========== ======= =========== ====== ============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balances,
December 31,
1995............. $ 6,593,252
Series C
preferred stock
issued in June
1996 to
investors at
$5.35 per share,
net of issuance
costs of
$55,864......... 6,163,249
Series D
preferred stock
issued in
December 1996 to
investors at
$8.00 per share,
net of issuance
costs $5,865.... 3,519,575
Common stock
issued in
connection with
stock option
exercise in
exchange for
$70,750 in cash
and $124,400 of
notes receivable
from
stockholders,
net of
repurchase of
72,674 shares... 70,750
Net loss........ (6,108,556)
-------------
Balances,
December 31,
1996............. 10,238,270
Series D
preferred stock
issued in June
1997 to
investors at
$8.00 per share,
net of issuance
costs $10,100... 5,989,900
Common stock
issued in
connection with
stock option
exercise in
exchange for
$33,913 in cash
and $359,999 of
notes receivable
from
stockholders.... 33,913
Deferred
compensation
related to grant
of stock
options......... --
Amortization of
deferred
compensation.... 107,481
Unrealized
losses on short-
term
investments..... (1,218)
Translation
adjustments..... 1,616
Net loss........ (7,907,377)
-------------
Balances,
December 31,
1997............. $ 8,462,585
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SYMPHONIX DEVICES INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM PERIOD FROM
MAY 17, MAY 17,
1994 (DATE 1994 (DATE
OF OF
INCEPTION) YEAR ENDED INCEPTION)
TO DECEMBER 31, TO
DECEMBER 31, -------------------------------------- DECEMBER 31,
1994 1995 1996 1997 1997
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $ (752,224) $ (3,651,811) $(6,108,556) $(7,907,377) $(18,419,968)
Adjustment to reconcile
net loss to net cash
used in operating
activities:
Amortization of
deferred
compensation......... -- -- -- 107,481 107,481
Depreciation and
amortization......... 17,523 198,891 420,814 497,939 1,135,167
Preferred and common
shares issued for
services............. 62,600 30,000 -- -- 92,600
Changes in operating
assets and
liabilities:
Prepaid expenses
and other current
assets............. (56,473) 2,376 (22,597) (374,415) (451,109)
Accounts payable... 24,483 44,313 (26,309) 323,903 366,390
Accrued
compensation....... 44,137 380,435 250,857 212,547 887,976
Other accrued
liabilities........ 141,338 (126,149) 99,813 661,515 776,517
------------ ------------ ----------- ----------- ------------
Net cash used in
operating
activities........ (518,616) (3,121,945) (5,385,978) (6,478,407) (15,504,946)
------------ ------------ ----------- ----------- ------------
Cash flows from
investing activities:
Purchases of short-term
investments............ (20,104,675) (12,784,507) (8,223,266) (10,007,214) (51,119,662)
Sales of short-term
investments............ 15,840,978 12,811,175 7,889,572 8,027,767 44,569,492
Purchases of property
and equipment.......... (294,492) (691,127) (408,720) (897,601) (2,291,940)
Change in other assets. (24,643) (34,041) 50,964 (68,435) (76,155)
------------ ------------ ----------- ----------- ------------
Net cash used in
investing
activities........ (4,582,832) (698,500) (691,450) (2,945,483) (8,918,265)
------------ ------------ ----------- ----------- ------------
Cash flows from
financing activities:
Proceeds from capital
leases................. 134,968 552,938 518,254 63,021 1,269,181
Payments on capital
lease obligations...... (2,970) (101,531) (221,443) (295,619) (621,563)
Proceeds from bank
borrowings............. -- -- -- 2,000,000 2,000,000
Payments received on
notes receivable from
stockholders........... 14,800 -- -- -- 14,800
Proceeds from issuance
of preferred stock, net
of issuance costs...... 5,242,911 5,635,908 9,682,824 5,989,900 26,551,543
Proceeds from issuance
of common stock........ 100 10,968 70,750 33,913 115,731
------------ ------------ ----------- ----------- ------------
Net cash provided
by financing
activities........ 5,389,809 6,098,283 10,050,385 7,791,215 29,329,692
------------ ------------ ----------- ----------- ------------
Net increase in cash and
cash equivalents........ 288,361 2,277,838 3,972,957 1,631,059 4,906,481
Effect of exchange rates
on cash and cash
equivalents............. -- -- -- 1,616 1,616
Cash and cash
equivalents, beginning
of period............... -- 288,361 2,566,199 6,539,156 --
------------ ------------ ----------- ----------- ------------
Cash and cash
equivalents, end of
period.................. $ 288,361 $ 2,566,199 $ 6,539,156 $ 4,908,097 $ 4,908,097
============ ============ =========== =========== ============
Supplemental disclosure
of cash flow
information:
Cash paid during the
period for interest.... $ -- $ 60,950 $ 86,113 $ 106,203 $ 253,266
============ ============ =========== =========== ============
Common stock issued in
exchange for promissory
note................... $ 29,600 $ -- $ 124,400 $ 359,999 $ 513,999
============ ============ =========== =========== ============
Preferred stock issued
in exchange for
services............... $ 24,000 $ 30,000 $ -- $ -- $ 54,000
============ ============ =========== =========== ============
Common stock issued in
exchange for services.. $ 38,600 $ -- $ -- $ -- $ 38,600
============ ============ =========== =========== ============
Unrealized losses on
short-term investments. $ -- $ -- $ -- $ (1,218) $ (1,218)
============ ============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
Symphonix Devices, Inc. and Subsidiary (a company in the development stage,
referred to hereafter as the "Company") was incorporated on May 17, 1994 to
develop and manufacture implantable and semi-implantable hearing devices.
Since its inception, the Company has been primarily engaged in developing its
initial product technology, raising capital and recruiting personnel.
In the course of its development activities, the Company has sustained
losses and expects such losses to continue through at least 1999. The Company
plans to continue its operations with proceeds from the sale of capital stock,
such as the initial public offering contemplated by the Prospectus, of which
these financial statements are a part, and with revenues from product sales.
If the offering contemplated herein is not consummated, the Company will have
to seek other sources of capital or adjust its operating plans.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Short-Term Investments:
All short-term investments are classified as available-for-sale and
therefore are carried at fair market value. Unrealized gains and losses on
such securities, when material, are reported as a separate component of
stockholders' equity. Realized gains and losses on sales of all such
securities are reported in earnings and computed using the specific
identification cost method.
Property and Equipment:
Property and equipment are stated at cost and are depreciated on a straight-
line basis over the shorter of the estimated useful lives of three to five
years or the length of the lease for leasehold improvements and assets
acquired under capital leases.
Research and Development:
Research and development costs are charged to operations as incurred.
Concentration of Credit Risk and Other Risks and Uncertainties:
The Company's cash, cash equivalents, and short-term investments are
primarily maintained at two financial institutions.
The Company's products require approvals from the Food and Drug
Administration and international regulatory agencies prior to commercialized
sales. There can be no assurance that the Company's products will receive any
of these required approvals. If the Company was denied such approval or such
approvals were delayed, it would have a materially adverse impact on the
Company.
F-8
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes:
The Company accounts for income taxes under the liability method, whereby
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Foreign currency translation:
The Company's international subsidiary uses its local currency as its
functional currency. Assets and liabilities are translated at exchange rates
in effect at the balance sheet date and income and expense accounts at average
exchange rates during the year. Resulting translation adjustments are recorded
directly to a separate component of stockholders' equity.
Computation of Historical Net Loss Per Common Share and Per Common Share-
Assuming Dilution:
The Company adopted Financial Accounting Standards Board No. 128 "Earnings
Per Share" and accordingly all prior periods have been restated. Net loss per
common share and per common share-assuming dilution, on an historical basis,
are computed using the weighted average number of shares of Common Stock
outstanding. Common equivalent shares from stock options and preferred stock
are excluded from the computation of net loss per common share-assuming
dilution as their effect is antidilutive. However, pursuant to the Securities
and Exchange Commission Staff Accounting Bulletin No. 83, common and common
equivalent shares issued at prices below the anticipated public offering price
during the 12 months immediately preceding the initial filing date,
aggregating 851,441 common equivalent shares, have been included in both
calculations as if they were outstanding for all periods presented (using the
treasury stock method and the anticipated initial public offering price).
Recent Accounting Pronouncements:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity
of a business enterprise during a period, resulting from transactions and
other events and circumstances from nonowner sources. The impact of adopting
SFAS No. 130, which is effective for the Company in 1998, has not been
determined.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information". SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-
producing segments of the entity for which such information is available and
is utilized by the chief operating decision maker. Specific information to be
reported for individual segments includes profit or loss, certain revenue and
expense items and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements would be provided.
SFAS No. 131 is effective for the Company in 1998. The Company operates in one
business segment; namely, the design, manufacture, and sale of implantable and
semi-implantable hearing management devices.
F-9
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SHORT-TERM INVESTMENTS:
Marketable securities are deemed by management to be available-for-sale and
at December 31, 1996 and 1997 comprise:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------------ ------------------------------
ACCRUED ESTIMATED ACCRUED ESTIMATED
COST BASIS INTEREST FAIR VALUE COST BASIS INTEREST FAIR VALUE
---------- -------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Municipal bonds......... $ 499,200 $ 8,229 $ 507,429 $ 499,938 $ 8,229 $ 508,307
Commercial paper........ 1,000,512 33,753 1,034,265 2,000,000 15,504 2,015,504
Medium term notes....... 1,999,496 27,324 2,026,820 3,005,665 21,196 3,026,057
U.S. Government agen-
cies................... 1,000,000 2,209 1,002,209 995,710 3,928 999,084
---------- ------- ---------- ---------- ------- ----------
$4,499,208 $71,515 $4,570,723 $6,501,313 $48,857 $6,548,952
========== ======= ========== ========== ======= ==========
</TABLE>
At December 31, 1996 and 1997, scheduled maturities for all of the
available-for-sale securities were less than one year. There were no realized
gains or losses recognized in 1996 and 1997.
4. PROPERTY AND EQUIPMENT:
Property and equipment include amounts for assets acquired under capital
leases of $1,206,160 and $1,201,775, with related accumulated amortization of
$510,734 and $882,148 at December 31, 1996 and 1997, respectively. Property
and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
Furniture and fixtures.............................. $ 123,598 $ 150,751
Machinery and equipment............................. 984,285 1,407,414
Leasehold improvements.............................. 223,426 625,456
Software............................................ 63,030 108,319
---------- -----------
1,394,339 2,291,940
Less accumulated depreciation and amortization...... (637,228) (1,135,167)
---------- -----------
$ 757,111 $ 1,156,773
========== ===========
</TABLE>
5. CAPITAL LEASE OBLIGATIONS:
Capital Leases:
The Company has capital lease obligations under seven lease lines that
expire between 1998 and 2001. Under the terms of these lease lines, the
Company is responsible for property taxes and insurance.
F-10
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997, the future minimum payments under capital leases are
as follows:
<TABLE>
<S> <C>
1998............................................................... $389,721
1999............................................................... 255,856
2000............................................................... 97,162
2001............................................................... 8,305
--------
Minimum lease payments............................................. 751,044
Less amount representing interest.................................. 103,426
--------
Principal amount of minimum lease payments......................... 647,618
Less current portion............................................... 322,562
--------
$325,056
========
</TABLE>
6. BANK BORROWINGS
The Company has a Loan Agreement with a bank providing for borrowings of up
to $2,000,000 and the issuance of letters of credit up to $250,000. The
agreement provides a revolving line of credit through December 31, 1998 after
which the principal amount is repayable over four years. Borrowings under the
agreement bear interest at the bank's prime rate plus 0.75% (9.25% at December
31, 1997) and are secured by substantially all of the Company's assets. The
Company is required to maintain certain levels of cash and stockholders'
equity and to comply with certain other financial covenants.
At December 31, 1997, the Company had borrowings of $2,000,000 and an
outstanding letter of credit in the amount of $243,680 under the Loan
Agreement.
Future payments of principal under the Loan Agreement are as follows:
<TABLE>
<S> <C>
1998.......................................................... $ --
1999.......................................................... 500,000
2000.......................................................... 500,000
2001.......................................................... 500,000
2002.......................................................... 500,000
----------
$2,000,000
==========
</TABLE>
7. COMMITMENTS:
Operating Lease:
The Company rents its facilities under an operating lease which expires in
August 1998. Under the terms of the lease, the Company is responsible for
taxes, insurance and maintenance expenses. In October 1997, the Company
entered into a lease on a new facility for a five year period commencing in
January 1998 and ending in December 2002.
Future minimum lease payments under these operating leases as of December
31, 1997 are as follows:
<TABLE>
<S> <C>
1998.......................................................... $ 755,468
1999.......................................................... 655,950
2000.......................................................... 664,663
2001.......................................................... 634,704
2002.......................................................... 666,432
----------
$3,377,217
==========
</TABLE>
F-11
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense for the periods ended December 31, 1995, 1996, 1997 and the
period from May 17, 1994 (date of inception) to December 31, 1997 was
$117,243, $118,344, $161,887 and $443,006, respectively.
8. STOCKHOLDERS' EQUITY:
Initial Public Offering
In November 1997, the Board of Directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell its common stock in an initial
public offering.
Reverse Stock Split
In November 1997, the Company's Board of Directors approved a one-for-1.376
reverse stock split of the Company's common stock and a corresponding change
in the preferred stock conversion ratios. All common stock and per share
amounts in these financial statements have been adjusted retroactively to give
effect to the split. In addition, the Company's Board of Directors approved an
Amended and Restated Certificate of Incorporation which eliminates the
existing convertible preferred stock and changes the number of authorized
preferred stock to 5,000,000 shares, $0.001 par value, and increases the
shares of common stock authorized to 50,000,000 shares, which Certificate is
to be filed following the effectiveness of the initial public offering.
Convertible Preferred Stock:
At December 31, 1997, the amounts, terms and liquidation value of Series A,
Series B, Series C and Series D convertible preferred stock were:
<TABLE>
<CAPTION>
SHARES OF
COMMON
STOCK
SHARES RESERVED PREFERENTIAL
SHARES ISSUED AND FOR LIQUIDATION
SERIES AMOUNT AUTHORIZED OUTSTANDING CONVERSION VALUE
- ------ ----------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
A....................... $ 5,435,441 5,500,000 5,463,000 5,500,000 $ 5,463,000
B....................... 5,497,378 1,500,000 1,378,500 1,500,000 5,514,000
C....................... 6,163,249 1,500,000 1,162,451 1,500,000 6,219,113
D....................... 9,509,475 1,250,000 1,190,680 1,250,000 9,525,440
----------- --------- --------- --------- -----------
Balances, December 31,
1997................... $26,605,543 9,750,000 9,194,631 9,750,000 $26,721,553
=========== ========= ========= ========= ===========
</TABLE>
Under the Company's restated Articles of Incorporation, the Company's
preferred stock is issuable in series and the Company's Board of Directors is
authorized to determine the rights, preferences and terms of each series.
Dividends:
The holders of Series A, Series B, Series C and Series D preferred stock are
entitled to receive dividends, out of any assets legally available, prior and
in preference to any declaration or payment of any dividend on the common
stock of the Company, at the rate of $0.10, $0.40, $0.535 and $0.80 per share
per year, respectively, or if greater (as determined on a per year basis and
on an as converted basis for the preferred stock), an amount equal to that
paid on any other outstanding shares of the Company. Such dividends are
payable when, as and if declared by the Board of Directors, and are not
cumulative. No dividends have been declared to date.
F-12
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Liquidation:
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series A, Series B, Series C
and Series D preferred stock are entitled to receive, prior and in preference
to any distribution of any of the assets or surplus funds of the Company to
the holders of common stock, an amount per share equal to the sum of $1.00,
$4.00, $5.35 and $8.00 respectively, for each outstanding Series A, Series B,
Series C and Series D preferred stock (as adjusted for any stock dividends,
combinations or splits) plus any declared but unpaid dividends on such shares.
If upon the occurrence of such event, the assets and funds distributed among
the holders of the preferred stock are insufficient to permit the payment to
such holders of the full aforesaid preferential amounts, then, the entire
assets and funds of the Company legally available for distribution are to be
distributed first ratably among the holders of the Series C and Series D
preferred stock in proportion to the full preferential amount each such holder
is otherwise entitled to receive. Then, such assets and funds shall be
distributed ratably among the holders of Series A and Series B preferred stock
in proportion to the full preferential amount each such holder is otherwise
entitled to receive.
After payment has been made to the holders of Series A, Series B, Series C
and Series D preferred stock, any remaining assets and funds are to be
distributed among the holders of common stock pro rata based on the number of
common stock held by each stockholder.
Mergers:
A merger, reorganization, or sale of all or substantially all of the assets
of the Company, in which the existing stockholders of the Company prior to the
transaction possess less than 50% of the voting power of the surviving entity
(or its parent) immediately after the transaction, shall be deemed to be a
liquidation, dissolution or winding up of the Company.
Voting:
Each share of preferred stock is entitled to voting rights equal to the
number of common shares into which each preferred share could be converted
into at the record date for a vote or consent of stockholders, except as
otherwise required by law, and has voting rights and powers equal to the
voting rights and powers of the common stock.
Conversion and Registration:
Each share of preferred stock, at the option of the holder, is convertible
into the number of fully paid and nonassessable shares of common stock which
results from dividing the conversion price per share in effect for the
preferred stock at the time of conversion into the per share conversion value
of such stock. The initial conversion price per share and initial per share
conversion value of Series A, Series B, Series C and Series D preferred stock
is $1.38, $5.50, $7.36 and $11.01, respectively. The initial conversion price
of Series A, Series B, Series C and Series D preferred stock is subject to
adjustment from time to time, as described in the Company's Restated Articles
of Incorporation.
In the event of a conversion of the Series C preferred stock in connection
with this initial public offering at a price lower than $11.70 per share of
common stock, then the Conversion Price for the Series C preferred stock shall
be reduced to $6.90. In the event of a conversion of the Series D preferred
stock in connection with this initial public offering at a price lower than
$11.00 per share of common stock, then the Conversion Price for the Series D
preferred stock shall be reduced to the initial public offering price.
F-13
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Conversion is automatic at the then effective conversion rate immediately
upon the closing of a firm commitment underwritten public offering pursuant to
an effective registration statement under the Securities Act of 1933 covering
the offer and sale of common stock in which the public offering price equals
or exceeds $10.00 per share (adjusted to reflect subsequent share dividends,
share splits or recapitalization) and the aggregate proceeds raised equals or
exceeds $17,000,000. The Company has reserved 9,750,000 shares of common stock
upon conversion of the preferred stock as of December 31, 1997).
Negotiation Rights:
In connection with the Series D preferred stock issuances, the Company
granted one of the investors first negotiation rights, whereby the Company
agreed not to (i) transfer, dispose of, sell, lease or license to any third
party certain defined intellectual property rights that are or may be used or
may have application in the field of implantable or semi-implantable hearing
aid devices or (ii) transfer or dispose of all or substantially all of the
assets or voting securities of the Company to any third party until it
provides that investor the opportunity to consummate a similar transaction.
The first negotiation rights survive from a period of 18 months from the date
of the Series D preferred stock agreement or 12 months from the effective date
of the Company's initial public offering, whichever first occurs. However, the
first negotiation rights will terminate if the investor, either directly or
through an affiliate, does not participate as an investor in the Company's
initial public offering.
Warrants:
The Company has issued warrants in connection with obtaining its equipment
lease line of credit.
The Company issued to the leasing company warrants to purchase up to 37,000
of the Company's Series A preferred stock at $1.00 per share and up to 9,250
of the Company's Series B preferred stock at $4.00 per share. The warrants to
purchase the Company's Series A and Series B preferred stock are exercisable
until October 2004.
Common Stock:
The Company has 2,784,664 shares of its common stock outstanding at December
31, 1997. Such shares of common stock were issued to the founders and other
key persons under purchase agreements. Under these agreements, any unvested
shares are subject to repurchase by the Company for a period of 90 days after
termination of services to the Company. Shares generally vest 1/48 per month
at the end of each full month. At December 31, 1997, approximately 632,194
shares of common stock are subject to repurchase.
Notes Receivable:
In 1994, 1996 and 1997, the Company issued 1,075,581, 207,122 and 337,809
shares, respectively, of its common stock to one of the founders and other key
persons in exchange for promissory notes of $29,600, $124,400 and $359,999,
respectively. The 1994 promissory notes bear annual interest of 5.36%, payable
in the year 1999. A principal payment of $14,800 was made in 1994. The 1996
and 1997 promissory notes bear annual interest ranging from 6.36% to 6.84%,
payable in the years 2001 and 2002. The related shares are pledged as
collateral for the notes.
F-14
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in November 1997. A total of 75,000 shares
of common stock are reserved for issuance under the Purchase Plan. The
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 10% of an employee's compensation. No
employee may purchase more than $25,000 worth of common stock in any calendar
year. The price of shares purchased under the Purchase Plan is 85% of the
price of the fair market value of the common stock at the beginning of the
offering period or the specified purchase date. The Purchase Plan will become
effective upon the closing of the Company's initial public offering.
1994 Stock Option Plan:
The 1994 Stock Option Plan (the "1994 Plan") provides for grants of
incentive stock options to employees (including officers and employee
directors) and nonstatutory stock options to employees (including officers and
employee directors) and consultants of the Company. The 1994 Plan is
administered by a committee appointed by the Board of Directors which
identifies optionees and determines the terms of options granted, including
the exercise price, number of shares subject to the option and the
exercisability thereof.
The terms of options granted under the 1994 Plan generally may not exceed
ten years. The term of all incentive stock options granted to an optionee who,
at the time of grant, owns stock representing more than 10% of the voting
power of all classes of stock of the Company or a parent or subsidiary of the
Company (a "Ten Percent Stockholder"), may not exceed five years, however.
Generally, options granted under the 1994 Plan vest and become exercisable
starting one year after the date of grant, with 25% of the shares subject to
the option becoming exercisable at that time and an additional 1/48th of such
shares becoming exercisable each month thereafter. Holders of options granted
under the 1994 Plan may exercise their unvested options prior to complete
vesting of shares, subject to such holder's entering a restricted stock
purchase agreement granting the Company an option to repurchase, in the event
of a termination of the optionee's employment or consulting relationship, any
unvested shares at a price per share equal to the original exercise price per
share for the option. The exercise price of incentive stock options granted
under the 1994 Plan must be at least equal to the fair market value of the
shares on the date of grant. The exercise price of nonstatutory stock options
granted under the 1994 Plan is determined by the Board of Directors. The
exercise price of any incentive stock option granted to a Ten Percent
Stockholder must equal at least 110% of the fair market value of the common
stock on the date of grant.
F-15
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity under the 1994 Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------------
SHARES NUMBER
AVAILABLE OF EXERCISE AGGREGATE
FOR GRANT SHARES PRICE PRICE
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Options reserved for 1994 Plan at
inception........................... 970,203
Options granted.................... (439,676) 439,676 $0.14 $ 61,555
Options exercised.................. (145,348) $0.14 (20,349)
-------- -------- --------
Balance, December 31, 1994........... 530,527 294,328 $0.14 41,206
Options granted.................... (486,903) 486,903 $0.14-$0.55 144,890
Options exercised.................. (79,712) $0.14 (11,160)
-------- -------- --------
Balance, December 31, 1995........... 43,624 701,519 $0.14-$0.55 174,936
Additional options reserved........ 654,070
Options granted.................... (571,616) 571,616 $0.55-$0.83 419,938
Options exercised.................. (476,861) $0.14-$0.83 (195,796)
Options canceled................... 211,592 (211,592) $0.14-$0.55 (59,717)
Repurchase of common shares........ 72,674
-------- -------- --------
Balance, December 31, 1996........... 410,344 584,682 $0.14-$0.83 339,361
Additional options reserved........ 375,000
Options granted.................... (395,680) 395,680 $1.10-$8.81 802,780
Options exercised.................. (400,336) $0.14-$2.20 (394,294)
Options canceled................... 13,495 (13,495) $0.14-$1.10 (7,338)
-------- -------- --------
Balance, December 31, 1997........... 403,159 566,531 $0.14-$8.81 $740,509
======== ======== ========
</TABLE>
For the years ended December 31, 1996 and 1997, the weighted average fair
value of options granted was $0.70 and $2.03 per share, respectively.
The difference between the exercise price and the deemed fair market value
of the Company's common stock at the date of issue of certain stock options,
totaling $1,572,596, has been recorded as deferred compensation as a component
of stockholders' equity. Of this amount, $107,481 has been recognized as an
expense through December 31, 1997. The remaining $1,465,115 will be recognized
as an expense as the shares and options vest over a period of up to four
years.
The options outstanding and currently exercisable by exercise price at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPTIONS CURRENTLY
OPTIONS OUTSTANDING EXERCISABLE
- ------------------------------------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED
EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER AVERAGE
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------- ----------- ---------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.14 132,177 6.99 $0.14 89,553 $0.14
$0.55 42,229 7.93 $0.55 12,270 $0.55
$0.73 85,974 8.59 $0.73 70,683 $0.73
$0.83 15,793 8.74 $0.83 5,528 $0.83
$1.10 145,445 9.40 $1.10 6,260 $1.10
$2.20 123,111 9.76 $2.20 30,851 $2.20
$8.81 21,802 9.92 $8.81 -- $8.81
------- -------
566,531 8.66 $1.30 215,145 $0.59
======= =======
</TABLE>
F-16
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1996, options to purchase 266,989 shares were exercisable
at an average weighted exercise price of $0.62 per share.
The Company has elected to continue to follow the provisions of APB No. 25,
"Accounting for Stock Issued to Employees," for financial reporting purposes
and has adopted the disclosure-only provisions of SFAS No. 123 ("SFAS No.
123"). Had compensation cost for the Company's stock option plans been
determined based on the fair market value at the grant date for awards in
1995, 1996 and 1997 consistent with the provisions of SFAS No. 123, the
Company's net loss and net loss per common share and per common share-assuming
dilution for 1995, 1996 and 1997 would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net loss--as reported...................... $3,651,811 $6,108,556 $7,907,377
========== ========== ==========
Net loss--pro forma........................ $3,656,311 $6,126,556 $7,948,377
========== ========== ==========
Net loss per common share and per common
share-assuming dilution--as reported...... $ 1.30 $ 2.01 $ 2.30
========== ========== ==========
Net loss per common share and per common
share--assuming dilution--pro forma....... $ 1.30 $ 2.01 $ 2.32
========== ========== ==========
</TABLE>
The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
In accordance with the provisions of SFAS No. 123, the fair value of each
option is estimated using the following assumptions used for grants during
1995, 1996 and 1997; dividend yield and volatility of 0% for all periods,
weighted risk-free interest rates of 6.6%, 5.8% and 6.0% at the date of grant
and expected terms of 5.0, 5.4 and 5.0 years, respectively.
9. INCOME TAXES:
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1996 and 1997 are
presented below:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Depreciation....................................... $ 103,164 $ 153,302
Capitalized start-up costs......................... 735,047 1,401,733
Net operating loss carryforward.................... 3,293,903 5,240,902
Research and development credits................... 445,933 1,016,400
Other.............................................. 35,991 51,223
Valuation allowance................................ (4,614,038) (7,863,560)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
Due to the uncertainties surrounding the realization of deferred tax assets,
the Company has provided a full valuation allowance and, therefore, no benefit
has been recognized for the net operating loss and other deferred tax assets.
At December 31, 1997, the Company has $13,171,517 for federal and
$13,080,375 for state net operating loss carryforwards which expire from 2009
through 2012 and 1999 through 2002, respectively, if not utilized.
F-17
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. In the event the Company has had a change in
ownership, utilization of the carryforwards could be restricted.
10. EMPLOYEE BENEFIT PLAN:
During 1996, the Company established a Retirement Savings and Investment
Plan (the "Plan") under which employees may defer a portion of their salary up
to the maximum allowed under IRS rules. The Company has the discretion to make
contributions to the Plan. As of December 31, 1997, no Company contributions
have been made to the Plan.
11. UNAUDITED PRO FORMA INFORMATION:
Upon the closing of the Company's initial public offering, all outstanding
preferred stock will be converted automatically into common stock. The pro
forma effect of the conversion has been presented as a separate column in the
Company's balance sheet, assuming the conversion had occurred as of December
31, 1997.
Pro forma net loss per common share and per common share--assuming dilution
has been presented to depict what the net loss per common share and per common
share--assuming dilution would have been had the common stock issuable upon
the conversion of the outstanding preferred stock been outstanding during such
periods.
12. RELATED PARTY TRANSACTIONS:
In February 1997, the stockholders approved the assignment of technology
relating to and including two patent applications to VibRx in consideration
for repayment of approximately $10,000 of related patent expenses and issuance
of common stock equal to 20% of all VibRx's outstanding shares at such time as
VibRx completes an initial financing with aggregate proceeds of at least
$500,000. VibRx was formed and is controlled by the Company's President and
Chief Executive Officer.
13. SUBSEQUENT EVENTS
In January 1998, the Company reincorporated in Delaware. Under the
reincorporation, each class and series of shares of the predecessor company
was exchanged for one share of identical class and series of stock of the
Delaware successor company having a par value of $0.001 per share for both
common stock and preferred stock. The accompanying consolidated financial
statements have been adjusted retroactively to give effect to the
reincorporation.
F-18
<PAGE>
The Company's implantable
hearing devices have not
been approved for marketing
by the United States Food
and Drug Administration or
any international regula-
tory authorities.
[ILLUSTRATION OF LASER DOPPLER VIBROMETRY]
Laser Doppler Vibrometry is used to map the movement of the ear's vibratory
structures for optimization of transducer design and performance.
[PICTURE OF FLOATING MASS TRANSDUCER]
Leveraging the Company's core FMT technology
[Symphonix Logo Appears Here]
Selective signal processing and FMT modification are designed to allow for
management of different types of hearing impairments.
[ILLUSTRATION OF AUDIOGRAM]
The Vibrant HF soundbridge is under development and designed to provide
hearing management for users with noise induced hearing loss at high
frequencies but relatively normal hearing at lower frequencies.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, sales person, or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company or any of the Underwriters or by
any other person. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy a security other than the shares of Common
Stock offered hereby, nor does it constitute an offer to sell or solicitation
of an offer to buy any of the securities offered hereby, to any person in any
jurisdiction in which it is unlawful to make such offer or solicitation to
such person. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that
information contained herein is correct as of any date subsequent to the date
hereof.
--------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Special Note Regarding Forward-Looking Statements......................... 17
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Financial Information............................................ 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 25
Management................................................................ 48
Certain Transactions...................................................... 55
Principal Stockholders.................................................... 57
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 62
Underwriting.............................................................. 64
Legal Matters............................................................. 65
Experts................................................................... 66
Additional Information.................................................... 66
Index to Consolidated Financial Statements................................ F-1
</TABLE>
--------------------
Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in
this distribution, may be required to deliver a Prospectus. This delivery is
in addition to the obligation of dealers to deliver a Prospectus when acting
as Underwriters and with respect to their unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,300,000 Shares
[LOGO OF SYMPHONIX]
Common Stock
--------------------
PROSPECTUS
--------------------
COWEN & COMPANY
UBS SECURITIES
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 10,144
NASD filing fee.................................................. 3,939
Nasdaq National Market Listing Fee............................... 50,000
Printing and engraving costs..................................... 150,000
Legal fees and expenses.......................................... 225,000
Accounting fees and expenses..................................... 175,000
Blue Sky fees and expenses....................................... 10,000
Director and Officer Liability Insurance......................... 150,000
Transfer Agent and Registrar fees................................ 10,000
Miscellaneous expenses........................................... 15,917
--------
Total.......................................................... $800,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any corporate agents under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act. The Registrant's Restated Certificate of
Incorporation to be filed after the closing of the offering to which this
Registration Statement relates (Exhibit 3.2 hereto) and the Registrant's
Bylaws (Exhibit 3.3 hereto) provide for indemnification of the Registrant's
directors, officers, employees and other agents to the extent and under the
circumstances permitted by the Delaware General Corporation Law. The
Registrant also intends to enter into agreements with its directors and
executive officers that will require the Registrant among other things to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors to the fullest extent not prohibited by
Delaware law.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Registrant, its directors and officers, and by the Registrant of the
Underwriters, for certain liabilities, including liabilities arising under the
Securities Act, and affords certain rights of contribution with respect
thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since May 1994, the Registrant has issued and sold the following
unregistered securities (such share numbers and per share prices do not
reflect the one-for-1.376 reverse split of the outstanding Common Stock
effected in January 1998 and the conversion of all outstanding shares of
Preferred Stock into shares of Common Stock which will occur automatically
upon the closing of this offering:
(1) Since May 1994, the Company has issued and sold 3,831,767 shares of
Common Stock to a total of 29 employees, employee and non-employee directors,
consultants, and accredited investors for consideration paid in cash and
transfer of technology at a price per share ranging from $0.02 to $1.60.
(2) Since November 1994, the Company has granted stock options to purchase
2,606,076 shares of Common Stock to a total of 78 employees, consultants, non-
employee directors and an employee
II-1
<PAGE>
director, at a weighted average exercise price of $1.30 per share pursuant to
the 1994 Option Plan.
(3) In November 1994, the Company issued a warrant to purchase 37,000 shares
of Series A Preferred Stock, convertible into shares of Common Stock, at an
exercise price of $1.00 per share to its lessor, Lighthouse Capital Partners.
(4) In May and November 1995, the Company issued warrants to purchase an
aggregate of 9,250 shares of Series B Preferred Stock, convertible into shares
of Common Stock, at an exercise price of $4.00 per share to its lessor,
Lighthouse Capital Partners.
(5) In July, August and October 1994 and January 1995, the Company issued
and sold 5,463,000 shares of Series A Preferred Stock to a total of 40
accredited investors, including one officer, for cash and services in the
aggregate amount of $5,463,000.
(6) In June 1995, the Company issued and sold 1,378,500 shares of Series B
Preferred Stock to a total of 31 accredited investors, including one officer,
for cash and services in the aggregate amount of $5,514,000.
(7) In May and June 1996, the Company issued and sold 1,162,451 shares of
Series C Preferred Stock to a total of 20 accredited for cash in the aggregate
amount of $6,219,113.
(8) In November and December 1996 and June 1997, the Company issued and sold
1,190,680 shares of Series D Preferred Stock to a total of 14 accredited
investors, for cash in the aggregate amount of $9,525,440.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act,
except in the case of item (5), above, which was deemed to be exempt from such
registration pursuant to Regulation D promulgated thereunder, and in the case
of items (1) and (2), above, on Rule 701 promulgated thereunder, as
transactions by an issuer not involving a public offering. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates and instruments issued in such transactions. All
recipients had adequate access, through their relationships with the Company,
to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of Symphonix Devices, Inc., a Delaware
corporation, as currently in effect.
3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant to be filed after the closing of the offering made under
this Registration Statement.
3.3 Bylaws of the Registrant, as currently in effect.
4.1 Specimen Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
10.2* 1994 Stock Option Plan and forms of Stock Option Agreements
thereunder.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.3* 1998 Employee Stock Purchase Plan.
10.4* Restated Investors Rights Agreement dated June 11, 1997 between the
Registrant and certain holders of the Registrant's securities.
10.5* Master Equipment Lease Agreement between Registrant and Lighthouse
Capital Partners dated December 2, 1994.
10.6* Assignment by Registrant to VibRx, Inc. dated March 14, 1997.
10.7* Registrant's Series D Preferred Stock Purchase Agreement dated June
11, 1997.
10.8* Net Lease Agreement between Realtec Properties I, L.P., a California
limited partnership, and Registrant dated July 28, 1994; letter
agreements dated July 28, 1994 and August 17, 1994 and First
Amendment dated April 17, 1997.
10.9* Lease between Silicon Valley Properties, L.L.C., a Delaware limited
liability partnership, and Registrant dated October 27, 1997.
10.10* Form of Option Vesting Agreement between the Registrant and its
officers.
10.11* License Agreement dated June 1, 1995 between Baptist Medical Center
of Oklahoma, Inc. and Registrant.
10.12 Loan and Security Agreement dated December 30, 1997 between the
Registrant and Silicon Valley Bank
11.1 Computation of net loss per common share and per common share--
assuming dilution.
21.1* List of Subsidiary of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants (see
page II-6).
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney (see page II-5).
27.1* Financial Data Schedule
</TABLE>
- --------
* Previously filed
(b) Financial Statement Schedules
Financial schedules not listed above have been omitted because the
information required to be set forth therein is not applicable or is shown in
the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(a) It will provide to the Underwriters at the closing as specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act may be permitted to directors, officers and
controlling persons of the Registrant, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-3
<PAGE>
(c) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(d) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar volume of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
(b) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide Offering thereof;
(c) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN JOSE, STATE OF
CALIFORNIA, ON THE 9TH DAY OF JANUARY, 1998.
SYMPHONIX DEVICES, INC.
Harry S. Robbins*
By: _________________________________
Harry S. Robbins
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Harry S. Robbins* President, Chief Executive January 9, 1998
____________________________________ Officer and Director
Harry S. Robbins (Principal Executive
Officer)
/s/ Alfred G. Merriweather Chief Financial Officer January 9, 1998
____________________________________ (Principal Financial and
Alfred G. Merriweather Accounting Officer)
Geoffrey R. Ball* Director January 9, 1998
____________________________________
Geoffrey R. Ball
B.J. Cassin* Director January 9, 1998
____________________________________
B.J. Cassin
Terry Gould* Director January 9, 1998
____________________________________
Terry Gould
Michael J. Levinthal* Director January 9, 1998
____________________________________
Michael J. Levinthal
Petri T. Vainio* Director January 9, 1998
____________________________________
Petri T. Vainio
</TABLE>
*By: /s/ Alfred G. Merriweather
________________________________
Alfred G. Merriweather
II-5
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated January 9, 1998 on our audits of the consolidated financial
statements of Symphonix Devices, Inc. and Subsidiary. We also consent to the
references to our firm under the captions "Experts" and "Selected Financial
Data."
COOPERS & LYBRAND L.L.P.
San Jose, California
January 9, 1998
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of Symphonix Devices,
Inc., a Delaware corporation, as currently in effect.
3.2 Form of Amended and Restated Certificate of
Incorporation of the Registrant to be filed after the
closing of the offering made under this Registration
Statement.
3.3 Bylaws of the Registrant, as currently in effect.
4.1 Specimen Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
10.1* Form of Indemnification Agreement between the
Registrant and each of its directors and officers.
10.2* 1994 Stock Option Plan and forms of Stock Option
Agreements thereunder.
10.3* 1998 Employee Stock Purchase Plan.
10.4* Restated Investors Rights Agreement dated June 11, 1997
between the Registrant and certain holders of the
Registrant's securities.
10.5* Master Equipment Lease Agreement between Registrant and
Lighthouse Capital Partners dated December 2, 1994.
10.6* Assignment by Registrant to VibRx, Inc. dated March 14,
1997.
10.7* Registrant's Series D Preferred Stock Purchase
Agreement dated June 11, 1997.
10.8* Net Lease Agreement between Realtec Properties I, L.P.,
a California limited partnership, and Registrant dated
July 28, 1994; letter agreements dated July 28, 1994
and August 17, 1994 and First Amendment dated April
17, 1997.
10.9* Lease between Silicon Valley Properties, L.L.C., a
Delaware limited liability partnership, and Registrant
dated October 27, 1997.
10.10* Form of Option Vesting Agreement between the Registrant
and its officers.
10.11* License Agreement dated June 1, 1995 between Baptist
Medical Center of Oklahoma, Inc. and Registrant.
10.12 Loan and Security Agreement dated December 30, 1997
between the Registrant and Silicon Valley Bank
11.1 Computation of net loss per common share and per common
share--assuming dilution.
21.1* List of Subsidiary of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P., Independent
Accountants (see page II-6).
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney (see page II-5).
27.1* Financial Data Schedule
</TABLE>
- --------
* Previously filed
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION OF
SYMPHONIX DEVICES, INC.
ARTICLE I.
The name of this Corporation is Symphonix Devices, Inc. (the "Corporation").
ARTICLE II.
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of Newcastle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III.
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated under the General
Corporation Law of Delaware.
ARTICLE IV.
This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the corporation is authorized to issue is 29,750,000 shares.
20,000,000 shares shall be Common Stock with a par value of $0.001 per share and
9,750,000 shares shall be Preferred Stock with a par value of $0.001 per share.
Of the Preferred Stock, 5,500,000 shares shall be designated Series A Preferred
Stock, 1,500,000 shares shall be designated Series B Preferred Stock, 1,500,000
shares shall be designated Series C Preferred Stock and 1,250,000 shares shall
be designated Series D Preferred Stock.
Immediately upon the automatic conversion of all of the outstanding shares
of Preferred Stock into Common Stock pursuant to Article V, Section 3(a)(ii) or
(iii), each outstanding 1.376 shares of Common Stock will be combined into one
share of Common Stock. No fractional shares will be issued in connection with
such reverse stock split and the number of shares issuable to each stockholder
shall be determined by rounding upwards to the next whole share on a
certificate-by-certificate basis.
<PAGE>
ARTICLE V.
The rights, preferences, privileges, restrictions and other matters
relating to the shares of Preferred Stock are as follows:
1. Dividends. The holders of shares of Series A Preferred Stock, Series
---------
B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall
be entitled to receive dividends, out of any assets legally available therefor,
prior and in preference to any declaration or payment of any dividend (payable
other than in Common Stock or other securities and rights convertible into or
entitling the holder thereof to receive, directly or indirectly, additional
shares of Common Stock of the Corporation) on the Common Stock of the
Corporation, at the rate of $0.10, $0.40, $0.535 and $0.80 per share per annum,
respectively, or if greater (as determined on a per annum basis and an as-
converted basis for the Preferred Stock), an amount equal to that paid on any
other outstanding shares of the Corporation whenever funds are legally available
therefor, payable when, as and if declared by the Board of Directors. No
dividend shall be declared with respect to any series of Preferred Stock unless
a dividend is declared with respect to each series of outstanding Preferred
Stock at a rate that is no less favorable to the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock and the Series D
Preferred Stock than $0.10, $0.40, $0.535 and $0.80 per annum for each share of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock, respectively. Such dividends shall not be cumulative.
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Common Stock by reason of their ownership thereof, an amount per
share equal to $1.00, $4.00, $5.35 and $8.00 for each outstanding share of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock, respectively (as adjusted for any combinations,
consolidations, stock distributions or stock dividends with respect to such
shares, hereinafter "as adjusted"), plus all declared but unpaid dividends on
such shares. If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential amounts,
then the entire assets and funds of the Corporation legally available for
distribution shall be distributed first ratably among the holders of Series C
Preferred Stock and Series D Preferred Stock until the holders of Series C
Preferred Stock and Series D Preferred Stock have received payment of their full
aforesaid preferential amounts; provided, however, that if the assets and funds
thus distributed among the holders of the Series C Preferred Stock and Series D
Preferred Stock shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amounts, then such assets shall be distributed
among such holders of Series C Preferred Stock and Series D Preferred Stock in
proportion to the respective amounts which would be payable on such shares of
Series C Preferred Stock and Series D Preferred Stock held by them if the
aforesaid preferential
-2-
<PAGE>
amounts were paid in full. Then, such assets and funds shall be distributed
ratably among the holders of the Series A Preferred Stock and Series B Preferred
Stock, based upon the number of shares of Series A Preferred Stock and Series B
Preferred Stock then held, in proportion to the respective amounts which would
be payable on the shares held by them if the aforesaid preferential amounts were
paid in full.
(b) After the payment of the full liquidation preference set forth in
Section 2(a) above, the remaining assets of the Corporation available for
distribution to shareholders shall be distributed pro rata to the holders of
Common Stock (based on the number of shares of Common Stock then held by each
such holder).
(c) A liquidation, dissolution, or winding up within the meaning of
this Section 2 shall be deemed to be occasioned by, and to include, (i) any sale
of all or substantially all of the assets of the Corporation and (ii) any
consolidation, merger or other transaction or series of transactions pursuant to
which the holders of the outstanding voting securities of the Corporation
immediately prior to such consolidation, merger or other transaction or series
of transactions fail to hold equity securities representing a majority of the
voting power of the surviving entity immediately following such consolidation,
merger or other transaction or series of transactions.
(d) Any securities to be delivered to the holders of the Preferred
Stock or Common Stock pursuant to this Section 2 shall be valued as follows:
(i) Securities not subject to investment letter or other
similar restrictions on free marketability:
(1) If traded on a national securities exchange or the
Nasdaq National Market (the "NMS"), the value shall be deemed to be the average
of the security's last reported sale prices on such exchange or the NMS over the
thirty (30) day period ending three (3) days prior to the closing;
(2) If traded over-the-counter (but not on the NMS), the
value shall be deemed to be the average of the mean of the closing bid and ask
prices over the thirty (30) day period ending three (3) days prior to the
closing; or
(3) If there is no active public market, the value shall
be the fair market value thereof, as mutually determined by the Corporation and
the holders of not less than fifty percent (50%) of the outstanding Preferred
Stock, voting together as a single class.
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability shall be to make
an appropriate discount from the market value determined as above in Sections
2(d)(i)(1), (2) or (3) to reflect the approximate fair market value thereof, as
mutually determined by the Corporation and the holders of not less than fifty
percent (50%) of the outstanding Preferred Stock, voting together as a single
class.
-3-
<PAGE>
(e) In the event the Corporation will not, at the closing of any
transaction identified in Sections 2(c)(i) or (ii) above, comply with the
requirements of this Section 2, the Corporation shall forthwith either:
(i) cause such closing to be postponed until such time as the
requirements of this Section 3 have been complied with, or
(ii) cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Preferred Stock shall revert to
and be the same as such rights, preferences and privileges existing immediately
prior to the date of the first notice referred to in Section 2(g) hereof.
(f) The Corporation shall give each holder of record of Preferred
Stock written notice of such impending transaction not later than twenty (20)
days prior to the shareholders' meeting called to approve a transaction
referenced in Sections 2(c)(i) and (ii), or twenty (20) days prior to the
closing of such transaction, whichever is earlier and shall also notify such
holders in writing of the final approval of such transaction. The first of such
notices shall describe the material terms and conditions of the impending
transaction and the provisions of this Section 2, and the Corporation shall
thereafter give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than twenty (20) days after the
Corporation has given the first notice provided for herein or sooner than ten
(10) days after the Corporation has given notice of any material changes
provided for herein. Notwithstanding the foregoing, the provisions of this
Section 2(f) may be waived, either prospectively or retrospectively, in whole or
in part, or any time period in this Section 2(f) may be shortened, in either
case, upon the written consent of the holders of the Preferred Stock which
represent at least a majority of the voting power of all then outstanding shares
of such Preferred Stock, voting together as a single class.
3. Conversion. The holders of the Preferred Stock shall have conversion
----------
rights as follows (the "Conversion Rights"):
(a) Right to Convert.
----------------
(i) Each share of Preferred Stock shall be convertible into
shares of Common Stock, at the option of the holder thereof, at any time after
the date of issuance of such share, at the office of the Corporation or any
transfer agent for such stock. Each share of Preferred Stock shall be
convertible into the number of fully paid and nonassessable shares of Common
Stock which results from dividing the Conversion Price (as hereinafter defined)
per share in effect for each series of Preferred Stock at the time of conversion
into the per share Conversion Value (as hereinafter defined) of such series. As
of the date the Certificate of Incorporation is filed with the Delaware
Secretary of State, the Conversion Price per share of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
shall be $1.00, $4.00, $5.35, and $8.00 respectively. The per share Conversion
Value shall be $1.00, $4.00, $5.35 and $8.00, respectively. The Conversion Price
of Series A Preferred Stock, Series B Preferred Stock, Series C
-4-
<PAGE>
Preferred Stock and Series D Preferred Stock shall be subject to adjustment from
time to time as provided below.
(ii) Each share of Preferred Stock shall automatically be
converted into shares of Common Stock at the then effective applicable
Conversion Price immediately upon the closing of the sale of the Corporation's
Common Stock in a firm commitment, underwritten public offering registered under
the Securities Act of 1933, as amended (other than a registration relating
solely to a transaction under Rule 145 under such Act (or any successor thereto)
or to an employee benefit plan of the Company), at a public offering price
(prior to underwriter commissions and expenses) equal to or exceeding seven
dollars and twenty-six cents ($7.26) per share of Common Stock (appropriately
adjusted for subdivisions and combinations of shares of Common Stock and
dividends on Common Stock payable in shares of Common Stock) and the aggregate
dollar amount of the offering (before deduction for underwriter commissions and
expenses relating to the issuance) of which exceeds seventeen million dollars
($17,000,000).
(iii) Each share of Preferred Stock shall automatically be
converted into shares of Common Stock at the then effective applicable
Conversion Price upon the vote or written consent of the holders of sixty-six
and two-thirds percent (66 2/3%) of the authorized shares of Preferred Stock
then outstanding, voting together as a single class.
(b) Mechanics of Conversion. Before any holder of Preferred Stock
-----------------------
shall be entitled to convert the same into shares of Common Stock, he shall
surrender the certificate or certificates thereof, duly endorsed, at the office
of the Corporation or of any transfer agent for such stock, and shall give
written notice to the Corporation at such office that he elects to convert the
same and shall state therein the name or names in which he wishes the
certificate or certificates for shares of Common Stock to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Preferred Stock, a certificate or certificates for the
number of shares of Common Stock to which he shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of surrender of the shares of Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date. If the
conversion is in connection with an underwritten offer of securities registered
pursuant to the Securities Act of 1933, as amended, the conversion may, at the
option of any holder tendering Preferred Stock for conversion, be conditioned
upon the closing with the underwriter of the sale of securities pursuant to such
offering, in which event the person(s) entitled to receive the Common Stock
issuable upon such conversion of Preferred Stock shall not be deemed to have
converted such Preferred Stock until immediately prior to the closing of such
sale of securities.
(c) Adjustments to Conversion Price for Diluting Issues.
---------------------------------------------------
(i) Special Definitions. For purposes of this Section 3(c),
-------------------
the following definitions shall apply:
-5-
<PAGE>
(1) "Option" shall mean rights, options or warrants to
--------
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
(2) "Convertible Securities" shall mean any evidences of
------------------------
indebtedness, shares or other securities directly or indirectly convertible into
or exchangeable for Common Stock.
(3) "Additional Shares of Common Stock" shall mean all
-----------------------------------
shares of Common Stock issued (or, pursuant to Section 3(c) (iii), deemed to be
issued) by the Corporation after the date hereof, other than:
(A) shares of Common Stock issued or issuable upon
conversion of shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock authorized herein;
(B) up to an aggregate of two million two hundred
thirty-five thousand (2,235,000) shares of Common Stock issued or issuable to
officers, directors, and employees of, or consultants or advisers to, the
Corporation pursuant to agreements, plans or arrangements approved by the Board
of Directors of the Corporation;
(C) shares of Common Stock issued or issuable as a
dividend or distribution on the Series A Preferred Stock, the Series B Preferred
Stock, Series C Preferred Stock or Series D Preferred Stock or any event for
which adjustment is made pursuant to Sections 3(e), 3(f) or 3(n) hereof;
(D) shares of Common Stock issued or issuable by way
of dividend or other distribution on shares excluded from the definition of
Additional Shares of Common Stock by the foregoing clauses (A) or (C) or this
clause (D) or on shares of Common Stock so excluded; or
(E) shares of Common Stock or other securities
issued or issuable to licensors of technology to the Corporation under any
agreement or arrangement approved by a majority of the disinterested Board of
Directors of the Corporation.
(ii) No Adjustment of Conversion Price. No adjustment to the
---------------------------------
Conversion Price of any series of Preferred Stock shall be made in respect of
the issuance of Additional Shares of Common Stock unless the consideration per
share for any Additional Share of Common Stock issued or deemed to be issued by
the Corporation is less than the Conversion Price of such series of Preferred
Stock in effect on the date of, and immediately prior to, the issue of such
Additional Share of Common Stock.
(iii) Issue of Securities Deemed Issue of Additional Shares of
--------------------------------------------------------
Common Stock. In the event the Corporation at any time or from time to time
- ------------
after the date hereof shall issue
-6-
<PAGE>
any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number) of Common Stock
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as of
the time of such issue or, in case such a record date shall have been fixed, as
of the close of business on such record date, provided that in any such case in
which Additional Shares of Common Stock are deemed to be issued:
(1) no further adjustment in the Conversion Price shall
be made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Corporation, or decreases in the number of shares
of Common Stock issuable, upon the exercise, conversion or exchange thereof, the
Conversion Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(3) upon the expiration of any such Options or any rights
of conversion or exchange under such Convertible Securities which shall not have
been exercised, the Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration, be recomputed
as if:
(A) in the case of Convertible Securities or Options
for Common Stock the only Additional Shares of Common Stock issued were the
shares of Common Stock, if any, actually issued upon the exercise of such
Options or conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
Corporation for the issue of all such Options, whether or not exercised, plus
the consideration actually received by the Corporation upon such exercise, or
for the issue of all such Convertible Securities which were actually converted
or exchanged, plus the additional consideration, if any, actually received by
the Corporation upon such conversion or exchange, and
(B) in the case of Options for Convertible
Securities only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the Corporation for the Additional Shares of common
Stock actually deemed to have been then issued was the consideration actually
received by the Corporation for the issue of all such Options, whether or not
exercised, plus the consideration
-7-
<PAGE>
actually received by the Corporation upon the issue of the Convertible
Securities with respect to which such Options were actually exercised;
(4) no readjustment pursuant to clause (2) or (3) above
shall have the effect of increasing the Conversion Price for any series of
Preferred Stock to an amount which exceeds the lower of (i) such Conversion
Price on the original adjustment date, or (ii) such Conversion Price that would
have resulted from any issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date; and
(5) in the case of any Options which expire by their
terms not more than thirty (30) days after the date of issue thereof, no
adjustment of the Conversion Price shall be made until the expiration or
exercise of all such Options.
(iv) Adjustment of Conversion Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Common Stock. If the Corporation shall issue Additional Shares of
- ----------------------
Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to Section 3(c) (iii)) without consideration or for a consideration per
share less than the Conversion Price for any series of Preferred Stock in effect
on the date of and immediately prior to such issuance (excluding stock
dividends, distributions, subdivisions, split-ups, or combinations which are
covered by Sections 3(e) and 3(f)), then the Conversion Price for such series of
Preferred Stock shall be reduced, concurrently with such issuance, to a price
(calculated to the nearest tenth of a cent) equal to the quotient obtained by
dividing the total computed under clause (x) below by the total computed under
clause (y) below as follows:
(x) an amount equal to the sum of:
(1) the total number of shares of Common Stock issuable
upon conversion of all of the then outstanding shares of Preferred Stock
(at the applicable Conver sion Prices for the Preferred Stock in effect
immediately prior to such issuance) multiplied by the applicable Conversion
Price for such series of Preferred Stock in effect immediately prior to
such issuance, plus
(2) the aggregate consideration, if any, received by the
Corporation for such issuance;
(y) an amount equal to the sum of
(1) the total number of shares of Common Stock issuable
upon conversion of all of the then outstanding shares of Preferred Stock
(at the applicable Conver sion Prices for the Preferred Stock in effect
immediately prior to such issuance), plus
(2) the Additional Shares of Common Stock issued in such
issuance.
-8-
<PAGE>
Notwithstanding the foregoing, the Conversion Price of a series of Preferred
Stock shall not be so reduced at such time if the amount of such reduction would
be an amount less than one-tenth of a cent ($0.001), but any such amount shall
be carried forward and reduction with respect thereto made at the time of and
together with any subsequent reduction which, together with such amount and any
other amount or amounts so carried forward, shall aggregate one-tenth of a cent
($0.001) or more.
(v) Determination of Consideration. For purposes of this
------------------------------
Section 3(c), the consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property. Such consideration shall:
-----------------
(A) insofar as it consists of cash, be computed at
the aggregate amount of cash received by the Corporation excluding amounts paid
or payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors irrespective of any
accounting treatment; and
(C) in the event Additional Shares of Common Stock
are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The consideration
----------------------------------
per share received by the Corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to Section 3(c)(iii), relating to Options
and Convertible Securities, shall be deter mined by dividing:
(A) the total amount, if any, received or receivable
by the Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Corporation upon the exercise of such Options or the conversion or exchange
of such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by
(B) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.
-9-
<PAGE>
d) Adjustment to Conversion Price in the Event of a Forced or
----------------------------------------------------------
Automatic Conversion. In the event of (i) a forced conversion of the Series C
- --------------------
Preferred Stock pursuant to Section 3(a)(iii) in connection with an initial
public offering at a price lower than $8.50 per share of Common Stock or (ii) an
automatic conversion of the Series C Preferred Stock pursuant to Section
3(a)(ii) at a price lower than $8.50 per share of Common Stock, then the
Conversion Price for the Series C Preferred Stock shall be reduced to $5.0156.
In the event of a forced conversion of the Series D Preferred Stock pursuant to
Section 3(a)(iii) in connection with an initial public offering at a price lower
than $8.00 per share of Common Stock or (ii) an automatic conversion of the
Series D Preferred Stock pursuant to Section 3(a)(ii) at a price lower than
$8.00 per share of Common Stock, then the Conversion Price for the Series D
Preferred stock shall be reduced to the amount of such initial public offering
price. The above numbers are subject to adjustment for subdivisions and
combinations of shares of Common Stock and dividends on Common Stock payable in
shares of Common Stock.
e) Adjustments to Conversion Price for Other Events. The Conversion
------------------------------------------------
Price shall be subject to adjustment from time to time as follows:
(vi) If the number of shares of Common Stock outstanding is
increased by a stock dividend or distribution payable in shares of Common Stock
or by a subdivision or split-up of shares of Common Stock, then, as of the
record date fixed for the determination of holders of Common Stock entitled to
receive such stock dividend, distribution, subdivision or split-up (or the date
of such dividend, distribution, split-up or subdivision if no record date is
fixed), the Conversion Price of each series of Preferred Stock shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of Preferred Stock shall be increased in proportion to
such increase of outstanding shares of Common Stock.
(vii) If the number of shares of Common Stock outstanding is
decreased by a combination of the outstanding shares of Common Stock, then,
following the record date of such combination, the Conversion Price of each
series of Preferred Stock shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of each share of Preferred Stock
shall be decreased in proportion to such decrease in outstanding shares of
Common Stock.
(f) Other Distributions. In the event the Corporation shall declare a
-------------------
distribution payable in securities of other persons, evidence of indebtedness
issued by the Corporation or other persons, or assets, options or rights not
referred to in Section 3(c) hereof, then, in each such case, provision shall be
made so that the holders of the Preferred Stock shall be entitled to receive,
upon the conversion thereof, the consideration per share which they would have
received had their Preferred Stock been converted into Common Stock on the date
of such event.
(g) No Impairment. The Corporation will not, through any
-------------
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Corporation, but will
at all times in good faith assist in the carrying out of all the provisions of
-10-
<PAGE>
this Section 3 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Preferred Stock against impairment.
(h) Certificates as to Adjustments. Upon the occurrence of each
------------------------------
adjustment or readjustment of the Conversion Price of any series of Preferred
Stock pursuant to this Section 3, the Corporation at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to each holder of Preferred Stock the Conversion Price of which has been
adjusted a certificate signed by the chief executive officer or the chief
financial officer of the Company setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based. The Corporation shall, upon the written request at any time of any
holder of Preferred Stock, furnish or cause to be furnished to such holder a
like certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of the Preferred Stock.
(i) Notices of Record Date. In the event of any taking by the
----------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any security or
right convertible into or entitling the holder thereof to receive Common Stock
or other securities of the Company, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Corporation shall mail to each
holder of Preferred Stock at least twenty (20) days prior to the date specified
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution, security or right, and the
amount and character of such dividend, distribution, security or right.
(j) Issue Taxes. The Corporation shall pay any and all issue and
-----------
other taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of shares of Preferred Stock pursuant hereto;
provided, however, that the Corporation shall not be obligated to pay any
transfer taxes resulting from any transfer requested by any holder in connection
with any such conversion.
(k) Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Preferred Stock, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose,
including, without limitation, engaging in best efforts to obtain the requisite
shareholder approval of any necessary amendment to this Certificate.
-11-
<PAGE>
(l) Fractional Shares. No fractional share shall be issued upon the
-----------------
conversion of any share or shares of Preferred Stock. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one share of
Preferred Stock by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion would
result in the issuance of a fraction of a share of Common Stock, the Corporation
shall, in lieu of issuing any fractional share, pay the holder otherwise
entitled to such fraction a sum in cash equal to the fair market value of such
fraction on the date of conversion (as determined in good faith by the Board of
Directors of the Corporation).
(m) Notices. Any notice required by the provisions of this Section 3
-------
to be given to the holders of shares of Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at his address appearing on the books of the Corporation.
(n) Adjustments. In case of any reorganization or any
-----------
reclassification of the capital stock of the Corporation, any consolidation or
merger of the Corporation with or into another corporation or corporations, or
the conveyance of all or substantially all of the assets of the Corporation to
another corporation (other than a subdivision, combination or merger or sale of
assets transaction provided for elsewhere in Section 2 or in this Section 3),
each share of Preferred Stock shall thereafter be convertible into the number of
shares of stock or other securities or property (including cash) to which a
holder of the number of shares of Common Stock deliverable upon conversion of
such share of Preferred Stock would have been entitled upon the record date of
(or date of, if no record date is fixed) such reorganization, reclassification,
consolidation, merger or conveyance; and, in any case, appropriate adjustment
(as determined by the Board of Directors) shall be made in the application of
the provisions herein set forth with respect to the rights and interests
thereafter of the holders of such Preferred Stock, to the end that the
provisions set forth herein shall thereafter be applicable, as nearly as
equivalent as is practicable, in relation to any shares of stock or the
securities or property (including cash) thereafter deliverable upon the
conversion of the shares of Preferred Stock.
4. Voting Rights. Except as otherwise expressly provided herein or as
-------------
required by law, the holder of each share of the Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such share of Preferred Stock could be converted and shall have
voting rights and powers equal to the voting rights and powers of the Common
Stock (except as otherwise expressly provided herein or as required by law,
voting together with the Common Stock as a single class) and shall be entitled
to notice of any shareholders' meeting in accordance with the Bylaws of the
Corporation. Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula (after aggregating all
shares into which shares of Preferred Stock held by each holder could be
converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
-12-
<PAGE>
5. Covenants. So long as at least five hundred thousand (500,000) shares
---------
of the Preferred Stock shall be outstanding, the Corporation shall not, without
first obtaining the approval (by vote or written consent, as provided by law) of
the holders of at least a majority in interest of the then outstanding shares of
Preferred Stock, voting together as a single class and on an as if converted
basis:
(a) effect any sale of all or substantially all of the assets of the
Corporation or any merger or consolidation of the Corporation with another
corporation;
(b) take any action (other than of a ministerial nature, including
the registration of a transfer on the books and records of the Corporation) to
initiate a transfer of 50% or more in interest (determined on an as converted
basis) of the capital stock of the Corporation in a single transaction or a
series of related transactions;
(c) amend or repeal any provision of, or add any provision to, the
Corporation's Certificate of Incorporation if such action would increase the
authorized number of shares of Preferred Stock, or alter or change the rights,
preferences, privileges or limitations provided for the benefit of the Preferred
Stock;
(d) create any series or class of stock having any preference or
priority as to dividends, redemption, voting, liquidation, conversion or assets
superior to or on a parity with any such preference or priority of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and
Series D Preferred Stock; or
(e) amend or repeal any provision of, or add any provision to, the
Corporation's Bylaws if such action would increase the authorized number of
directors of the Company to more than seven (7) directors.
ARTICLE VI.
The following is applicable to the Common Stock:
1. Dividend Rights. Subject to the prior rights of holders of all
---------------
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or winding up
------------------
of the Corporation, the assets of the Corporation shall be distributed as
provided in Section 2 of Article V hereof.
3. Redemption. The Common Stock is not redeemable.
----------
-13-
<PAGE>
4. Voting Rights.
-------------
(a) General. The holder of each share of Common Stock shall have the
-------
right to one vote, and shall be entitled to notice of any shareholders' meeting
in accordance with the Bylaws of the Corporation, and shall be entitled to vote
upon such matters and in such manner as may be provided by law.
ARTICLE VII.
The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under the General
Corporation Law of Delaware. Any repeal or modification of this Article shall
only be prospective and shall not affect the rights under this Article in effect
at the time of the alleged occurrence of any action or omission to act giving
rise to liability.
ARTICLE VIII.
Indemnification. The Corporation may indemnify to the fullest extent
---------------
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that such person or his or her testator or intestate is or
was a director, officer or employee of the Corporation, or any predecessor of
the Corporation, or serves or served at any other enterprise as a director,
officer or employee at the request of the Corporation or any predecessor to the
Corporation.
ARTICLE IX.
Holders of stock of any class or series of this corporation shall not be
entitled to cumulate their votes for the election of directors or any other
matter submitted to a vote of the stockholders, unless such cumulative voting is
required pursuant to the General Corporation Law of Delaware, in which event
each such holder shall be entitled to as many votes as shall equal the number of
votes which (except for this provision as to cumulative voting) such holder
would be entitled to cast for the election of directors with respect to his
shares of stock multiplied by the number of directors to be elected by him, and
the holder may cast all of such votes for a single director or may distribute
them among the number of directors to be voted for, or for any two or more of
them as such holder may see fit, so long as the name of the candidate for
director shall have been placed in nomination prior to the voting and the
stockholder, or any other holder of the same class or series of stock, has given
notice at the meeting prior to the voting of the intention to cumulate votes.
ARTICLE X.
1. Number of Directors. The board of directors shall consist of not less
-------------------
then five (5) and not more than seven (7) members.
-14-
<PAGE>
2. Election of Directors. Elections of directors need not be by written
---------------------
ballot unless a stockholder demands election by written ballot at any
stockholder meeting and before voting begins, or unless the Bylaws of the
corporation shall so provide.
ARTICLE XI.
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the corporation.
ARTICLE XII.
Immediately upon the closing of a public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
any of the corporation's securities (as that term is defined under the
Securities Act of 1933, as then in effect), no action shall be taken by the
stockholders of the corporation except at an annual or special meeting of the
stockholders called in accordance with the Bylaws of the corporation and no
action shall be taken by the stockholders by written consent.
ARTICLE XIII.
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE XIV.
The name and mailing address of the incorporator are:
David J. Saul, Esq.
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
* * *
-15-
<PAGE>
The undersigned incorporator hereby acknowledges that the above Certificate of
Incorporation of Symphonix Devices, Inc. is his act and deed and that the facts
stated therein are true.
/s/ David J. Saul
----------------------------------------
David J. Saul
Dated: December 15, 1997
-16-
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
SYMPHONIX DEVICES, INC.
The following Restated Certificate of Incorporation of Symphonix Devices,
Inc. (i) restates the provisions of the Certificate of Incorporation of
Symphonix Devices, Inc. filed with the Secretary of State of the State of
Delaware on January __, 1998, and (ii) supersedes the original Certificate of
Incorporation and all prior restatements thereof and amendments thereto in their
entirety.
ARTICLE I
The name of the corporation is Symphonix Devices, Inc. (the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
The Corporation is authorized to issue two classes of shares of stock to be
designated, respectively, Common Stock, $0.001 par value, and Preferred Stock,
$0.001 par value. The total number of shares that the Corporation is authorized
to issue is 55,000,000 shares. The number of shares of Common Stock authorized
is 50,000,000. The number of shares of Preferred Stock authorized is 5,000,000.
The Preferred Stock may be issued from time to time in one or more series
pursuant to a resolution or resolutions providing for such issue duly adopted by
the Board of Directors (authority to do so being hereby expressly vested in the
board). The Board of Directors is further authorized to
<PAGE>
determine or alter the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued series of Preferred Stock and to fix the
number of shares of any series of Preferred Stock and the designation of any
such series of Preferred Stock. The Board of Directors, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, may increase or
decrease (but not below the number of shares in any such series then
outstanding) the number of shares of any series subsequent to the issue of
shares of that series.
The authority of the Board of Directors with respect to each such class or
series shall include, without limitation of the foregoing, the right to
determine and fix:
(a) the distinctive designation of such class or series and the number
of shares to constitute such class or series;
(b) the rate at which dividends on the shares of such class or series
shall be declared and paid, or set aside for payment, whether dividends at the
rate so determined shall be cumulative or accruing, and whether the shares of
such class or series shall be entitled to any participating or other dividends
in addition to dividends at the rate so determined, and if so, on what terms;
(c) the right or obligation, if any, of the corporation to redeem
shares of the particular class or series of Preferred Stock and, if redeemable,
the price, terms and manner of such redemption;
(d) the special and relative rights and preferences, if any, and the
amount or amounts per share, which the shares of such class or series of
Preferred Stock shall be entitled to receive upon any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation;
(e) the terms and conditions, if any, upon which shares of such class
or series shall be convertible into, or exchangeable for, shares of capital
stock of any other class or series, including the price or prices or the rate or
rates of conversion or exchange and the terms of adjustment, if any;
(f) the obligation, if any, of the corporation to retire, redeem or
purchase shares of such class or series pursuant to a sinking fund or fund of a
similar nature or otherwise, and the terms and conditions of such obligation;
(g) voting rights, if any, on the issuance of additional shares of
such class or series or any shares of any other class or series of Preferred
Stock;
(h) limitations, if any, on the issuance of additional shares of such
class or series or any shares of any other class or series of Preferred Stock;
and
(i) such other preferences, powers, qualifications, special or
relative rights and privileges thereof as the Board of Directors of the
corporation, acting in accordance with this Restated
-2-
<PAGE>
Certificate of Incorporation, may deem advisable and are not inconsistent with
law and the provisions of this Restated Certificate of Incorporation.
ARTICLE V
The Corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon the stockholders
herein are granted subject to this right.
ARTICLE VI
The Corporation is to have perpetual existence.
ARTICLE VII
1. Limitation of Liability. To the fullest extent permitted by the
-----------------------
General Corporation Law of the State of Delaware as the same exists or as may
hereafter be amended, a director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director.
2. Indemnification. The Corporation may indemnify to the fullest extent
---------------
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that such person or his or her testator or intestate is or
was a director, officer or employee of the Corporation, or any predecessor of
the Corporation, or serves or served at any other enterprise as a director,
officer or employee at the request of the Corporation or any predecessor to the
Corporation.
3. Amendments. Neither any amendment nor repeal of this Article VII, nor
----------
the adoption of any provision of the Corporation's Certificate of Incorporation
inconsistent with this Article VII, shall eliminate or reduce the effect of this
Article VII, in respect of any matter occurring, or any action or proceeding
accruing or arising or that, but for this Article VII, would accrue or arise,
prior to such amendment, repeal, or adoption of an inconsistent provision.
ARTICLE VII
In the event any shares of Preferred Stock shall be redeemed or converted
pursuant to the terms hereof, the shares so converted or redeemed shall not
revert to the status of authorized but unissued shares, but instead shall be
canceled and shall not be re-issuable by the Corporation.
-3-
<PAGE>
ARTICLE IX
Holders of stock of any class or series of this corporation shall not be
entitled to cumulate their votes for the election of directors or any other
matter submitted to a vote of the stockholders, unless such cumulative voting is
required pursuant to Sections 2115 and/or 301.5 of the California Corporations
Code, in which event each such holder shall be entitled to as many votes as
shall equal the number of votes which (except for this provision as to
cumulative voting) such holder would be entitled to cast for the election of
directors with respect to his shares of stock multiplied by the number of
directors to be elected by him, and the holder may cast all of such votes for a
single director or may distribute them among the number of directors to be voted
for, or for any two or more of them as such holder may see fit, so long as the
name of the candidate for director shall have been placed in nomination prior to
the voting and the stockholder, or any other holder of the same class or series
of stock, has given notice at the meeting prior to the voting of the intention
to cumulate votes.
ARTICLE X
1. Number of Directors. The number of directors which constitutes the
-------------------
whole Board of Directors of the corporation shall be designated in the Bylaws of
the corporation. The directors shall be divided into three classes with the
term of office of the first class (Class I) to expire at the annual meeting of
stockholders held in 1999; the term of office of the second class (Class II) to
expire at the annual meeting of stockholders held in 2000; the term of office of
the third class (Class III) to expire at the annual meeting of stockholders held
in 2001; and thereafter for each such term to expire at each third succeeding
annual meeting of stockholders after such election.
2. Election of Directors. Elections of directors need not be by written
---------------------
ballot unless the Bylaws of the corporation shall so provide.
ARTICLE XI
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the corporation.
ARTICLE XII
No action shall be taken by the stockholders of the corporation except at
an annual or special meeting of the stockholders called in accordance with the
Bylaws and no action shall be taken by the stockholders by written consent. The
affirmative vote of sixty-six and two-thirds percent (66 2/3%) of the then
outstanding voting securities of the corporation, voting together as a single
class, shall be required for the amendment, repeal or modification of the
provisions of Article IX, Article X or Article
-4-
<PAGE>
XII of this Restated Certificate of Incorporation or Sections 2.4, 2.5, 2.10 or
3.2 of the Corporation's Bylaws.
ARTICLE XII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
This Restated Certificate of Incorporation has been duly adopted by the
Board of Directors of the Corporation in accordance with the provisions of
Sections 242 and 245 of the General Corporation Law of the State of Delaware, as
amended.
The Restated Certificate of Incorporation only restates and integrates and
does not further amend the provisions of the Corporation's Certificate of
Incorporation, as amended and corrected, and there is no discrepancy between
those provisions and the provisions of this Restated Certificate of
Incorporation.
IN WITNESS WHEREOF, Symphonix Devices, Inc. has caused this certificate to
be signed by Alfred F. Merriweather, its Vice President of Finance and Chief
Financial Officer, this ____day of 1998.
------------
----------------------------------------
Alfred F. Merriweather, Vice President
of Finance and Chief Financial Officer
-5-
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
SYMPHONIX DEVICES, INC.
(A DELAWARE CORPORATION)
<PAGE>
BYLAWS OF
SYMPHONIX DEVICES, INC.
(a Delaware corporation)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I
CORPORATE OFFICES...................................................... -1-
1.1 REGISTERED OFFICE.......................................... -1-
1.2 OTHER OFFICES.............................................. -1-
ARTICLE II
MEETINGS OF STOCKHOLDERS............................................... -1-
2.1 PLACE OF MEETINGS.......................................... -1-
2.2 ANNUAL MEETING............................................. -1-
2.3 SPECIAL MEETING............................................ -1-
2.4 NOTICE OF STOCKHOLDERS' MEETINGS........................... -2-
2.5 ADVANCE NOTICE OF STOCKHOLDER
NOMINEES AND STOCKHOLDER BUSINESS.......................... -2-
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE............... -3-
2.7 QUORUM..................................................... -4-
2.8 ADJOURNED MEETING; NOTICE.................................. -4-
2.9 VOTING..................................................... -4-
2.10 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING................. -5-
2.11 PROXIES.................................................... -6-
2.12 ORGANIZATION............................................... -6-
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE...................... -6-
2.14 WAIVER OF NOTICE........................................... -6-
ARTICLE III
DIRECTORS.............................................................. -7-
3.1 POWERS..................................................... -7-
3.2 NUMBER OF DIRECTORS........................................ -7-
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS................... -7-
3.4 RESIGNATION AND VACANCIES.................................. -8-
3.5 REMOVAL OF DIRECTORS....................................... -9-
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
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<S> <C>
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE................ -9-
3.7 REGULAR MEETINGS........................................ -9-
3.8 SPECIAL MEETINGS; NOTICE................................ -9-
3.9 QUORUM.................................................. -10-
3.10 WAIVER OF NOTICE........................................ -10-
3.11 ADJOURNMENT............................................. -10-
3.12 NOTICE OF ADJOURNMENT................................... -10-
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING....... -10-
3.14 FEES AND COMPENSATION OF DIRECTORS...................... -11-
3.15 APPROVAL OF LOANS TO OFFICERS........................... -11-
ARTICLE IV
COMMITTEES.......................................................... -11-
4.1 COMMITTEES OF DIRECTORS................................. -11-
4.2 MEETINGS AND ACTION OF COMMITTEES....................... -12-
4.3 COMMITTEE MINUTES....................................... -12-
ARTICLE V
OFFICERS............................................................ -12-
5.1 OFFICERS................................................ -12-
5.2 ELECTION OF OFFICERS.................................... -13-
5.3 SUBORDINATE OFFICERS.................................... -13-
5.4 REMOVAL AND RESIGNATION OF OFFICERS..................... -13-
5.5 VACANCIES IN OFFICES.................................... -14-
5.6 CHAIRMAN OF THE BOARD................................... -14-
5.7 PRESIDENT............................................... -14-
5.8 VICE PRESIDENTS......................................... -14-
5.9 SECRETARY............................................... -14-
5.10 CHIEF FINANCIAL OFFICER................................. -15-
5.11 ASSISTANT SECRETARY..................................... -15-
5.12 ADMINISTRATIVE OFFICERS................................. -15-
5.13 AUTHORITY AND DUTIES OF OFFICERS........................ -16-
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEESAND OTHER AGENTS..... -16-
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS................... -16-
6.2 INDEMNIFICATION OF OTHERS................................... -17-
6.3 INSURANCE................................................... -17-
ARTICLE VII
RECORDS AND REPORTS................................................... -18-
7.1 MAINTENANCE AND INSPECTION OF RECORDS....................... -18-
7.2 INSPECTION BY DIRECTORS..................................... -18-
7.3 ANNUAL STATEMENT TO STOCKHOLDERS............................ -18-
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.............. -18-
7.5 CERTIFICATION AND INSPECTION OF BYLAWS...................... -19-
ARTICLE VIII
GENERAL MATTERS....................................................... -19-
8.1 RECORD DATE FOR PURPOSES OTHER
THAN NOTICE AND VOTING...................................... -19-
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS................... -19-
8.3 CORPORATE CONTRACTS AND
INSTRUMENTS: HOW EXECUTED.................................. -19-
8.4 STOCK CERTIFICATES; TRANSFER;
PARTLY PAID SHARES.......................................... -20-
8.5 SPECIAL DESIGNATION ON CERTIFICATES......................... -20-
8.6 LOST CERTIFICATES........................................... -21-
8.7 TRANSFER AGENTS AND REGISTRARS.............................. -21-
8.8 CONSTRUCTION; DEFINITIONS................................... -21-
ARTICLE IX
AMENDMENTS............................................................ -21-
</TABLE>
-iii-
<PAGE>
BYLAWS
------
OF
--
SYMPHONIX DEVICES, INC.
-----------------------
(a Delaware corporation)
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be fixed in the certificate
of incorporation of the corporation.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the second
Tuesday of May in each year at 10:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting, directors shall be elected, and
any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
---------------
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or,
until the closing of the first sale of the corporation's common stock pursuant
to a firmly underwritten registered public offering of the company's securities
(the"IPO"), by one or more stockholders holding shares in the aggregate entitled
to cast not less than ten percent (10%) of the votes at that meeting. No other
person or persons are permitted to call a special meeting.
If a special meeting is called by any person or persons other than the
board of directors, then the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered mail or by telegraphic
or other facsimile transmission to the chairman of the board, the president, or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the stockholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.6 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings of stockholders shall be sent or otherwise given in
accordance with Section 2.6 of these bylaws not less than ten (10) nor more than
sixty (60) days before the date of the meeting. The notice shall specify the
place, date and hour of the meeting and (i) in the case of a special meeting,
the purpose or purposes for which the meeting is called (no business other than
that specified in the notice may be transacted) or (ii) in the case of the
annual meeting, those matters which the board of directors, at the time of
giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
---------------------------------------------------------------
Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,
(a) nominations for the election of directors, and
(b) business proposed to be brought before any stockholder meeting
<PAGE>
may be made by the board of directors or proxy committee appointed by the board
of directors or by any stockholder entitled to vote in the election of directors
generally if such nomination or business proposed is otherwise proper business
before such meeting. However, any such stockholder may nominate one or more
persons for election as directors at a meeting or propose business to be brought
before a meeting, or both, only if such stockholder has given timely notice in
proper written form of their intent to make such nomination or nominations or to
propose such business. To be timely, such stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than one hundred twenty (120) calendar days in advance of
the date specified in the corporation's proxy statement released to stockholders
in connection with the previous year's annual meeting of stockholders; provided,
however, that in the event that no annual meeting was held in the previous year
or the date of the annual meeting has been changed by more than thirty (30) days
from the date contemplated at the time of the previous year's proxy statement,
notice by the stockholder to be timely must be so received a reasonable time
before the solicitation is made. To be in proper form, a stockholder's notice
to the secretary shall set forth:
(i) the name and address of the stockholder who intends to make the
nominations or propose the business and, as the case may be, of the person
or persons to be nominated or of the business to be proposed;
(ii) a representation that the stockholder is a holder of record of stock
of the corporation entitled to vote at such meeting and, if applicable,
intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice;
(iii) if applicable, a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder;
(iv) such other information regarding each nominee or each matter of
business to be proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to be
proposed by the board of directors; and
(v) if applicable, the consent of each nominee to serve as director of the
corporation if so elected.
The chairman of the meeting shall refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.
<PAGE>
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. Notice shall be deemed to have been given
at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
------
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting in accordance
with Section 2.8 of these bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the certificate of incorporation or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.
If a quorum be initially present, the stockholders may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.
2.8 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time and place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 VOTING
------
-4-
<PAGE>
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.13 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation or
these bylaws, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder and stockholders shall not be entitled to
cumulate their votes in the election of directors or with respect to any matter
submitted to a vote of the stockholders.
Notwithstanding the foregoing, if the stockholders of the corporation are
entitled, pursuant to Sections 2115 and 301.5 of the California Corporations
Code, to cumulate their votes in the election of directors, each such
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes that such stockholder normally
is entitled to cast) only if the candidates' names have been properly placed in
nomination (in accordance with these bylaws) prior to commencement of the
voting, and the stockholder requesting cumulative voting has given notice prior
to commencement of the voting of the stockholder's intention to cumulate votes.
If cumulative voting is properly requested, each holder of stock, or of any
class or classes or of a series or series thereof, who elects to cumulate votes
shall be entitled to as many votes as equals the number of votes that (absent
this provision as to cumulative voting) he or she would be entitled to cast for
the election of directors with respect to his or her shares of stock multiplied
by the number of directors to be elected by him, and he or she may cast all of
such votes for a single director or may distribute them among the number to be
voted for, or for any two or more of them, as he or she may see fit.
2.10 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
------------------------------------------
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.
If the board of directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
-5-
<PAGE>
The record date for any other purpose shall be as provided in Section 8.1
of these bylaws.
2.11 PROXIES
-------
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.
2.12 ORGANIZATION
------------
The president, or in the absence of the president, the chairman of the
board, or, in the absence of the president and the chairman of the board, one of
the corporation's vice presidents, shall call the meeting of the stockholders to
order, and shall act as chairman of the meeting. In the absence of the
president, the chairman of the board, and all of the vice presidents, the
stockholders shall appoint a chairman for such meeting. The chairman of any
meeting of stockholders shall determine the order of business and the procedures
at the meeting, including such matters as the regulation of the manner of voting
and the conduct of business. The secretary of the corporation shall act as
secretary of all meetings of the stockholders, but in the absence of the
secretary at any meeting of the stockholders, the chairman of the meeting may
appoint any person to act as secretary of the meeting.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
2.14 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except
-6-
<PAGE>
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders need be
specified in any written waiver of notice unless so required by the certificate
of incorporation or these bylaws.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and to
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The board of directors shall not be less than five (5) nor more than seven
(7) members. The exact number of directors shall be six (6) until changed,
within the limits specified above by a bylaw amending this Section 3.2 duly
adopted by the board of directors or the stockholders. The indefinite number of
directors may be changed, or a definite number may be fixed without provision
for an indefinite number, by an amendment to this bylaw, duly adopted by the
board of directors or by the stockholders, or by a duly adopted amendment to the
certificate of incorporation. No reduction of the authorized number of
directors shall have the effect of removing any director before that director's
term of office expires.
Upon the IPO (as defined in Section 2.3), the directors shall be divided
into three classes, with the term of office of the first class, which class
shall initially consist of two directors, to expire at the first annual meeting
of stockholders held after the IPO; the term of office of the second class,
which class shall initially consist of two directors, to expire at the second
annual meeting of stockholders held after the IPO; the term of office of the
third class, which class shall initially consist of two directors, to expire at
the third annual meeting of stockholders held after the IPO; and thereafter for
each such term to expire at each third succeeding annual meeting of stockholders
held after such election.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy, shall hold office until the expiration of the term for which elected
and until a successor has been elected and qualified.
-7-
<PAGE>
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote of
the stockholders or by court order may be filled only by the affirmative vote of
a majority of the shares represented and voting at a duly held meeting at which
a quorum is present (which shares voting affirmatively also constitute a
majority of the required quorum). Each director so elected shall hold office
until the next annual meeting of the stockholders and until a successor has been
elected and qualified.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
-8-
<PAGE>
3.5 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors; provided, however, that, if and so
long as stockholders of the corporation are entitled to cumulative voting, if
less than the entire board is to be removed, no director may be removed without
cause if the votes cast against his removal would be sufficient to elect him if
then cumulatively voted at an election of the entire board of directors.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.
Any meeting of the board, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another; and all such participating
directors shall be deemed to be present in person at the meeting.
3.7 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time as shall from time to time be determined by the board of directors.
If any regular meeting day shall fall on a legal holiday, then the meeting shall
be held at the same time and place on the next succeeding full business day.
3.8 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telecopy or telegram, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone, telecopy or telegram, it shall be
delivered personally or by telephone or to the telegraph company at least forty-
eight (48) hours before the time of the holding of the meeting. Any oral notice
given personally or by telephone may be communicated either to the director or
to a person at the office of the director who the person giving the notice has
reason to believe will promptly communicate it to the director. The notice need
not specify the purpose
-9-
<PAGE>
or the place of the meeting, if the meeting is to be held at the principal
executive office of the corporation.
3.9 QUORUM
------
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.12
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
certificate of incorporation and applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the quorum for that meeting.
3.10 WAIVER OF NOTICE
----------------
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice, whether before or after the meeting, or (ii) who attends the
meeting other than for the express purposed of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. All such waivers shall be filed with the corporate records
or made part of the minutes of the meeting. A waiver of notice need not specify
the purpose of any regular or special meeting of the board of directors.
3.11 ADJOURNMENT
-----------
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting of the board to another time and place.
3.12 NOTICE OF ADJOURNMENT
---------------------
Notice of the time and place of holding an adjourned meeting of the board
need not be given unless the meeting is adjourned for more than twenty-four (24)
hours. If the meeting is adjourned for more than twenty-four (24) hours, then
notice of the time and place of the adjourned meeting shall be given before the
adjourned meeting takes place, in the manner specified in Section 3.8 of these
bylaws, to the directors who were not present at the time of the adjournment.
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the
-10-
<PAGE>
board of directors. Such written consent and any counterparts thereof shall be
filed with the minutes of the proceedings of the board of directors.
3.14 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.14 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.15 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall have and
may exercise all the powers and authority of the board, but no such committee
shall have the power or authority to (i) amend the certificate of incorporation
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the board
of directors as provided in Section 151(a) of the General Corporation Law of
Delaware, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or
-11-
<PAGE>
252 of the General Corporation Law of Delaware, (iii) recommend to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, (iv) recommend to the stockholders a
dissolution of the corporation or a revocation of a dissolution or (v) amend the
bylaws of the corporation; and, unless the board resolution establishing the
committee, the bylaws or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the following provisions of Article III of these bylaws:
Section 3.6 (place of meetings; meetings by telephone), Section 3.7 (regular
meetings), Section 3.8 (special meetings; notice), Section 3.9 (quorum), Section
3.10 (waiver of notice), Section 3.11 (adjournment), Section 3.12 (notice of
adjournment) and Section 3.13 (board action by written consent without meeting),
with such changes in the context of those bylaws as are necessary to substitute
the committee and its members for the board of directors and its members;
provided, however, that the time of regular meetings of committees may be
determined either by resolution of the board of directors or by resolution of
the committee, that special meetings of committees may also be called by
resolution of the board of directors, and that notice of special meetings of
committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may adopt
rules for the government of any committee not inconsistent with the provisions
of these bylaws.
4.3 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The Corporate Officers of the corporation shall be a president, a secretary
and a chief financial officer. The corporation may also have, at the discretion
of the board of directors, a chairman of the board, one or more vice presidents
(however denominated), one or more assistant secretaries, a treasurer and one or
more assistant treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 5.3 of these bylaws. Any number of
offices may be held by the same person.
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<PAGE>
In addition to the Corporate Officers of the Company described above, there
may also be such Administrative Officers of the corporation as may be designated
and appointed from time to time by the president of the corporation in
accordance with the provisions of Section 5.12 of these bylaws.
5.2 ELECTION OF OFFICERS
--------------------
The Corporate Officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board of directors, subject to the rights,
if any, of an officer under any contract of employment, and shall hold their
respective offices for such terms as the board of directors may from time to
time determine.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or may empower the president to
appoint, such other Corporate Officers as the business of the corporation may
require, each of whom shall hold office for such period, have such power and
authority, and perform such duties as are provided in these bylaws or as the
board of directors may from time to time determine.
The president may from time to time designate and appoint Administrative
Officers of the corporation in accordance with the provisions of Section 5.12 of
these bylaws.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of a Corporate Officer under any contract of
employment, any Corporate Officer may be removed, either with or without cause,
by the board of directors at any regular or special meeting of the board or,
except in case of a Corporate Officer chosen by the board of directors, by any
Corporate Officer upon whom such power of removal may be conferred by the board
of directors.
Any Corporate Officer may resign at any time by giving written notice to
the corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the Corporate
Officer is a party.
Any Administrative Officer designated and appointed by the president may be
removed, either with or without cause, at any time by the president. Any
Administrative Officer may resign at any time by giving written notice to the
president or to the secretary of the corporation.
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<PAGE>
5.5 VACANCIES IN OFFICES
--------------------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise such other
powers and perform such other duties as may from time to time be assigned to him
by the board of directors or as may be prescribed by these bylaws. If there is
no president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction and control of the business and the officers of the corporation. He
or she shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He or she shall have the general powers and duties of management
usually vested in the office of president of a corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or these bylaws.
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the president, and if there is no chairman
of the board, the vice presidents, if any, in order of their rank as fixed by
the board of directors or, if not ranked, a vice president designated by the
board of directors, shall perform all the duties of the president and when so
acting shall have all the powers of, and be subject to all the restrictions
upon, the president. The vice presidents shall have such other powers and
perform such other duties as from time to time may be prescribed for them
respectively by the board of directors, these bylaws, the president or the
chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of the board of directors,
committees of directors and stockholders. The minutes shall show the time and
place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings and the proceedings thereof.
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<PAGE>
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable times
be open to inspection by any director for a purpose reasonably related to his
position as a director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He or she shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these bylaws.
5.11 ASSISTANT SECRETARY
-------------------
The assistant secretary, if any, or, if there is more than one, the
assistant secretaries in the order determined by the board of directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his or her inability or refusal
to act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
5.12 ADMINISTRATIVE OFFICERS
-----------------------
In addition to the Corporate Officers of the corporation as provided in
Section 5.1 of these bylaws and such subordinate Corporate Officers as may be
appointed in accordance with Section 5.3 of these bylaws, there may also be such
Administrative Officers of the corporation as may be designated and appointed
from time to time by the president of the corporation. Administrative Officers
shall perform such duties and have such powers as from time to time may be
determined by the president or the board of directors in order to assist the
Corporate Officers in the furtherance of their duties. In the performance of
such duties and the exercise of such powers, however, such Administrative
Officers shall
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<PAGE>
have limited authority to act on behalf of the corporation as the board of
directors shall establish, including but not limited to limitations on the
dollar amount and on the scope of agreements or commitments that may be made by
such Administrative Officers on behalf of the corporation, which limitations may
not be exceeded by such individuals or altered by the president without further
approval by the board of directors.
5.13 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing powers, authority and duties, all officers of
the corporation shall respectively have such authority and powers and perform
such duties in the management of the business of the corporation as may be
designated from time to time by the board of directors.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
-------------------------------------------------
AND OTHER AGENTS
----------------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware as the same now exists or may hereafter
be amended, indemnify any person against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit,
or proceeding in which such person was or is a party or is threatened to be made
a party by reason of the fact that such person is or was a director or officer
of the corporation. For purposes of this Section 6.1, a "director" or "officer"
of the corporation shall mean any person (i) who is or was a director or officer
of the corporation, (ii) who is or was serving at the request of the corporation
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
Board of Directors of the corporation.
The corporation shall pay the expenses (including attorney's fees) incurred
by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding referred to in this
Section 6.1 in advance of its final disposition; provided, however, that payment
of expenses incurred by a director or officer of the corporation in advance of
the final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by the director or officer
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<PAGE>
to repay all amounts advanced if it should ultimately be determined that the
director of officer is not entitled to be indemnified under this Section 6.1 or
otherwise.
The rights conferred on any person by this Article shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the corporation's Certificate of Incorporation, these
bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.
Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit, or
proceeding, in which such person was or is a party or is threatened to be made a
party by reason of the fact that such person is or was an employee or agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) shall mean any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
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<PAGE>
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine (and to make copies of) the
corporation's stock ledger, a list of its stockholders and its other books and
records for a purpose reasonably related to his or her position as a director.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, if any, the president, any vice president, the
chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation. The authority herein granted may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
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<PAGE>
7.5 CERTIFICATION AND INSPECTION OF BYLAWS
--------------------------------------
The original or a copy of these bylaws, as amended or otherwise altered to
date, certified by the secretary, shall be kept at the corporation's principal
executive office and shall be open to inspection by the stockholders of the
corporation, at all reasonable times during office hours.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-----------------------------------------------------
For purposes of determining the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the board of directors may fix, in advance, a record date, which shall not
precede the date upon which the resolution fixing the record date is adopted and
which shall not be more than sixty (60) days before any such action. In that
case, only stockholders of record at the close of business on the date so fixed
are entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided by law.
If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the board of directors adopts the applicable
resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
-----------------------------------------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
--------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize and empower any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation; such power and authority may be general or confined to specific
instances. Unless so authorized or ratified by the board of directors or within
the agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the corporation by any contract or engagement or to
pledge its credit or to render it liable for any purpose or for any amount.
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<PAGE>
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
------------------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and, upon request,
every holder of uncertificated shares, shall be entitled to have a certificate
signed by, or in the name of the corporation by, the chairman or vice-chairman
of the board of directors, or the president or vice-president, and by the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of such corporation representing the number of shares registered in certificate
form. Any or all of the signatures on the certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if he or she were such officer,
transfer agent or registrar at the date of issue.
Certificates for shares shall be of such form and device as the board of
directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of shares
for which it is issued; a summary statement or reference to the powers,
designations, preferences or other special rights of such stock and the
qualifications, limitations or restrictions of such preferences and/or rights,
if any; a statement or summary of liens, if any; a conspicuous notice of
restrictions upon transfer or registration of transfer, if any; a statement as
to any applicable voting trust agreement; if the shares be assessable, or, if
assessments are collectible by personal action, a plain statement of such facts.
Upon surrender to the secretary or transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
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<PAGE>
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.6 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 TRANSFER AGENTS AND REGISTRARS
------------------------------
The board of directors may appoint one or more transfer agents or transfer
clerks, and one or more registrars, each of which shall be an incorporated bank
or trust company -- either domestic or foreign, who shall be appointed at such
times and places as the requirements of the corporation may necessitate and the
board of directors may designate.
8.8 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of this
provision, as used in these bylaws, the singular number includes the plural, the
plural number includes the singular, and the term "person" includes both an
entity and a natural person.
ARTICLE IX
AMENDMENTS
----------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote or by the board of directors of
the corporation. The fact that such power has been so conferred upon the
directors shall not divest the stockholders of the power, nor limit their
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<PAGE>
power to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.
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<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
SYMPHONIX DEVICES, INC.
ADOPTION BY INCORPORATOR
------------------------
The undersigned person appointed in the Certificate of Incorporation to act
as the Incorporator of Symphonix Devices, Inc. hereby adopts the foregoing
bylaws, comprising twenty-two (22) pages, as the Bylaws of the corporation.
Effective as of December 15, 1997.
/s/ David J. Saul
____________________________________
David J. Saul, Incorporator
Certificate by Secretary of Adoption by Incorporator
----------------------------------------------------
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Symphonix Devices, Inc. and that the foregoing Bylaws,
comprising twenty-two (22) pages, were adopted as the Bylaws of the corporation
effective as of December 15, 1997, by the person appointed in the Certificate
of Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this 15 day of December 1997.
/s/J. Casey McGlynn
____________________________________
J. Casey McGlynn, Secretary
<PAGE>
EXHIBIT 4.1
NUMBER [COMPANY LOGO] SHARES
SDI-
SYMPHONIX DEVICES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK COMMON STOCK
CUSIP 871951109
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT
[SPECIMEN]
IS THE RECORD HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
shares of SYMPHONIX DEVICES, INC. (the "Company")
transferable on the books of the Company in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid until countersigned by the Transfer Agent and registered by the
Registrar:
Witness the facsimile seal of the company and the facsimile
signatures of its duly authorized officers.
[SEAL OF SYMPHONIX DEVICES, INC. APPEARS HERE]
Dated:
---------------------
/s/ J. Casey McGlynn /s/ Harry S. Robbins
- ------------------------ --------------------------
Secretary President
COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
Transfer Agent and Registrar
<PAGE>
SYMPHONIX DEVICES, INC.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right
of survivorship and not as
tenants in common
UNIF GIFT MIN ACT -- _______________Custodian__________________
(Cust) (Minor)
under Uniform Gifts to Minors Act_________________
(State)
UNIF TRIF MIN ACT -- _______________Custodian (until age______)
(Cust)
__________under Uniform Transfers to Minors Act___________
(Minor) (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[_______________________]
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________SHARES
OF THE COMMON STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT
________________________________________________________________________ATTORNEY
TO TRANSFER THE SAID SHARES ON THE SHARE REGISTRAR OF THE WITHIN CORPORATION
WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
Dated__________________________________
________________________________________________________
NOTICE THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER
SIGNATURE(S) GUARANTEED:
BY________________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI]
January 12, 1998
Symphonix Devices, Inc.
3047 Orchard Parkway
San Jose, CA 95134
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 333-
40339) filed with the Securities and Exchange Commission on November 17, 1997
(as amended by Amendment No. 1 thereto filed on January 12, 1998, as such may be
amended or supplemented, the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of 2,300,000 shares
of Common Stock of Symphonix Devices, Inc. (the "Shares"). The Shares, which
include up to 345,000 shares of Common Stock issuable pursuant to an over-
allotment option granted to the underwriters, are to be sold to the underwriters
as described in such Registration Statement for the sale to the public or issued
to the Representatives of the underwriters. As your counsel in connection with
this transaction, we have examined the proceedings proposed to be taken in
connection with said sale and issuance of the Shares.
It is our opinion that, upon approval by the pricing committee duly
authorized by the Company's Board of Directors, the Shares when issued and
sold in the manner referred to in the Registration Statement will be legally
and validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part hereof, and
any amendment thereto.
Very truly yours,
/s/ Wilson Sonsini Goodrich & Rosati
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 10.12
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LOAN AND SECURITY AGREEMENT
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1 ACCOUNTING AND OTHER TERMS...................... 1
2 LOAN AND TERMS OF PAYMENT....................... 1
2.1 Credit Extensions................................................. 1
2.2 Interest Rate, Payments........................................... 2
2.3 Fees.............................................................. 2
2.4 Additional Costs.................................................. 2
3 CONDITIONS OF LOANS............................. 2
3.1 Conditions Precedent to Initial Credit Extension.................. 2
3.2 Conditions Precedent to all Credit Extensions..................... 2
4 CREATION OF SECURITY INTEREST................... 3
4.1 Grant of Security Interest........................................ 3
5 REPRESENTATIONS AND WARRANTIES.................. 3
5.1 Due Organization and Authorization................................ 3
5.2 Collateral........................................................ 3
5.3 Litigation........................................................ 3
5.4 No Material Adverse Change in Financial Statements................ 3
5.5 Solvency.......................................................... 3
5.6 Regulatory Compliance............................................. 4
5.7 Subsidiaries...................................................... 4
5.8 Full Disclosure................................................... 4
6 AFFIRMATIVE COVENANTS........................... 4
6.1 Government Compliance............................................. 4
6.2 Financial Statements, Reports, Certificates....................... 4
6.3 Inventory; Returns................................................ 5
6.4 Taxes............................................................. 5
6.5 Insurance......................................................... 5
6.6 Primary Accounts.................................................. 5
6.7 Financial Covenants............................................... 5
6.8 Further Assurances................................................ 6
7 NEGATIVE COVENANTS.............................. 6
7.1 Dispositions...................................................... 6
7.2 Changes in Business, Ownership, Management or Business Locations.. 6
7.3 Mergers or Acquisitions........................................... 6
7.4 Indebtedness...................................................... 6
7.5 Encumbrance....................................................... 6
7.6 Distributions; Investments........................................ 7
7.7 Transactions with Affiliates...................................... 7
7.8 Subordinated Debt................................................. 7
7.9 Compliance........................................................ 7
8 EVENTS OF DEFAULT............................... 7
8.1 Payment Default................................................... 7
8.2 Covenant Default.................................................. 7
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8.3 Material Adverse Change........................................... 8
8.4 Attachment........................................................ 8
8.5 Insolvency........................................................ 8
8.6 Other Agreements.................................................. 8
8.7 Judgments......................................................... 8
8.8 Misrepresentations................................................ 8
9 BANK'S RIGHTS AND REMEDIES...................... 8
9.1 Rights and Remedies............................................... 8
9.2 Power of Attorney................................................. 9
9.3 Accounts Collection............................................... 9
9.4 Bank Expenses..................................................... 9
9.5 Bank's Liability for Collateral................................... 10
9.6 Remedies Cumulative............................................... 10
9.7 Demand Waiver..................................................... 10
10 NOTICES......................................... 10
11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER..... 10
12 GENERAL PROVISIONS.............................. 10
12.1 Successors and Assigns........................................... 10
12.2 Indemnification.................................................. 11
12.3 Time of Essence.................................................. 11
12.4 Severability of Provision........................................ 11
12.5 Amendments in Writing, Integration............................... 11
12.6 Counterparts..................................................... 11
12.7 Survival......................................................... 11
12.8 Confidentiality.................................................. 11
13 DEFINITIONS..................................... 11
13.1 Definitions...................................................... 11
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THIS LOAN AND SECURITY AGREEMENT is dated December 30, 1997, between
SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara,
CA 95054 with a loan production office located at 1731 Embarcadero, Ste. 220,
Palo Alto, California 94303 and SYMPHONIX DEVICES, INC. ("Borrower"), whose
address is 3047 Orchard Parkway, San Jose, California 95134 provides the terms
on which Bank will lend to Borrower and Borrower will repay Bank. The parties
agree as follows:
1 ACCOUNTING AND OTHER TERMS
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Accounting terms not defined in this Agreement will be construed
following GAAP Calculations and determinations must be made following GAAP. The
term "financial statements" includes the notes and schedules. The terms
"including" and "includes" always mean "including (or includes) without
limitation," in this or any Loan Document. This Agreement shall be construed to
impart upon Bank a duty to act reasonably at all times.
2 LOAN AND TERMS OF PAYMENT
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2.1 CREDIT EXTENSIONS.
Borrower will pay Bank the unpaid principal amount of all Credit
Extensions and interest on the unpaid principal amount of the Credit Extensions
as set forth in this Agreement.
2.1.1 Letter of Credit Facility.
Bank will issue or have issued Letters of Credit for Borrower's account
on or before the Availability End Date. The face amount of outstanding Letters
of Credit (including drawn but unreimbursed Letters of Credit and any Letter of
Credit Reserve) may not exceed $250,000. Each Letter of Credit will have an
expiry date of no later than 180 days after the Letter of Credit Maturity Date,
but Borrower's reimbursement obligation will be secured by cash or cash
equivalents on terms reasonably acceptable to Bank at any time after the Letter
of Credit Maturity Date if the term of this Agreement is not extended by Bank.
2.1.2 Advances.
(a) Through December 31, 1998 (the "Availability End Date"), Bank agrees
to make advances ("Advance" and, collectively, " Advances") not exceeding the
Committed Line at any one time outstanding.
(b) Interest accrues from the date of each Advance at the rate in
Section 2.2((a)) and is payable monthly until the Availability End Date occurs.
The principal amount of Advances outstanding at the close of business on the
Availability End Date are payable in 48 equal monthly installments of principal
beginning on the last day of each month following the Availability End Date and
ending on the December 31, 2002 (the "Loan Maturity Date"). Amounts borrowed
pursuant to this Section 2.1.2 may be repaid and reborrowed at any time prior to
the Availability End Date provided that the aggregate principal amount of all
advances outstanding at any one time shall not exceed the Committed Line
Borrower may prepay the Advances in whole or in part at any time after the
Availability End Date together with any Prepayment Fee (with respect to any
principal amounts accruing interest at a fixed rate). Prepayment of principal
made after the Availability End Date shall be applied against installments in
the order of maturity.
(c) To obtain an Advance, Borrower must notify Bank (the notice is
irrevocable) by facsimile no later than 3:00 p.m. Pacific time 1 Business Day
before the day on which the Advance is to be made. The notice in the form of
Exhibit B (Payment/Advance Form) must be signed by a Responsible Officer or
designee.
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2.2 INTEREST RATE, PAYMENTS.
(a) Interest Rate. Prior to the Availability End Date, Advances accrue
interest on the outstanding principal balance at a per annum rate of 0.75
percentage points above the Prime Rate. Advances outstanding as of the
Availability End Date accrue interest at Borrower's option of either (i) a fixed
rate equal to 350 basis points above the Treasury Note Rate or (ii) a variable
per annum rate of 0.75 percentage points above the Prime Rate. After an Event of
Default, Obligations accrue interest at 5 percent above the rate effective
immediately before the Event of Default. The interest rate increases or
decreases when the Prime Rate changes. In the event Borrower elects the fixed
rate option, the Prepayment fee will apply. Interest is computed on a 360 day
year for the actual number of days elapsed.
(b) Payments. Interest due on the Advances is payable on the last day
of each month. Bank may debit any of Borrower's deposit accounts including
Account Number __________________________ for principal and interest payments or
any amounts Borrower owes Bank. Bank will notify Borrower when it debits
Borrower's accounts. These debits are not a set-off. Payments received after
12:00 noon Pacific time are considered received at the opening of business on
the next Business Day. When a payment is due on a day that is not a Business
Day, the payment is due the next Business Day and additional fees or interest
accrue.
2.3 FEES.
Borrower will pay:
(a) Facility Fee. A fully earned, non-refundable Facility Fee of
$10,000 for the Committed Line due on the Closing Date and an additional $10,000
for the Committed Line due on March 31, 1998; and
(b) Bank Expenses. All Bank Expenses (including reasonable attorneys'
fees and expenses) incurred through and after the date of this Agreement, are
payable within 30 days of the date that Borrower receives an invoice itemizing
such Bank Expenses.
2.4 ADDITIONAL COSTS.
If any law or regulation increases Bank's costs or reduces its income for
any loan, Borrower will pay the increase in cost or reduction in income
or additional expense.
3 CONDITIONS OF LOANS
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3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION.
Bank's obligation to make the initial Credit Extension is subject to the
condition precedent that it receive the agreements, documents and fees it
requires.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.
Bank's obligations to make each Credit Extension, including the initial
Credit Extension, is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 5 must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Credit Extension and no Event of Default may have occurred and be continuing, or
result from the Credit Extension. Each Credit Extension is Borrower's
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representation and warranty on that date that the representations and warranties
of Section 5 are true in all material respects.
4 CREATION OF SECURITY INTEREST
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4.1 GRANT OF SECURITY INTEREST.
Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations and performance
of each of Borrower's duties under the Loan Documents. Except for Permitted
Liens, any security interest will be a first priority security interest in the
Collateral. Upon the occurrence and during the continuance of an Event of
Default, Bank may place a "hold" on any deposit account pledged as Collateral.
5 REPRESENTATIONS AND WARRANTIES
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Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND AUTHORIZATION.
Borrower and each Subsidiary is duly existing and in good standing in its
state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it
is bound in which the default could cause a Material Adverse Change.
5.2 COLLATERAL.
Borrower has good title to the Collateral, free of Liens except Permitted
Liens. All Inventory is in all material respects of good and marketable
quality, free from material defects, it being understood that sale or
distribution of the Inventory for commercial purposes is subject to FDA approval
and/or the approval of similar governmental authorities in foreign countries.
5.3 LITIGATION.
Except as shown in the Schedule, there are no actions or proceedings
pending or, to Borrower's knowledge, threatened by or against Borrower or any
Subsidiary in which an adverse decision could cause a Material Adverse Change
other than regulatory proceedings with the FDA and European governmental
authorities relating to the approval of Borrower's products.
5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
5.5 SOLVENCY.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions
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in this Agreement; and Borrower expects to be able to pay its debts (including
trade debts) as they mature.
5.6 REGULATORY COMPLIANCE.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has
complied with the Federal Fair Labor Standards Act. Borrower has not violated
any laws, ordinances or rules, the violation of which could cause a Material
Adverse Change. None of Borrower's or any Subsidiary's properties or assets has
been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge,
by previous Persons, in disposing, producing, storing, treating, or transporting
any hazardous substance other than legally. Borrower and each Subsidiary has
timely filed all required tax returns and paid, or made adequate provision to
pay, all material taxes, except those being contested in good faith with
adequate reserves under GAAP. Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all government authorities that are necessary to
continue its business as currently conducted.
5.7 SUBSIDIARIES.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
5.8 FULL DISCLOSURE.
No representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements contained in the certificates or statements misleading (it being
recognized by Bank that any projections and forecasts provided by Borrower are
not to be viewed as facts and that actual results during the period or periods
covered thereby may differ from the projected or forecasted results).
6 AFFIRMATIVE COVENANTS
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Borrower will do all of the following:
6.1 GOVERNMENT COMPLIANCE.
Borrower will maintain its and all Subsidiaries' legal existence and good
standing in its jurisdiction of formation and maintain qualification in each
jurisdiction in which the failure to so qualify could have a material adverse
effect on Borrower's business or operations. Borrower will comply, and have
each Subsidiary comply, with all laws, ordinances and regulations to which it is
subject, noncompliance with which could have a material adverse effect on
Borrower's business or operations or cause a Material Adverse Change.
6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(a) Borrower will deliver to Bank: (i) as soon as available, but no
later than 30 days after the last day of each month, a company prepared
consolidated balance sheet and income statement covering Borrower's consolidated
operations during the period, in a form and certified by a Responsible Officer;
(ii) as soon as available, but no later than 90 days after the last day of
Borrower's fiscal year, audited consolidated financial statements prepared under
GAAP, consistently applied, together with an unqualified opinion on the
financial statements from an independent certified public accounting firm
acceptable to Bank; (iii) within 5 days of filing, copies of all statements,
reports and notices made
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available to Borrower's security holders or to any holders of Subordinated Debt
and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and
Exchange Commission; (iv) a prompt report of any legal actions pending or to
Borrower's knowledge threatened against Borrower or any Subsidiary that could
result in damages or costs to Borrower or any Subsidiary of $100,000 or more;
and (v) budgets, sales projections, operating plans or other financial
information Bank requests. Items (i) and (ii) above shall not be required at
such time as Borrower is a publicly traded company, except at such time as
Borrower's Remaining Months Liquidity is less than 9 months.
(b) Within 30 days after the last day of each month, Borrower will
deliver to Bank with the monthly financial statements a Compliance Certificate
signed by a Responsible Officer in the form of Exhibit C.
6.3 INVENTORY; RETURNS.
Returns and allowances between Borrower and its account debtors will
follow Borrower's customary practices as they exist from time to time.
6.4 TAXES.
Borrower will make, and cause each Subsidiary to make, timely payment of
all material federal, state, and local taxes or assessments and will deliver to
Bank, on demand, appropriate certificates attesting to the payment.
6.5 INSURANCE.
Borrower will keep its business and the Collateral insured for risks and
in amounts, as is customary for similar company's of Borrower's size and in
Borrower's line of business. All property policies will have a lender's loss
payable endorsement showing Bank as an additional loss payee and all liability
policies will show the Bank as an additional insured and provide that the
insurer must give Bank at least 20 days notice before canceling its policy. At
Bank's request, Borrower will deliver certified copies of policies and evidence
of all premium payments. Proceeds payable under any policy will, following the
occurrence and during the continuance of an Event of Default, be payable to Bank
on account of the Obligations.
6.6 PRIMARY ACCOUNTS.
Borrower will maintain its primary U.S. depository and operating accounts
with Bank.
6.7 FINANCIAL COVENANTS.
Borrower will maintain as of the last day of each month (or as of the
last day of each fiscal quarter at such time as Borrower becomes a publicly
traded corporation):
(i) DEBT/TANGIBLE NET WORTH RATIO. A ratio of Total Liabilities less
Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than
1.00 to 1.00 decreasing to 0.50 to 1.00 beginning with the period ending June
30, 1998 and each period ending thereafter.
(ii) TANGIBLE NET WORTH. A Tangible Net Worth of at least $5,000,000.
(iii) DEBT SERVICE COVERAGE. At such time as Borrower is not required
to comply with clauses (iv) and (v) of this Section 6.7, a ratio of earnings
after tax plus interest, depreciation and amortization for the specified period
on an annualized basis to current maturities of long term debt and capitalized
leases ("Debt Service Coverage") of at least 1.75 to 1.00.
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(iv) LIQUIDITY COVERAGE. Unrestricted cash (and equivalents) plus fifty
(50%) percent of net trade accounts receivable or net availability under an
accounts receivable revolving line of credit with Bank, equal to 2 times the
aggregate outstanding Credit Extensions.
(v) REMAINING MONTHS LIQUIDITY. Borrower will maintain at least 6
months Average Monthly Cash Burn. "Average Monthly Cash Burn" shall mean
Borrower's net change in cash per month as calculated on a three (3) month
rolling average basis, net of changes in debt and equity.
(vi) Notwithstanding the foregoing, Borrower shall only be required to
comply with clauses (iv) and (v) of this Section 6.7 until Borrower has been in
compliance therewith for three consecutive fiscal quarters.
6.8 FURTHER ASSURANCES.
Borrower will execute any further instruments and take further action as
Bank requests to perfect or continue Bank's security interest in the Collateral
or to effect the purposes of this Agreement.
7 NEGATIVE COVENANTS
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Borrower will not do any of the following:
7.1 DISPOSITIONS.
Without Bank's consent, which will not be unreasonably withheld, convey,
sell, lease, transfer or otherwise dispose of (collectively "Transfer"), or
permit any of its Subsidiaries to Transfer, all or any part of its business or
property, other than Transfers (i) of Inventory in the ordinary course of
business, (ii) of licenses and similar arrangements for the use of a non-
material portion of Borrower's property for fair and reasonable consideration
(materiality being based on the assets of Borrower as appearing on its balance
sheet maintained in accordance with GAAP), or (iii) of worn-out or obsolete
Equipment.
7.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS.
Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower or businesses
reasonably related or incidental thereto. Borrower will not, without at least 30
days prior written notice, relocate its chief executive office or add any
material offices or business locations.
7.3 MERGERS OR ACQUISITIONS.
Merge or consolidate with any other Person, or acquire, or permit any of
its Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person; provided, however, that Borrower may (i)
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reincorporate in the State of Delaware, provided that the surviving corporation
executes any and all documents reasonably required by Bank or (ii) merge or
consolidate a Subsidiary into another Subsidiary or into Borrower.
7.4 INDEBTEDNESS.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.
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7.5 ENCUMBRANCE.
Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
here.
7.6 DISTRIBUTIONS; INVESTMENTS.
Make any Investment in any Person, other than Permitted Investments. Pay
any dividends or make any distribution or payment or redeem, retire or purchase
any capital stock; provided that (i) Borrower may make any dividend payment or
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other distribution payable in its equity securities; (ii) Borrower may convert,
or honor any conversion of, its convertible debt or equity securities
outstanding from time to time in accordance with their terms, and (iii) Borrower
may repurchase stock from former officers, directors or employees in accordance
with the terms of repurchase agreements or stock option or purchase plans as
long as an Event of Default has not occurred or would exist after giving effect
to such repurchase.
7.7 TRANSACTIONS WITH AFFILIATES.
Directly or indirectly enter or permit any material transaction with any
Affiliate except transactions that are in the ordinary course of Borrower's
business on terms less favorable to Borrower than would be obtained in an arm's
length transaction with a non-affiliated Person; provided that the foregoing
shall not apply to (i) transactions or arrangements outstanding on the date of
this agreement, (ii) transactions constituting Permitted Investments or
liquidations thereof, (iii) any transaction entered into for the purpose of
granting or altering registration rights with respect to the capital stock of
the Borrower, or (iv) any transaction entered into prior to the date of this
Agreement of which Bank has written notice.
7.8 SUBORDINATED DEBT.
Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.
7.9 COMPLIANCE.
Become an "investment company" or a company controlled by an "investment
company," under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock, or use
the proceeds of any Advance for that purpose; fail to meet the minimum funding
requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as
defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards
Act or violate any other law or regulation, if the violation could have a
material adverse effect on Borrower's business or operations or cause a Material
Adverse Change, or permit any of its Subsidiaries to do so.
8 EVENTS OF DEFAULT
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Any one of the following is an Event of Default:
8.1 PAYMENT DEFAULT.
If Borrower fails to pay any of the Obligations when due;
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8.2 COVENANT DEFAULT.
If Borrower does not perform any obligation in Section 6 or violates any
covenant in Section 7 or does not perform or observe any other material term,
condition or covenant in this Agreement, any Loan Documents, or in any agreement
between Borrower and Bank and as to any default under a term, condition or
covenant that can be cured, has not cured the default within 10 days after it
occurs, or if the default cannot be cured within 10 days or cannot be cured
after Borrower's attempts within 10 day period, and the default may be cured
within a reasonable time, then Borrower has an additional period (of not more
than 30 days) to attempt to cure the default. During the additional time, the
failure to cure the default is not an Event of Default (but no Credit Extensions
will be made during the cure period);
8.3 MATERIAL ADVERSE CHANGE.
(i) If there occurs a material impairment in the perfection or
priority of the Bank's security interest in the Collateral or in the value of
such Collateral which is not covered by adequate insurance or (ii) if the Bank
determines, based upon information available to it and in its reasonable
judgment, that it is reasonably foreseeable that Borrower will fail to comply
with one or more of the financial covenants in Section 6 during the next
succeeding financial reporting period (a "Material Adverse Change").
8.4 ATTACHMENT.
If any material portion of Borrower's assets is attached, seized, levied
on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Credit Extensions will be
made during the cure period);
8.5 INSOLVENCY.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 60 days (but no Credit Extensions will be made before
any Insolvency Proceeding is dismissed);
8.6 OTHER AGREEMENTS.
If there is a default in any agreement between Borrower and a third party
that gives the third party the right to accelerate any Indebtedness exceeding
$250,000 or that could cause a Material Adverse Change;
8.7 JUDGMENTS.
If a money judgment(s) in the aggregate of at least $100,000 is rendered
against Borrower and is unsatisfied and unstayed for 20 days (but no Credit
Extensions will be made before the judgment is stayed or satisfied); or
8.8 MISREPRESENTATIONS.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
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9 BANK'S RIGHTS AND REMEDIES
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9.1 RIGHTS AND REMEDIES.
While an Event of Default occurs and continues Bank may, without notice
or demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an Event
of Default described in Section 8.5 occurs all Obligations are immediately due
and payable without any action by Bank);
(b) Stop advancing money or extending credit for Borrower's benefit
under this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account debtors
for amounts, on terms and in any order that Bank considers advisable;
(d) Make any payments and do any acts it considers necessary or
reasonable to protect its security interest in the Collateral. Borrower will
assemble the Collateral if Bank requires and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank's rights
or remedies;
(e) Apply to the Obligations any (i) balances and deposits of Borrower
it holds, or (ii) any amount held by Bank owing to or for the credit or the
account of Borrower;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale, and sell the Collateral; and
(g) Dispose of the Collateral according to the Code.
9.2 POWER OF ATTORNEY.
Effective only while an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's
name on any checks or other forms of payment or security; (ii) sign Borrower's
name on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts directly
with account debtors, for amounts and on terms Bank determines reasonable; and
(v) transfer the Collateral into the name of Bank or a third party as the Code
permits. Bank may exercise the power of attorney to sign Borrower's name on any
documents necessary to perfect or continue the perfection of any security
interest regardless of whether an Event of Default has occurred. Bank's
appointment as Borrower's attorney in fact, and all of Bank's rights and powers,
coupled with an interest, are irrevocable until all Obligations have been fully
repaid and performed and Bank's obligation to provide Credit Extensions
terminates.
9.3 ACCOUNTS COLLECTION.
While an Event of Default occurs and continues, Bank may notify any
Person owing Borrower money of Bank's security interest in the funds and verify
the amount of the Account, and Borrower must collect all payments in trust for
Bank and, if requested by Bank, immediately deliver the payments to Bank in the
form received from the account debtor, with proper endorsements for deposit.
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9.4 BANK EXPENSES.
If Borrower fails to pay any amount or furnish any required proof of
payment to third persons Bank may make all or part of the payment or obtain
insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank's waiver of any Event of Default.
9.5 BANK'S LIABILITY FOR COLLATERAL.
If Bank complies with reasonable banking practices, it is not liable for:
(a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral;
(c) any diminution in the value of the Collateral; or (d) any act or default of
any carrier, warehouseman, bailee, or other person. Borrower bears all risk of
loss, damage or destruction of the Collateral.
9.6 REMEDIES CUMULATIVE.
Bank's rights and remedies under this Agreement, the Loan Documents, and
all other agreements are cumulative. Bank has all rights and remedies provided
under the Code, by law, or in equity. Bank's exercise of one right or remedy is
not an election, and Bank's waiver of any Event of Default is not a continuing
waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is
effective unless signed by Bank and then is only effective for the specific
instance and purpose for which it was given.
9.7 DEMAND WAIVER.
Borrower waives demand, notice of default or dishonor, notice of payment
and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
10 NOTICES
-------
All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A Party may change its notice address by giving the other Party
written notice.
11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER
-------------------------------------------
California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Santa Clara County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
10
<PAGE>
12 GENERAL PROVISIONS
------------------
12.1 SUCCESSORS AND ASSIGNS.
This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.
12.2 INDEMNIFICATION.
Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE.
Time is of the essence for the performance of all obligations in this
Agreement.
12.4 SEVERABILITY OF PROVISION.
Each provision of this Agreement is severable from every other provision
in determining the enforceability of any provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION.
All amendments to this Agreement must be in writing. This Agreement
represents the entire agreement about this subject matter, and supersedes prior
negotiations or agreements. All prior agreements, understandings,
representations, warranties, and negotiations between the parties about the
subject matter of this Agreement merge into this Agreement and the Loan
Documents.
12.6 COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.
12.7 SURVIVAL.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding (other than
inchoate indemnity obligations). The obligations of Borrower in Section 12.2 to
indemnify Bank will survive until all statutes of limitations for actions that
may be brought against Bank have run.
12.8 CONFIDENTIALITY.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any interest in the Loans, (iii) as required by law,
regulation, subpoena, or other order,
11
<PAGE>
(iv) as required in connection with Bank's examination or audit and (v) as Bank
considers appropriate exercising remedies under this Agreement. Confidential
information does not include information that either: (a) is in the public
domain or in Bank's possession when disclosed to Bank, or becomes part of the
public domain after disclosure to Bank; or (b) is disclosed to Bank by a third
party, if Bank does not know that the third party is prohibited from disclosing
the information.
13 DEFINITIONS
-----------
13.1 DEFINITIONS.
In this Agreement:
"ACCOUNTS" are all existing and later arising accounts, contract rights,
and other obligations owed Borrower in connection with its sale or lease of
goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"ADVANCE" is defined in Section 2.1.2.
"AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, and, for any Person that is a limited liability company,
that Person's managers and members.
"AVAILABILITY END DATE" is defined in Section 2.1.2.
"BANK EXPENSES" are all reasonable audit fees and expenses and reasonable
costs or expenses (including reasonable attorneys' fees and expenses) for
preparing, negotiating, administering, defending and enforcing the Loan
Documents (including appeals or Insolvency Proceedings).
"BORROWER'S BOOKS" are all Borrower's books and records including
ledgers, records regarding Borrower's assets or liabilities, the Collateral,
business operations or financial condition and all computer programs or discs or
any equipment containing the information.
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.
"CAPITALIZED PRODUCT DEVELOPMENT COSTS" are all costs associated with the
development of Borrower's product, including, but not limited to software, that
are not recorded as an expense and have been classified as an asset account.
"CLOSING DATE" is the date of this Agreement.
"CODE" is the California Uniform Commercial Code.
"COLLATERAL" is the property described on Exhibit A.
---------
"COMMITTED LINE" is $2,000,000.
"CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement
12
<PAGE>
designated to protect a Person against fluctuation in interest rates, currency
exchange rates or commodity prices; but "Contingent Obligation" does not include
endorsements in the ordinary course of business. The amount of a Contingent
Obligation is the stated or determined amount of the primary obligation for
which the Contingent Obligation is to be determined in accordance with GAAP.
"CREDIT EXTENSION" is each Advance, Letter of Credit, or any other
extension of credit by Bank for Borrower's benefit.
"EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations.
"GAAP" is generally accepted accounting principles.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"INSOLVENCY PROCEEDING" are proceedings by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"INVENTORY" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"INVESTMENT" is any beneficial ownership of (including stock, partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any Person.
"LETTER OF CREDIT FACILITY" is described in Section 2.1.1.
"LETTER OF CREDIT MATURITY DATE" is December 31, 1998, renewable annually
upon Borrower's request for so long as (i) an Event of Default is not continuing
and (ii) an Advance is outstanding.
"LIEN" is a mortgage, lien, deed of trust, pledge, security interest or
other encumbrance.
"LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes or
guaranties executed by Borrower or Guarantor, and any other present or future
written agreement between Borrower and/or for the benefit of Bank in connection
with this Agreement, all as amended, extended or restated.
"LOAN MATURITY DATE" is defined in Section 2.2.
"MATERIAL ADVERSE CHANGE" is defined in Section 8.3.
"OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including letters of credit and
Exchange Contracts and including interest accruing after Insolvency Proceedings
begin and debts, liabilities, or obligations of Borrower assigned to Bank.
13
<PAGE>
"PERMITTED INDEBTEDNESS" is:
(a) Borrower's indebtedness to Bank under this Agreement or any other
Loan Document;
(b) Indebtedness existing on the Closing Date and shown on the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course of
business;
(e) Indebtedness secured by Permitted Liens;
(f) Indebtedness in respect of bid, performance or advance payment bonds
and appeal or surety bonds;
(g) Other Indebtedness not to exceed $100,000 in the aggregate
outstanding any one time.
"PERMITTED INVESTMENTS" are:
(a) Investments shown on the Schedule and existing on the Closing Date;
and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States or its agency or any State maturing within 1
year from its acquisition, (ii) commercial paper maturing no more than 1 year
after its creation and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., (iii) Bank's certificates of
deposit issued maturing no more than 1 year after issue or money market deposit
accounts issued by a domestic commercial bank or other financial institution
having capital and surplus in excess of $100 million; (iv) temporary cash
investments made in accordance with the Investment Policy approved from time to
time by Borrower's board of directors.
(c) advances to employees and officers of the Company for purposes of
purchasing stock of the Company and other advances to employee and officers in
the ordinary course of business not to exceed $100,000;
(d) accounts receivable created or acquired in the ordinary course of
business;
(e) investments the consideration for which is the capital stock of the
Company;
(f) investments in joint ventures or similar arrangements consisting of
the licensing of technology or the providing of services by Borrower or any
Subsidiary; and
(g) investments in Subsidiaries in an aggregate amount not to exceed
$2,000,000; and
(h) other Investments not to exceed $100,000 at any one time outstanding.
"PERMITTED LIENS" are:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
--
any of Bank's security interests;
(c) Purchase money Liens (i) on Equipment, real property or improvements
acquired or held by Borrower or its Subsidiaries incurred for financing the
acquisition of the Equipment, real property or
14
<PAGE>
improvements or (ii) existing on Equipment, real property or improvements when
acquired, if the Lien is confined to the property and improvements and the
--
proceeds of the Equipment, real property or improvements together with
accessions additions and attachments to such property;
(d) Leases or subleases and licenses or sublicenses granted in the
ordinary course of Borrower's business and any interest or title of a lessor,
licensor or under any lease or license, if the leases, subleases, licenses and
--
sublicenses permit granting Bank a security interest;
(e) statutory or common law Liens incurred in the ordinary course of
business that do not have a material effect on the value of Bank's interest in
the Collateral;
(f) Liens arising from judgments, decrees or attachments in circumstances
not constituting an Event of Default under Section 8.4;
(g) Liens that constitute rights of set-off of a customary nature or
banker's Liens with respect to amounts on deposit, that are not prior to Bank's
Lien whether arising by operation of law or by contract, in connection with
arrangements entered into with banks or other financial institutions in the
ordinary course of business;
(h) easements, reservations, rights-of-way, restrictions, minor defects
or irregularities in title or similar changes or encumbrances affecting real
property arising in the ordinary course of Borrower's business not resulting in
a Material Adverse Change; and
(i) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
---
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.
"PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.
"PREPAYMENT FEE" is a fee on any portion of the Obligations with a fixed
interest rate (the "Fixed Obligations") paid before the payment due date. "Base
Interest Rate" means Bank's initial cost of funding the Fixed Obligations. The
Prepayment Fee is calculated as follows: First Bank determines a "Current Market
Rate" based on what the Bank would receive if it loaned the amount on the
prepayment date in a wholesale funding market matching maturity, principal
amount and principal and interest payment dates (the aggregate payments received
are the "Current Market Rate Amount"). Bank may select any wholesale funding
market rate as the Current Market Rate. Second, Bank will take the prepayment
amount and calculate the present value of each principal and interest payment
which, without prepayment, the Bank would have received during the term of the
Fixed Obligations using the Base Interest Rate. The sum of the present value
calculations is the "Mark to Market Amount." Third, the Bank will subtract the
Mark to market Amount from the Current Market Rate Amount. Any amount greater
than zero is the Prepayment Fee.
"PRIME RATE" is Bank's most recently announced "prime rate," even if it
is not Bank's lowest rate.
"REMAINING MONTHS LIQUIDITY" is defined in Section 6.7.
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"SCHEDULE" is any attached schedule of exceptions.
15
<PAGE>
"SUBORDINATED DEBT" is debt incurred by Borrower subordinated to
Borrower's debt to Bank (and identified as subordinated by Borrower and Bank).
"SUBSIDIARY" is for any Person, or any other business entity of which
more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by the Person or one or more Affiliates of
the Person.
"TANGIBLE NET WORTH" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
-----
goodwill, (b) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities, plus Subordinated Debt (less
---
the current portion of such Subordinated Debt allowed to be paid).
"TOTAL LIABILITIES" is on any day, obligations that should, under GAAP,
be classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.
"TREASURY NOTE RATE" is a Treasury Yield Percentage. Treasury Yield
Percentage is the average weekly yield (of the week ending figures) in the most
recent Federal Reserve Statistical Release on actively traded U.S. Treasury
obligations of similar maturity to the principal being repaid or if a
Statistical Release is not published, the arithmetic average (to the nearest
.01%) of the per annum yields to maturity for each Business Day during the week
(ending at least two Business Days before the determination is made) of all
actively traded marketable United States Treasury fixed interest rate securities
with a constant maturity of, or not more than 30 days longer or shorter than the
average life of the principal and interest payments that are being prepaid
(excluding securities that can be surrendered at face value to pay Federal
estate tax, or which provide for tax benefits to the holder).
"UNRESTRICTED CASH RESERVES" is, at any time of determination, the sum of
Borrower's (i) cash balance of deposit accounts and investment accounts, plus
(ii) market value of all readily marketable securities beneficially owned by
Borrower, minus (iii) cash value of any certificates of deposit or securities
encumbered and/or restricted by any Bank or any other Persons.
BORROWER:
Symphonix Devices, Inc.
By: /s/ Alfred G. Merriweather
-----------------------------------
Title: CFO
--------------------------------
BANK:
SILICON VALLEY BANK
By: /s/ Mercy F. Forde
-----------------------------------
Title: Vice President
--------------------------------
16
<PAGE>
EXHIBIT A
---------
The Collateral consists of all of Borrower's right, title and interest in
and to the following:
All goods and equipment now owned or hereafter acquired, including, without
limitation, all machinery, fixtures, vehicles (including motor vehicles and
trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower;
All documents, cash, deposit accounts, securities, securities entitlements,
securities accounts, investment property, letters of credit, certificates of
deposit, instruments and chattel paper now owned or hereafter acquired and
Borrower's Books relating to the foregoing;
All copyright rights, copyright applications, copyright registrations and
like protections in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired; all trade secret
rights, including all rights to unpatented inventions, know-how, operating
manuals, license rights and agreements and confidential information, now owned
or hereafter acquired; all mask work or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired; all claims
for damages by way of any past, present and future infringement of any of the
foregoing; and
All Borrower's Books relating to the foregoing and any and all claims,
rights and interests in any of the above and all substitutions for, additions
and accessions to and proceeds thereof.
Subject to the next sentence, the Collateral shall not include Equipment
that Borrower leases from a third party or Equipment that is financed by a third
party to the extent that contracts evidencing such lease or financing prohibit
the granting of a security interest therein to Bank. The term "Collateral"
shall not include any general intangibles or contract rights of Borrower
(whether owned or held as licensee or lessee, or otherwise) to the extent that
(i)such general intangibles or contract rights are not assignable or capable of
being encumbered as a matter of law or under the terms of the license, lease or
other agreement applicable thereto (but solely to the extent that such
restriction shall be enforceable under applicable law) without the consent of
the licensor or lessor thereof or other applicable party thereto and (ii)such
consent has not been obtained: provided, however, that "Collateral" shall
include, (A)any general intangible or contract right which is an Account or a
proceed of, or otherwise related to the enforcement or collection of, any
Account or goods which are the subject of any Account, and (B)any and all
proceeds of
1
<PAGE>
any general intangibles or contract rights which are otherwise excluded to the
extent that the assignment or encumbrance of such proceeds is not so restricted,
and (C)upon obtaining the consent of any such licensor, lessor, or other
applicable party with respect to any such otherwise excluded general
intangibles, contract rights and Equipment, such general intangibles, contract
rights and Equipment as well as any and all proceeds thereof that might
theretofore have been excluded from the term "Collateral."
2
<PAGE>
EXHIBIT B
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
---------------------
FAX#: (408) 496-2426 TIME:
---------------------
FROM: Symphonix Devices, Inc.
-----------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
-----------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
---------------------------------------------------------
PHONE NUMBER:
-----------------------------------------------------------------
FROM ACCOUNT # TO ACCOUNT #
---------------------- -------------------------
REQUESTED TRANSACTION TYPE REQUESTED DOLLAR AMOUNT
- -------------------------- -----------------------
PRINCIPAL INCREASE (ADVANCE) $
-----------------------------------------
PRINCIPAL PAYMENT (ONLY) $
-----------------------------------------
INTEREST PAYMENT (ONLY) $
-----------------------------------------
PRINCIPAL AND INTEREST (PAYMENT) $
-----------------------------------------
OTHER INSTRUCTIONS:
-----------------------------------------------------------
- ------------------------------------------------------------------------------
All Borrower's representations and warranties in the Loan and Security Agreement
are true, correct and complete in all material respects on the date of the
telephone request for and Advance confirmed by this Borrowing Certificate; but
those representations and warranties expressly referring to another date shall
be true, correct and complete in all material respects as of that date.
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- ------------------------------------- ---------------------------------
Authorized Requester Phone #
- ------------------------------------- ---------------------------------
Received By (Bank) Phone #
------------------------------------
Authorized Signature (Bank)
1
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
3003 Tasman Drive
Santa Clara, CA 95054
FROM: SYMPHONIX DEVICES, INC.
The undersigned authorized officer of Symphonix Devices, Inc. certifies
that, except as set forth below, under the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), Borrower is in
complete compliance for the period ending _______________ with all required
covenants except as noted below. Attached are the required documents supporting
the certification. The Officer certifies that these are prepared in accordance
with Generally Accepted Accounting Principles (GAAP) consistently applied from
one period to the next except as explained in an accompanying letter or
footnotes. The Officer acknowledges that no borrowings may be requested at any
time or date of determination that Borrower is not in compliance with any of the
terms of the Agreement, and that compliance is determined not just at the date
this certificate is delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT Required COMPLIES
- ------------------ -------- --------
<S> <C> <C>
Monthly financial statements+CC* Monthly within 30 days Yes No
Annual (Audited)* FYE within 90 days Yes No
</TABLE>
*Replaced with the following at such time as Borrower becomes publicly traded
and Borrower maintains a minimum Remaining Months Liquidity of no less than 9
months:
<TABLE>
<CAPTION>
<S> <C> <C>
10-Q, 10-K and 8-K +CC Within 5 days after filing with SEC Yes No
FINANCIAL COVENANT Required ACTUAL COMPLIES
- ------------------ -------- ------ --------
Maintain on a Monthly Basis**:
Minimum Tangible Net Worth $5,000,000 $________ Yes No
Maximum Debt/Tangible Net Worth 1.00:1.00*** _____:1.00 Yes No
Minimum Liquidity 2X Credit Extensions
Outstanding _________ Yes No
Remaining Months Liquidity 6 months Average
Cash Burn _________ Yes No
Minimum Debt Service**** 1.75:1.00 _____:1.00 Yes No
</TABLE>
**Maintain on a Quarterly Basis at such time as Borrower becomes publicly traded
and Borrower maintains a minimum Remaining Months Liquidity of no less than 9
months.
*** Decreasing to 0.50 to 1.00 as of period ending June 30, 1997 and each period
ending thereafter.
**** At such time as Borrower maintains a Debt Service Coverage of at least 1.75
to 1.00 for 3 consecutive fiscal quarters, a Debt Service Coverage of at least
1.75 to 1.00 shall replace the Liquidity Coverage and Minimum Remaining Months
Liquidity covenants.
COMMENTS REGARDING EXCEPTIONS: See Attached. BANK USE ONLY
Sincerely, Received by:
--------------------
Symphonix Devices, Inc. authorized signer
- ---------------------------
Signature Date:
--------------------------
- --------------------------- Verified:
Title --------------------
authorized signer
- ---------------------------
Date Date:
--------------------------
Compliance Status: Yes No
<PAGE>
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of December 30, 1997 by and
between Symphonix Devices, Inc. ("Borrower") and Silicon Valley Bank ("Bank").
In connection with, among other documents, the Loan and Security Agreement (the
"Loan Documents") being concurrently executed herewith between Borrower and
Bank, Borrower agrees as follows:
1. Except as permitted under the Loan and Security Agreement, Borrower
shall not sell, transfer, assign, mortgage, pledge, lease, grant a
security interest in, or encumber any of Borrower's intellectual
property, including, without limitation, the following:
a. Any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and
derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or
hereafter existing, created, acquired or held;
b. All mask works or similar rights available for the protection of
semiconductor chips, now owned or hereafter acquired;
c. Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
d. Any and all design rights which may be available to Borrower now
or hereafter existing, created, acquired or held;
e. All patents, patent applications and like protections including,
without limitation, improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the
same, including without limitation the patents and patent
applications;
f. Any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower
connected with and symbolized by such trademarks, including
without limitation;
g. Any and all claims for damages by way of past, present and future
infringements of any of the rights included above, with the
right, but not the obligation, to sue for and collect such
damages for said use or infringement of the intellectual property
rights identified above;
h. All licenses or other rights to use any of the Copyrights,
Patents, Trademarks or Mask Works; and
i. All amendments, extensions, renewals and extensions of any of the
Copyrights, Trademarks, Patents, or Mask Works;
2. It shall be an event of default under the Loan Documents between
Borrower and Bank if there is a breach of any term of this Negative
Pledge Agreement.
<PAGE>
3. Capitalized terms used but not otherwise defined herein shall have the
same meaning as in the Loan Documents.
BORROWER:
Symphonix Devices, Inc.
By: /s/ Alfred G. Merriweather
---------------------------------
Name: Alfred G. Merriweather
-------------------------------
Title: CFO
------------------------------
BANK:
SILICON VALLEY BANK
By: /s/ Mercy F. Forde
---------------------------------
Name: Mercy F. Forde
-------------------------------
Title: Vice President
------------------------------
<PAGE>
CORPORATE BORROWING RESOLUTION
BORROWER: SYMPHONIX DEVICES, INC. Bank: Silicon Valley Bank
3047 ORCHARD PARKWAY 1731 Embarcadero, Ste. 220
SAN JOSE, CA 95134 PALO ALTO, CA 94303
I, THE UNDERSIGNED SECRETARY OR ASSISTANT SECRETARY OF SYMPHONIX DEVICES, INC.
("BORROWER"), HEREBY CERTIFY that Borrower is a corporation duly organized and
existing under and by virtue of the laws of the State of California.
I FURTHER CERTIFY that at a meeting of the Directors of Borrower (or by other
duly authorized corporate action in lieu of a meeting), duly called and held, at
which a quorum was present and voting, the following resolutions were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers, employees, or
agents of Borrower, whose actual signatures are shown below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
<S> <C> <C>
Harry S. Robbins President & CEO /s/ Harry S. Robbins
- -------------------------------- --------------------------------------- -----------------------------------
Alfred G. Merriweather CFO /s/ Alfred G. Merriweather
- -------------------------------- --------------------------------------- -----------------------------------
- -------------------------------- --------------------------------------- -----------------------------------
- -------------------------------- --------------------------------------- -----------------------------------
</TABLE>
acting for and on behalf of Borrower and as its act and deed be, and they hereby
are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers of
Borrower and Bank, such sum or sums of money as in their judgment should be
borrowed.
EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank the loan documents
of Borrower, on Bank's forms, at such rates of interest and on such terms
as may be agreed upon, evidencing the sums of money so borrowed or any
indebtedness of Borrower to Bank, and also to execute and deliver to Bank
one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the loan documents, or
any portion of the loan documents.
GRANT SECURITY. To grant a security interest to Bank in any of Borrower's
assets, which security interest shall secure all of Borrower's obligations
to Bank
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to Borrower or in which Borrower may have an
interest, and either to receive cash for the same or to cause such proceeds
to be credited to the account of Borrower with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
LETTERS OF CREDIT. To execute letter of credit applications and other
related documents pertaining to Bank's issuance of letters of credit.
<PAGE>
FOREIGN EXCHANGE CONTRACTS. To execute and deliver foreign exchange
contracts, either spot or forward, from time to time, in such amount as, in
the judgment of the officer or officers herein authorized.
ISSUE WARRANTS. To issue warrants to purchase Borrower's capital stock,
for such class, series and number, and on such terms, as an officer of
Borrower shall deem appropriate.
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay any
and all fees and costs, and to execute and deliver such other documents and
agreements, including agreements waiving the right to a trial by jury, as
they may in their discretion deem reasonably necessary or proper in order
to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of Borrower's agreements or commitments in effect at the
time notice is given.
I FURTHER CERTIFY that the persons named above are principal officers of the
Corporation and occupy the positions set opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Corporation;
and that they are in full force and effect and have not been modified or revoked
in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on December 30, 1997 and attest
that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
/s/ J. Casey McGlynn
X ______________________________________________
*Secretary or Assistant Secretary
X ______________________________________________
*NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, this resolution should
also be signed by a second Officer or Director of Borrower.
2
<PAGE>
EXHIBIT 11.1
SYMPHONIX DEVICES, INC.
COMPUTATION OF NET LOSS PER COMMON SHARE AND
PER COMMON SHARE--ASSUMING DILUTION
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM PERIOD FROM
MAY 17, 1994 MAY 17, 1994
(DATE OF (DATE OF
INCEPTION) YEAR ENDED INCEPTION)
TO DECEMBER 31, TO
DECEMBER 31, ------------------------------------- DECEMBER 31,
1994 1995 1996 1997 1997
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Weighted average common
shares outstanding for
the period............. 1,770,726 1,961,551 2,190,040 2,579,177 2,184,309
Common equivalent shares
pursuant to Staff
Accounting Bulleting
No. 83................. 851,441 851,441 851,441 851,441 851,441
--------- ----------- ----------- ----------- ------------
Shares used in per share
calculations........... 2,622,167 2,812,992 3,041,481 3,430,618 3,035,750
========= =========== =========== =========== ============
Net loss................ $(752,224) $(3,651,811) $(6,108,556) $(7,907,377) $(18,419,968)
========= =========== =========== =========== ============
Net loss per common
share and per common
share--assuming
dilution (1)........... $ (0.29) $ (1.30) $ (2.01) $ (2.30) $ (6.07)
========= =========== =========== =========== ============
</TABLE>
- -------
(1) There is no difference between basic and diluted loss per share for each
period.
