<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-23767
SYMPHONIX DEVICES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 77-0376250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
<TABLE>
<S> <C>
2331 Zanker Road,
San Jose, California 95131-1107
(address of principal executive offices) (zip code)
</TABLE>
Registrant's telephone number, including area code: (408) 232-0710
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [_] No [X].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of December 31, 1999 was approximately $17,519,504 based upon
the last sales price reported for such date on the NASDAQ National Market
System. For purposes of this disclosure, shares of Common Stock held by
persons who hold more than 5% of the outstanding shares of Common Stock and
shares held by officers and directors of the registrant, have been excluded in
that such persons may be deemed to be affiliates. This determination is not
necessarily conclusive.
At December 31, 1999, registrant had outstanding 13,443,355 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of this Form 10-K is incorporated by
reference to the definitive proxy statement for the annual meeting of
stockholders of the Company which will be filed no later than 120 days after
December 31, 1999.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I.................................................................. 3
ITEM 1. BUSINESS................................................... 3
ITEM 2. PROPERTIES................................................. 22
ITEM 3. LEGAL PROCEEDINGS.......................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 22
PART II................................................................. 23
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 23
ITEM 6. SELECTED FINANCIAL DATA.................................... 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 31
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS.......................... 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 49
PART III................................................................ 49
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 49
ITEM 11. EXECUTIVE COMPENSATION..................................... 50
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 50
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 50
PART IV................................................................. 51
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.................................................. 51
SIGNATURES.............................................................. 54
</TABLE>
i
<PAGE>
PART I
This Annual Report on Form 10-K (the "Annual Report") contains certain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act"), including statements
that indicate what the Company "believes", "expects" and "anticipates" or
similar expressions. These statements involve known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements of the Company to differ materially from those expressed or
implied by such forward-looking statements. Such factors include, among
others, the information contained under the captions Part I, Item 1,
"Business," and Part II, Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this Annual Report. The
reader is cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date of this
Annual Report. The Company undertakes no obligation to publicly release the
results of any revision of these forward-looking statements. The reader is
strongly urged to read the information set forth under the captions Part I,
Item 1, "Business," and Part II, Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for a more detailed
description of these significant risks and uncertainties.
ITEM 1. BUSINESS
Overview
Symphonix Devices, Inc. ("Symphonix" or the "Company") develops,
manufactures and markets a proprietary line of semi-implantable SoundbridgeTM
hearing devices for the management of hearing impairment, a medical disorder
that affects approximately 28 million people in the United States alone. The
Company is also developing a fully-implantable Soundbridge. The Soundbridge is
a middle ear implant technology designed to vibrate the small bones in the
middle ear, enhancing the natural hearing process. The Vibrant Soundbridge,
the family of semi-implantable devices, is currently being marketed in Europe
in conjunction with the Company's European distribution partner, Siemens
Audiologische Technik GmbH ("Siemens"), and is in clinical trials in the
United States. The fully implantable Soundbridge family is currently in
development. The Company believes that the Soundbridge technology overcomes
the inherent limitations of traditional hearing devices, and represents a
novel approach in the management of hearing loss.
In September 1996, the Company initiated clinical trials of the first-
generation Vibrant Soundbridge in both the United States and Europe. The
Company received permission in the European Union (EU) to affix the CE mark to
the Vibrant Soundbridge in March 1998. Through a technology alliance with
Siemens, the Company is currently developing its fourth generation Vibrant
Soundbridge, based on 8-channel, digital signal processing. As of January 31,
2000, over 300 patients have been implanted with the Vibrant Soundbridge in
over 60 centers in both the United States and Europe.
How the Ear Works
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.
As sound enters the ear canal, it is slightly amplified by the natural
resonant characteristics of the ear canal. The sound waves cause vibration of
the tympanic membrane and are 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.
3
<PAGE>
Sound is distinguished by frequency and intensity. The frequency of sound is
perceived as pitch and is measured in cycles per second, or Hertz ("Hz"). The
normal human ear perceives sounds in the range of 20 to 18,000 Hz, although
most components of human speech are generally in the range of 400 to 4,000 Hz.
A more subtle aspect of frequency is that certain letters of the alphabet are
spoken at a different frequency than others. For example, certain consonants
such as "m," "n" and "g" and all vowels are spoken at relatively low
frequencies while other consonants and sounds such as "t," "s," "f" and "sch"
are spoken at higher frequencies. Accordingly, at a given volume, certain
letters may be more audible than others.
The intensity of sound is perceived as loudness and is measured in decibels
("dB"). The lowest level of intensity at which an individual perceives sound
is known as the threshold of hearing. The range in decibels from a person's
threshold of hearing to the level at which the person perceives sound to be
uncomfortably loud is known as the dynamic range. Both the threshold of
hearing and the dynamic range vary with the frequency of sound. An individual
with normal hearing can comfortably hear sounds ranging in intensity from
approximately 30 dB to 100 dB. When an individual's threshold of hearing is
improved as a result of using a hearing instrument, the difference between the
aided threshold level at a particular frequency and the unaided threshold
level at that frequency is known as functional gain' and is measured in
decibels.
[GRAPHIC TO COME]
Hearing Impairment
Hearing impairment can adversely affect quality of life and psychological
well being. Hearing-impaired people often withdraw from discussions and other
social interactions to avoid frustration and embarrassment from not being able
to fully participate in and understand conversations. Difficulty in
communicating effectively can lead to negative emotions and attitudes,
increased stress levels and reduced self-confidence, sociability and
effectiveness in the workplace.
Approximately 28 million Americans are hearing-impaired. Hearing loss is one
of the most prevalent chronic health conditions in the United States,
affecting people of all ages, in all segments of the population, and across
all socioeconomic levels. Hearing loss affects approximately 17 in 1,000
children under age 18. Incidence increases with age; approximately 314 in
1,000 people over age 65 have hearing loss. Hearing loss can be hereditary, or
it can result from disease, trauma, or long-term exposure to damaging noise or
medications. Hearing loss can vary from a mild but important loss of
sensitivity, to a total loss of hearing.
4
<PAGE>
Traditionally, statistics on hearing loss have shown seniors from 65 years
of age to be the most vulnerable age group with over 30% reporting hearing
loss while approximately 10% in the 40 to 65 year age group acknowledge
losses. This latter figure has now ballooned as more and more baby boomers
seek help. Experts predict that as America ages, hearing loss will become an
epidemic.
Experts also agree that noise-induced hearing loss is to blame for most
hearing loss for 40 and 50 year olds. Many of these baby boomers acknowledge
that decibel-blasting rock and roll concerts in their youth have left lasting
memories as well as permanent damage to the delicate hair cells in the inner
ear which conduct electro-chemical impulses to the brain where they are
deciphered as sounds. The National Institute on Deafness and Communication
Disorders (NIDCD) reports that 20,000,000 Americans are exposed to hazardous
noise levels in dangerously noisy environments. The estimated annual cost of
lost productivity, special education, and medical care because of untreated
hearing loss in the U.S. is $56 billion--an annual per capita tax of $216.
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.
Sensorineural hearing impairment occurs in the inner ear and/or neural
pathways and 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.
Existing Therapies
The traditional approaches to management of sensorineural hearing impairment
involve the use of hearing aids or cochlear implants. Hearing aids are
commonly used to manage the mild to severe sensorineural hearing impaired
population (approximately 24 million of the 28 million hearing-impaired people
in the United States). Cochlear implants have been primarily used for the
profound hearing-impaired segment of the market (less than 1 million people in
the United States). However, both approaches have significant limitations in
addressing their respective markets.
Hearing Aids
Hearing aids are acoustic devices that amplify sound to increase the
movement of the tympanic membrane and indirectly vibrate the ossicles 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 technology, there are still many
drawbacks:
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.
5
<PAGE>
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 earwax 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.
Largely as a result of these problems, hearing aid manufacturers experienced
product return rates of approximately 20% in 1999. In addition, approximately
16% of those who have purchased hearing aids report that they never wear their
hearing aids. However, despite the inherent limitations of hearing aids,
approximately 1.9 million new hearing aids were sold in the United States in
1999.
Cochlear Implants
Cochlear implants were originally developed for people who have a profound
hearing loss, approximately one million people in the United States alone. The
cochlear implant is inserted into the inner ear in a highly invasive and non-
reversible surgery that destroys pre-surgery, unaided hearing (residual
hearing). The implant electrically stimulates the auditory nerve through an
electrode array that provides audible cues to the user which are not
interpreted by the brain as normal sound. Users generally require intensive
and extended counseling, speech therapy, and training following surgery to be
able to properly interpret these cues and achieve any benefit. Best results
are achieved with adults whose hearing loss develops later in life or with
children. Recently, some cochlear implants have been indicated for severe
hearing loss. However, cochlear implants have been controversial both because
of strong resistance from portions of the deaf community and because of the
irreversible nature of the surgery in which the cochlea is invaded and
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
the worldwide market for cochlear implant devices was approximately $150
million in 1999.
The Symphonix Solution
The Company is developing proprietary semi-implantable and implantable
Soundbridge families, for the management of mild to severe hearing impairment.
The Soundbridge families are based on the Company's 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. 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
6
<PAGE>
structures. This, in turn, enhances stimulation of the delicate sensory hair
cells in the inner ear. With the Vibrant Soundbridge, the FMT receives
electrical signals from an Audio Processor. The Audio Processor picks up sound
from the environment and converts that sound into electrical signals which are
then transmitted to an implant under the skin.
The Vibrant Soundbridge is implanted in a two-hour surgery that can be
performed on an outpatient basis utilizing techniques similar to those
employed in routine otologic procedures. Based on clinical studies to-date,
the Company believes that the Soundbridge:
Does not significantly affect the patient's residual hearing. This means
that the unaided hearing level after surgery is equivalent to the pre-
surgery, unaided hearing level.
Improves overall sound quality and clarity. By leaving the ear canal
unobstructed and the natural resonance undisturbed, a more natural sound
quality is obtained over a broader range of frequencies.
Improves fit and comfort. No part of the Vibrant Soundbridge is inserted
in the ear canal, resulting in increased comfort for users of the Vibrant
Soundbridge.
Reduces acoustic feedback. Since the Vibrant Soundbridge mechanically
drives the ossicles, it reduces acoustic feedback.
Improves functional gain. Users are able to experience greater output, or
intensity, from their Soundbridge as compared to their hearing aid. As a
result, their threshold level of hearing is improved.
Improves a patient's satisfaction and perceived benefit in both everyday
and challenging listening situations. Patients are more satisfied with
their performance in difficult environments, like those with background
noise, a well as in common environments like those in which they
communicate directly with friends.
Reduces maintenance issues. Since no components of the Vibrant
Soundbridge are in the ear canal, the reliability problems caused by wax
and moisture are eliminated.
Strategy
The Company's objective is to establish the Soundbridge technology as the
standard of care worldwide for the management of mild to severe hearing
impairment. The key elements of the Company's strategy are:
Demonstrate improved functional performance and quality of life. The
Company intends to promote the potential benefits of its products to the
broad hearing-impaired population in order to reach the large number of
people who are not being adequately treated for their medical disorder
today. The Company believes that by demonstrating improvement in a
patient's performance in a variety of listening environments, quality of
life will increase and the Soundbridge will become a highly-differentiated
approach to managing hearing impairment.
Develop broad awareness of Soundbridge technology within the otology,
audiology and hearing-impaired communities. The Company intends to position
the Soundbridge as a technologically-advanced surgical implant that
addresses an unmet clinical need, creating a new option for the hearing-
impaired. The Company will initially target otologists, a segment of the
broader ENT population that specializes in ear surgery. The Company will
also build awareness among audiologists and other potential patient
referral sources, as well as conduct direct-to-consumer educational
activities to stimulate patient flow.
Leverage the Company's patented core technology. The Company intends to
leverage its patented core FMT technology to develop next-generation
Soundbridge devices. The Company intends to dedicate significant resources
to continued research and development to further develop its core
technology and to expand the medical indications for this technology. To
further enhance system development, the Company intends to leverage
technology developed by Siemens, particularly in the area of signal
processing, in accordance with the existing technology alliance between
Siemens and the Company.
7
<PAGE>
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 11 patents issued in the United
States, one patent issued internationally and 33 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 totally implantable
Soundbridges, utilizing the Company's core FMT technology to manage hearing
impairment. The Company believes that its semi-implantable Soundbridge, the
Vibrant Soundbridge, will enable the Company to address a significant portion
of the mild to severe hearing impairment market currently not satisfied with
traditional hearing aid devices. In addition, the Company is developing a
totally implantable Soundbridge, which is being designed to be completely
implanted under the skin with no external components.
The semi-implantable Soundbridge family utilizes the same implant, with
differences in function being provided by modifications to the external Audio
Processor, its software and/or programming platform. Utilization of a common
implant will allow a user to upgrade the Audio Processor if a user's hearing
changes over time, or as external processing technology continues to improve.
The following table describes the current portfolio of Soundbridges available,
or under development, by the Company and their status:
<TABLE>
<CAPTION>
Soundbridge Hearing Loss
Family Product Descriptions Addressed Status(1)
----------- -------------------- ------------ ---------
<C> <S> <C> <C>
Semi- Second generation semi- Mild to severe Vibrant P pivotal trial
implantable implantable hearing enrollment completed, Pre-
(Vibrant device with programmable market Approval Application
Soundbridge) dual channel analog submitted in United States;
signal processing CE mark and product sales in
Europe
Modified second Noise-induced Vibrant HF pivotal trial
generation semi- high frequency underway in United States;
implantable hearing loss CE mark obtained in Europe
device designed to
address noise-induced
high frequency hearing
loss by using modified
signal processing.
Third generation semi- Mild to severe Vibrant D pivotal trial
implantable hearing enrollment completed, Pre-
device, with market Approval Application
programmable 3 channel submitted in United States;
digital signal CE mark and product sales in
processing. Europe
Fourth generation semi- Mild to severe Late stage of development;
implantable hearing IDE supplement expected to
device, with be submitted in 2000;
programmable 8 channel application for CE expected
digital signal to be submitted in 2000
processing, PC-based
programming
Totally Designed to be Mild to severe Totally implantable
Implantable completely implanted Soundbridge family in
under the skin with no development
external components,
PC-based programming
</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.
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
8
<PAGE>
broad band electromagnetic fields and (iii) a small 1.5 volt battery that
powers the device. The Audio Processor is placed on the head 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.
[GRAPHIC TO COME]
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 modulated electronic signal through the skin from the external
Audio Processor and extracts the appropriate drive signal for the FMT, (ii) a
conductor link that connects the implanted receiver unit to the FMT and (iii)
the FMT, 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.
The FMT is a tiny transducer, approximately 2mm in length, which comprises a
permanent magnet suspended within a titanium housing. A coil surrounding the
housing generates a small electromagnetic field based on the 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
mimics and enhances the natural movement of the ossicles, which in turn
generates enhanced stimulation of the sensory hair cells of 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.
[GRAPHIC TO COME]
9
<PAGE>
The surgical procedure for the implantation of the Vibrant Soundbridge
involves techniques that are similar to those employed in other common
otologic procedures. The internal receiver unit is implanted behind the ear,
under the skin and muscle. 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 procedure involves surgical
techniques that are familiar to ear surgeons, the Company believes that
surgeon training will not be a significant impediment to market acceptance.
The procedure may be performed on an outpatient basis, and generally can be
performed in about two hours. Approximately eight weeks following the surgery,
an audiologist fits the Audio Processor with the appropriate sound processing
settings. The Company's approved Investigational Device Exemption ("IDE") only
permits implantation in one ear. This will generally be the ear with the
poorest unaided functional hearing. Based on clinical experience to-date, the
Company believes that the surgical procedure can be reversed without damage to
the patient's residual hearing.
The Vibrant Soundbridge Family
The Vibrant P Soundbridge is designed to provide, through programming
adjustments, a degree of customization to address the specific needs of a
particular user's hearing loss, thereby permitting a broad range of hearing
losses to be managed. At the time of fitting, the Audio Processor is connected
to a hand-held programming unit that allows the audiologist to separately
adjust the low and high frequency responses of the Audio Processor. This
permits customization to the patient's needs in both the low and high
frequency channels commensurate with their specific hearing loss
characteristic.
The Company received approval to affix the CE mark to the Vibrant P
Soundbridge in March 1998 and commenced selling activities in the European
Union at that time. The Vibrant P Soundbridge has superseded the Company's
first generation semi-implantable Soundbridge. In the United States, the
Company has completed enrollment in the pivotal phase of a U.S. Food and Drug
Administration ("FDA") approved multi-center study and has submitted its pre-
market approval (PMA) application for the Vibrant P Soundbridge. There can be
no assurance that the Company's PMA application will result in a timely
approval of the Vibrant P Soundbridge, if at all.
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 are usually limited in
effectiveness at higher frequencies due to acoustic feedback and acoustic
receiver response limitations. With the increasing exposure to noise in modern
society, it has been observed that people may experience noise-induced hearing
loss from aircraft, automobiles, lawn mowers and high powered stereo equipment
as well as military service and machinery within the workplace. The Vibrant HF
Soundbridge will be configured through selective signal processing.
The Company received permission to affix the CE mark to the Vibrant HF
Soundbridge in July 1998. The Company is gathering clinical data on the
Vibrant HF Soundbridge on a limited number of patients in Europe prior to
initiating full-scale commercial selling activities. In the United States, the
patients are still being enrolled in the Company's study to evaluate the
Vibrant HF.
The Vibrant D Soundbridge is similar to the Vibrant P Soundbridge, but is
designed to permit an improved degree of customization to address the specific
needs of a particular user's hearing loss, through digital signal processing.
Fully automatic and independent sound processing in three separate frequency
channels is provided. At the time of fitting, the Audio Processor is connected
to a programming unit that allows the audiologist to adjust separately the
low, middle and high frequency responses. This sophisticated system will be
capable of analyzing sound and automatically adjusting the Soundbridge's
response.
The Company received approval to affix the CE mark to the Vibrant D
Soundbridge in May 1999 and commenced selling activities in the European Union
in June 1999. In the United States, the Company received
10
<PAGE>
approval of an IDE supplement in March 1999 to include the Vibrant D
Soundbridge in its existing pivotal trial of the Vibrant P Soundbridge. The
Company has completed enrollment of patients and has submitted its pre-market
approval application for the Vibrant D Soundbridge as part of its pre-market
application for the Vibrant P Soundbridge. There can be no assurance that the
Company's pre-market approval application will result in a timely approval of
the Vibrant D Soundbridge, if at all.
During 1999, the Company entered into an OEM Supply and Technology Agreement
with Siemens Audiologische Technik GmbH, of Erlangen, Germany. In accordance
with this agreement, Siemens agreed to supply to the Company with its most
advanced digital signal processing (DSP) technology for use in the Company's
products. Additionally, Siemens agreed to license to the Company its state-of-
the-art programming platform, known as the CONNEXX(TM) programming system.
Utilizing this new signal processing technology from Siemens, the Company is
currently developing a fourth generation Audio Processor similar to the
Vibrant D Soundbridge, but designed to permit an even greater degree of
customization to address the specific needs of a particular user's hearing
loss. This latest digital processing technology incorporates eight separate
frequency channels that can be individually adjusted or adjusted in
combinations of channels. At the time of fitting, the Audio Processor is
connected to a programming unit that allows the audiologist to independently
adjust each of the eight frequency response channels, providing more optimal
tuning of the Soundbridge response to the patient's particular hearing loss.
The Company believes that this sophisticated system, based on Siemens DSP
technology, will be capable of continuously analyzing sound and automatically
adjusting the Soundbridge's response. This system will also incorporate new
programming technology (CONNEXX) that will allow the audiologist to program
the Audio Processor with greater flexibility and accuracy using a PC-based
programmer. It is intended to provide automated algorithms for assisting the
audiologist to more quickly and easily achieve the desired Soundbridge
response.
The Company intends to submit an IDE supplement for this latest generation
Audio Processor during 2000 and also to initiate a limited clinical trial in
2000. The Company also intends to request authorization to affix the CE mark
to this latest generation Audio Processor in 2000.
Totally Implantable Soundbridge Family
The Company is developing versions of the Soundbridge for the management of
mild to severe hearing impairment that are totally implantable with no
external components. The essential function of the FMT for these products will
be the same as in the semi-implantable Soundbridge 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 totally implantable Soundbridge, if successfully developed, will be
applicable especially for people who are particularly physically active or who
are concerned about aesthetics.
Three critical elements of producing the totally implantable Soundbridge are
the development of an implantable microphone that can adequately pick up sound
from the external environment, the development of a transcutaneously
rechargeable battery to power the device and the implementation of the signal
processing chip set. The microphone is being developed internally by the
Company and the battery is being developed under a cooperative development
project with a specialized medical battery manufacturer. Additionally, the
Company has implemented the same advanced DSP sound processing technology
available from Siemens for use in its the totally implantable Soundbridge. The
totally implantable Soundbridge will also be programmed utilizing the Siemens
CONNEXX software platform. However, there can be no assurance that such
components will be successfully developed in a timely manner, if at all.
Although the Company has commenced selling the Vibrant P and Vibrant D
Soundbridges in the European Union, all of the Company's other products are in
development, and accordingly, significant revenues from product sales will not
be realized for at least several years, if ever. There can be no assurance
that any of the Company's product development efforts will be successfully
completed, that any of the Company's products will be proven to be safe and
effective, that regulatory approvals will be obtained or labeling claims will
be as broad
11
<PAGE>
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 Phase I
study of the Vibrant Soundbridge from the FDA. The Vibrant Soundbridge was the
Company's first generation semi-implantable hearing device. This trial was
limited to five subjects, including Geoffrey R. Ball, a founder of the
Company, at two investigational sites and was intended to test the safety and
provide preliminary evidence of efficacy of the device and the surgical
procedures used to implant the device. Due to the limited number of subjects
evaluated, no statistically valid conclusions could be made from the results
reported to the FDA.
In the Phase I study, the Company observed the following performance
characteristics: increased functional gain at higher frequencies (i.e., >2000
Hz); elimination of occlusion effect; elimination of acoustic feedback;
elimination of placement loss; and reduction of maintenance issues. A self-
assessment questionnaire targeted seven communicative issues (i.e.,
reverberation, familiar talker, reduced cues, background noise, aversion to
sounds, ease of communication, and distortion of sounds). Subject responses
indicated a significant improvement in six of the seven categories with the
Vibrant Soundbridge when compared to their current acoustic hearing aid.
In November 1997, the Company filed an IDE supplement summarizing the Phase
I results, proposing the study protocol and labeling claims, providing
technical information regarding the Vibrant P Soundbridge and requesting
permission to proceed to the pivotal study. In December 1997, the FDA approved
the multi-center pivotal study in 55 subjects at up to 12 sites with the
second generation Vibrant P Soundbridge. In November 1998 the Company received
FDA approval of an additional IDE supplement to expand the inclusion criteria
to include the Vibrant HF Soundbridge in this study. As the Company had
already enrolled 54 subjects in the pivotal study, the inclusion of 15
additional subjects was requested by the Company to facilitate enrollment of a
greater number of subjects to receive the Vibrant HF Soundbridge. On December
22, 1998, the Company requested FDA approval of an IDE supplement to allow an
additional 15 subjects which was approved by the FDA on January 19, 1999.
There have been 8 subjects implanted with the Vibrant Soundbridge and fit with
the Vibrant HF Audio Processor. The remaining subjects are expected to be
enrolled in the first half of 2000. On February 11, 1999, the Company filed an
IDE supplement to study a digital Audio Processor, Vibrant D, on 54 subjects
initially enrolled in the study. The FDA approved the IDE supplement on March
3, 1999 authorizing the evaluation of the Vibrant D on those Phase III
subjects who had completed the required protocol under the second generation
Vibrant Soundbridge. A total of 50 subjects have been fit and evaluated with
the Vibrant D Soundbridge. The Company received conditional approval from the
FDA on September 10, 1999 for an IDE supplement which authorized the Company
to enroll up to 15 additional subjects under the existing protocol for the
purpose of monitoring the effects of a manufacturing change. An additional 5
subjects requested by the Company in an IDE was approved by the FDA in January
2000. A total of 30 subjects from the US and 60 from the European Union have
been enrolled and included in the protocol to monitor the manufacturing
change. These subjects have been designated as the Phase IIIa cohort. In
total, there have been 67 subjects implanted in the Phase III US clinical
study of the Vibrant Soundbridge. Fifty-nine of these to study the Vibrant P
and D Audio Processors and 8 to study the Vibrant HF.
Of the 54 subjects initially enrolled in the pivotal study, 53 have
completed the five-month protocol with the Vibrant P Audio Processor. The
study focused on five primary end-points: no change to residual hearing;
improved functional gain; elimination of occlusion; reduction of acoustic
feedback; and improved benefit and satisfaction in relation to the hearing aid
as measured by self-assessment questionnaires. The results of the study to
date support all the study endpoints and are statistically significant.
Fifty of the 54 subjects enrolled in the pivotal study also completed the 6-
week clinical study with the digital Audio Processor, Vibrant D. Those study
endpoints included measures of functional gain, reduction of acoustic
12
<PAGE>
feedback and subject perceived improvement in benefit and satisfaction
(compared to their presurgery acoustic hearing aid) as measured by self-
assessment questionnaires. Data analysis indicated statistical significance
for all of the study endpoints. Results in the U.S. clinical investigation are
consistent with those seen in the European EN540 clinical study and the post-
study commercial patients whose numbers exceed 225.
The US clinical study of subjects implanted with the Vibrant Soundbridge and
fit with the HF Audio Processor is still enrolling subjects with an expected
completion date in the first half of 2000.
The data to support the claims for safety and effectiveness of the Vibrant
Soundbridge has been submitted to the Food & Drug Administration and amended
in February 2000. The FDA has reviewed this submission and deemed it fileable.
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
that 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.
Europe
In March 1998, the Company completed a multi-center EN 540 clinical trial in
Europe at seven institutions. Clinical sites were located in Germany, Italy,
the Netherlands, the United Kingdom, Switzerland and France. The EN 540
protocol investigated the safety and performance of the first and second
generation Vibrant Soundbridge. In the EN 540 trial, 47 subjects were
implanted with the Company's Soundbridges, 19 with the first generation
Vibrant Soundbridge and 28 with the second generation. The results of the
EN540 trial were considered adequate by the Company's Notified Body for
purposes of affixing the CE mark to the Vibrant P Soundbridge. Subsequent to
the completion of the EN540 trial, the Company received authorization to affix
the CE mark to the Vibrant HF and D Soundbridges. The Company has begun
selling the Vibrant P, D and HF Soundbridge in Europe. As of December 31,
1999, approximately 225 patients have been implanted with the Vibrant
Soundbridge in Europe including patients implanted in the Company's EN540
trial as well as patients implanted subsequent to the completion of the EN540
trial.
Research and Development
The Company had 31 employees engaged in research and development, including
regulatory and clinical affairs, as of December 31, 1999. The Company's
research and development has focused on developing its patented core FMT
technology, developing its family of Vibrant Soundbridges and conducting
appropriate pre-clinical and clinical testing. The Company expended
approximately $7.9 million, $8.3 million and $6.4 million for the years ended
December 31, 1999, 1998 and 1997, respectively, on research and development.
The Company anticipates that it will continue to expend substantial resources
on completion of the development and clinical testing of the semi-implantable
family of Soundbridges, supporting manufacturing scale-up and the development
and clinical testing of the totally implantable Soundbridge. In addition, the
Company may devote resources to the development of additional external Audio
Processor enhancements and the development of a family 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.
13
<PAGE>
Manufacturing
The Company currently manufactures its products in limited quantities for
laboratory testing, for its clinical trials and for commercial sales in
Europe. The manufacture of the Company's Soundbridges is a complex operation
involving a number of separate processes, components and assemblies. Each
device is assembled and individually tested by the Company. The manufacturing
process consists primarily of assembly of internally manufactured and
purchased components and subassemblies, and certain processes are performed in
an environmentally controlled area. After completion of the manufacturing and
testing processes, a sub-contracted supplier sterilizes the implantable
devices. The Company has no experience manufacturing its products in the
volumes or with the yields that will be necessary for the Company to achieve
significant commercial sales, and there can be no assurance that the Company
can establish high volume manufacturing capacity or, if established, that the
Company will be able to manufacture its products in high volumes with
commercially acceptable yields. The Company will need to expend significant
capital resources and develop manufacturing expertise to establish commercial-
scale-manufacturing capabilities. Furthermore, prior to approval of a PMA, the
Company's facilities, procedures and practices will be subject to a pre-
approval inspection by the FDA. The Company's inability to successfully
manufacture or commercialize its Soundbridges in a timely manner 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 hearing devices and implantable medical devices, such as
pacemakers, defibrillators and drug delivery pumps. A number of components and
subassemblies, such as silicone, signal processing electronics and implant
packaging is provided by single source suppliers. Certain components of the
Vibrant Soundbridges are provided by sole source suppliers. None of the
Company's suppliers is contractually obligated to continue to supply the
Company nor is the Company contractually obligated to buy from a particular
supplier. For certain of these components and subassemblies, there are
relatively few alternative sources of supply, and establishing additional or
replacement suppliers for such components and subassemblies could not be
accomplished quickly. In addition, if the Company wishes to significantly
modify its manufacturing processes or change the supplier of a critical
component, additional approvals will be required from the FDA before the
change can be implemented. Because of the long lead time for some components
and subassemblies that are currently available from a single source, a
supplier's inability or failure to supply such components or subassemblies in
a timely manner or the Company's decision to change suppliers could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's manufacturing facilities are subject to periodic inspection by
regulatory authorities worldwide. In particular, its operations must undergo
Quality System ("QS") regulation compliance inspections conducted by the FDA
and corresponding state agencies as well as compliance inspections from our
European notified body. 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. Recently, the Company has been inspected and
recertified by our European notified body. The Company will be required to
continually comply with the QS regulation requirements in order to produce
products for sale in the United States and with applicable quality system
standards and directives in order to produce products for sale in the EU. Any
failure of the Company to comply with the QS regulation or applicable
standards and directives may result in the Company being required to take
corrective actions, such as modification of its policies and procedures.
Pending such corrective actions, the Company could be unable to manufacture or
ship any products, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Sales, Marketing and Training
The primary market for the Company's products in the United States is well-
defined and highly concentrated. Of the approximately 10,000 ENT surgeons in
the United States, approximately 400 are specialists in otology. The Company
believes that it can address this market with a direct sales force. The
Company's
14
<PAGE>
strategy is to market its products initially to those 400 specialists in
otology. Because the surgical procedure for implanting the Soundbridge
utilizes many of the same techniques currently used by otologists, the Company
believes that surgeon training will not be a significant impediment to market
acceptance.
The Company intends to focus on the elements of the patient flow process and
to create educational and other programs to stimulate patient flow at all
levels, including going directly to the hearing-impaired patient. The Company
will also seek to develop a high degree of awareness of the Soundbridge
therapy by audiologists.
The Company has established a European sales and marketing organization
which, as of December 31, 1999, is comprised of ten (10) sales, marketing and
clinical support personnel with headquarters located in Basel, Switzerland. In
December 1999, the Company established a distribution partnership with Siemens
covering most of the markets in Europe. The Company believes this partnership
will significantly enhance its presence, especially within the audiology
community. The Company also has established distributors in Latin America,
primarily focused in Brazil, Argentina and Columbia. A sales manager, based in
San Jose, is responsible for their activity. In the United States, the Company
intends to establish a direct sales force focused on both surgeons and
audiologists. In other international markets, including Japan, the Company
will seek to establish either a network of distributors or a strategic
partner.
There can be no assurance that the Company will be able to build an adequate
direct sales force or marketing organization in any country, that establishing
a direct sales force or marketing organization will be cost-effective or that
the Company's sales and marketing efforts will be successful. In addition, the
Company has entered into distribution agreements with only a limited number of
international distributors. There can be no assurance that the Company will be
able to enter into similar agreements with other qualified distributors on a
timely basis on terms acceptable to the Company, or at all, or that such
distributors will devote adequate resources to selling the Company's products.
Failure to establish an adequate direct sales force domestically and in select
international markets, and to enter into successful distribution
relationships, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Competition
The medical device industry is subject to intense competition in the United
States and abroad. The Company believes its products will compete primarily
with the traditional approaches to managing hearing impairment, principally
hearing aids. Principal manufacturers of acoustic hearing aids include Siemens
Hearing Instruments, Inc., Starkey Laboratories Inc., Beltone Electronics
Corp., Dahlberg Inc., GN ReSound Inc., Oticon, Inc., Widex Hearing Aid Co.,
Inc. and Phonak Inc. There can be no assurance that the Company's Soundbridges
will be able to successfully compete with established hearing aid products.
Although, to the Company's knowledge, none of these acoustic hearing aid
manufacturers are currently developing direct drive devices, there can be no
assurance that these potential competitors will not succeed in developing
technologies and products in the future that are more effective, less
expensive than those being developed by the Company or that do not require
surgery. The Company is aware of several university research groups and
development-stage companies that have active research or development programs
related to direct drive devices for sensorineural hearing loss. One such
company, IMPLEX AG Hearing Technology, was authorized by their European
Notifed Body on November 15, 1999 to affix the CE mark on their totally
integrated cochlear amplifier (TICA). This company has reported its intent to
pursue a clinical investigation in the U.S. to support FDA regulatory
requirements, but to the Company's knowledge, has not been given IDE approval
to initiate those trials. A US based company, Otologics, LLC is developing a
semi-implantable direct drive device for sensorineural hearing loss called the
MET (middle ear transducer). This device has begun the FDA regulatory process,
completing the Phase I (feasibility) study and recently initiating limited
multicenter clinical trials. 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.
15
<PAGE>
The Company believes that the primary competitive factors in the hearing
management market will be the quality of the hearing enhancement, safety,
whether surgery is required, reliability, endorsement by the surgeon and
audiology communities, patient comfort, cosmetic result and price. The Company
believes that it will be competitive with respect to these factors.
Nonetheless, because the Company's products are either under development or in
the very early stages of commercialization, the relative competitive position
of the Company in the future is difficult to predict.
The medical device industry is characterized by rapid and significant
technological change. Accordingly, the Company's success will depend also 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 11 issued patents and 10 pending
patent applications, of which 1 has been allowed but not yet issued.
Additionally, the Company has 1 issued and 24 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. 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
and a second United States patent covering the signal processing and
amplification circuitry for hearing aids. The Company's success will depend in
part on its ability to obtain patent protection for its products and
processes, to preserve its trade secrets, and to operate without infringing or
violating the proprietary rights of others.
The patent positions and trade secret provisions of medical device
companies, including those of the Company, are uncertain and involve complex
and evolving legal and factual questions. The coverage sought in a patent
application either can be denied or significantly reduced before or after the
patent is issued. Consequently, there can be no assurance that any patents
from pending applications or from any future patent application will be
issued, that the scope of the patent protection will exclude competitors or
provide competitive advantages to the Company, that any of the Company's
patents will be held valid if subsequently challenged or that others will not
claim rights in or ownership of the patents and other proprietary rights held
by the Company. Since patent applications are secret until patents are issued
in the United States or corresponding applications are published in other
countries, and since publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, the Company cannot be certain
that it was the first to file patent applications for such inventions.
In addition, there can be no assurance that competitors, many of which have
substantial resources, will not seek to apply for and obtain patents that will
prevent, limit or interfere with he Company's ability to make, use or sell its
products either in the United States or in international markets. Although the
Company has conducted searches of patents issued to other companies, research
or academic institutions or others, there can be no assurance that such
patents do not exist, have not been filed or could not be filed or issued,
which contain claims relating to the Company's technology, products or
processes. Patents issued and patent applications filed in the United States
or internationally relating to medical devices are numerous and there can be
no assurance that current and potential competitors and other third parties
have not filed or in the future will not file applications for, or have not
received or in the future will not receive, patents or obtain additional
proprietary rights relating to products or processes used or proposed to be
used by the Company. In addition, patent applications in foreign countries are
maintained in secrecy for a period after filing. Publication of discoveries in
the scientific or patent literature tends to lag behind actual discoveries and
the filing of related patent applications. There may be pending applications,
which if issued with claims in their present form, might provide proprietary
rights to third parties relating to products or processes used or proposed to
be used by the Company. The Company may be required to obtain licenses to
patents or proprietary rights of others. Further, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the
same extent as do the laws of the United States. Litigation or regulatory
proceedings, which could result in substantial cost and uncertainty to the
Company, may
16
<PAGE>
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, which practice these procedures, from being sued for
patent infringement. Therefore, depending upon how these limitations are
interpreted by the courts, they could have a material adverse effect on the
Company's ability to enforce any of its proprietary methods or procedures
deemed to be surgical or medical procedures on a body. In certain other
countries outside the United States, patent coverage relating to the
performance of surgical or medical procedures is not available. Therefore,
patent coverage in such countries will be limited to the FMT or to narrower
aspects of the FMT.
The medical device industry in general has been characterized by substantial
litigation. Litigation regarding patent and other intellectual property
rights, whether with or without merit, could be time-consuming and expensive
to respond to and could distract the Company's technical and management
personnel. The Company may become involved in litigation to defend against
claims of infringement by the Company, to enforce patents issued to the
Company or to protect trade secrets of the Company. If any relevant claims of
third-party patents are held as infringed and not invalid in any litigation or
administrative proceeding, the Company could be prevented from practicing the
subject matter claimed in such patents, or would be required to obtain
licenses from the patent owners of each such patent, or to redesign its
products or processes to avoid infringement. In addition, in the event of any
possible infringement, there can be no assurance that the Company would be
successful in any attempt to redesign its products or processes to avoid such
infringement or in obtaining licenses on terms acceptable to the Company, if
at all. Accordingly, an adverse determination in a judicial or administrative
proceeding or failure by the Company to redesign its products or processes or
to obtain necessary licenses could prevent the Company from manufacturing and
selling its products, which would have a material adverse effect on the
Company's business, financial condition and results of operations. Although
the Company has not been involved in any litigation to date, in the future,
costly and time-consuming litigation brought by the Company may be necessary
to enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company, or to determine the enforceability, scope and validity
of the proprietary rights of others.
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,
17
<PAGE>
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 middle ear hearing
devices, are considered Class III devices.
Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through a 510(k) Premarket Notification or
FDA approval through a PMA application. While the Company has no products for
which it expects to seek 510(k) clearance, it may file 510(k) submissions with
respect to future products. A 510(k) clearance will generally only be granted
if the information submitted to the FDA establishes that the device is
"substantially equivalent" to a legally marketed predicate medical device.
Frequently, the FDA will require clinical data in support of a 510(k)
submission, and the 510(k) process can become time-consuming and expensive.
Significant modifications of the labeling, manufacturing and design of any
product that has been cleared through the 510(k) process will require a new
510(k) Premarket Notification, if those modifications could significantly
affect the safety, effectiveness or intended use of the device.
A PMA must be submitted if the device cannot be cleared through the 510(k)
process. A PMA must be supported by extensive data, including, but not limited
to, technical, preclinical, clinical trials, manufacturing, and labeling to
demonstrate the safety and effectiveness of the device. The Company believes
that all versions of the Vibrant Soundbridge currently under development are
Class III devices and will require a PMA, as will future configurations of
implantable middle ear hearing devices. The FDA has implemented a new
streamlined PMA process called the modular PMA. Under the modular PMA process,
modules reflecting the content requirements of a traditional PMA can be
submitted as they are completed, allowing them to be reviewed and approved in
a sequential manner.
Before the Company's products can be commercialized in the United States,
the Company must submit, in a PMA, extensive data on preclinical studies and
clinical trials, device design, manufacturing, labeling, promotion and
advertising, as well as other aspects of the product. In addition, the Company
must submit clinical data gathered in trials conducted under an IDE
demonstrating to the satisfaction of the FDA that the product is safe and
effective for its labeling claims, and obtain marketing approval from the FDA.
Phase I of the IDE study has been completed. Phase I was limited to two sites
and five subjects and was intended to test the safety and provide preliminary
evidence of the effectiveness of the device and the surgical procedure used to
implant the device. In November 1997, the Company filed an IDE supplement
summarizing the Phase I results, finalizing the study protocol and proposed
labeling claims, providing technical information regarding the Vibrant P
Soundbridge, and requested permission to proceed to the pivotal study. In
December 1997, the FDA approved the multi-center pivotal study in 55 subjects
at up to 12 sites with the second generation Vibrant P Soundbridge. In
November 1998 the Company received FDA approval of an IDE supplement to
include the Vibrant HF Soundbridge in this study. To facilitate enrollment of
a greater number of subjects who receive the Vibrant HF Soundbridge, on
December 22, 1998, the Company requested FDA approval of an IDE supplement to
allow an
18
<PAGE>
additional 15 subjects. This IDE supplement was approved by the FDA on January
19, 1999 and the Company has enrolled 8 subjects in this part of the clinical
study. In March 1999 the FDA approved an IDE supplement permitting the
evaluation of the Vibrant D Soundbridge. Subjects who had completed the
clinical trial protocol for the Vibrant P Soundbridge were eligible for
enrollment in the evaluation of the Vibrant D Soundbridge. In September 1999
the Company submitted a PMA pursuant to the modular process which included
data gathered in the clinical study of the Vibrant P and Vibrant D
Soundbridges. The Company also submitted information related to a
manufacturing change to the device and proposed to enroll additional subjects
to provide safety data on this manufacturing change. The Company placed an
applicant hold on the FDA's fileability review of the Company's PMA pending
agreement on a protocol for the safety follow-up of those additional subjects.
In January 2000 the FDA approved the Company's protocol for 90 subjects (30
from the U.S. or Canada and 60 from the European Union), all of whom have been
enrolled. In February 2000 the Company amended its PMA application and
requested a removal of applicant hold on the FDA's fileability review of the
PMA. The FDA has reviewed this submission and deemed it fileable. 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.
New PMAs or PMA supplements are required for significant modifications to
the manufacture, labeling and design of a device that is approved through the
PMA process. Supplements to a PMA often require submission of the same type of
information as a PMA, except that the supplement is limited to information
needed to support any changes from the device covered by the original PMA and
may not require as extensive clinical data or the convening of an advisory
panel.
The PMA process can be expensive, uncertain and can frequently require
several years. Even when a PMA is approved, the FDA may impose restrictions on
the indications for which the device can be marketed. There can be no
assurance that the Company will be able to obtain necessary approvals on a
timely basis, or at all, and delays in obtaining or failure to obtain such
approvals, the loss of previously obtained approvals, or failure to comply
with existing or future regulatory requirements could have an adverse effect
on the Company's business, financial condition and results of operations.
Subsequent to the receipt of a FDA approval, the Company will continue to be
regulated by the FDA with regard to the reporting of adverse events related to
its products, and ongoing compliance with QS regulation. The Company's
manufacturing facility must be registered with the FDA and the CDHS and will
be subject to periodic inspections by the FDA and by the CDHS. A Device
Manufacturing License has been issued by the State of California and this
license must be renewed annually for the Company to continue manufacture of
medical devices in California.
Europe
The primary regulatory environment in Europe is that of the EU which
consists of 15 countries encompassing most of the major countries in Europe.
The EU has adopted numerous directives and standards regulating the design,
manufacture, clinical trial, labeling, and adverse event reporting for medical
devices. The principal directives prescribing the laws and regulations
pertaining to medical devices in the EU are the Medical Devices Directive
93/42/EEC ("MDD") and the Active Implantable Medical Devices Directive
90/385/EEC ("AIMDD"). In the EU, the Company's soundbridges will be regulated
as active implantables and therefore be governed by the AIMDD. For products,
such as those of the Company, that have not previously
19
<PAGE>
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 received approval to affix the CE mark to
the Vibrant P, the Vibrant HF, and the Vibrant D Soundbridges. To satisfy
these requirements, the Company generally must complete a clinical trial
conducted under European clinical trial standards (EN 540) to determine the
safety and performance of the products. The Vibrant HF and Vibrant D
Soundbridges utilize the same implanted component as the Vibrant P
Soundbridge. Accordingly, the Notified Body did not require additional
clinical data for the Vibrant HF and Vibrant D Soundbridges. The Company must
continue to pass annual EN ISO 9001, EN 46001 and AIMDD 2.3 quality system
audits in order to retain the authorization to affix the CE mark to its
products.
Once a manufacturer has satisfactorily completed the regulatory compliance
tasks required by the directives and received favorable determinations by the
Notified Body, it is eligible to place the CE mark on its products.
Manufacturers are subject to ongoing regulation under the AIMDD. The quality
system will be subject to periodic audit and recertification, and serious
adverse events must be reported to the authorities in the country where the
incident takes place. If such incidents occur, the manufacturer may have to
take remedial action, including withdrawal of the product from the EU market.
While no additional premarket approvals in individual EU countries are
required, prior to the marketing of a device bearing the CE mark, practical
complications with respect to market introduction may occur. For example,
differences among countries have arisen with regard to labeling requirements.
Also, as the directives do not cover reimbursement and distribution practices,
differences may occur in these and other areas.
Third-Party Reimbursement
The Company believes that its products will generally be purchased by
hospitals and otology practices upon the recommendation of an otologic
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
20
<PAGE>
care costs, to reimburse all or part of the cost of the procedure in which the
medical device is being used. Such third-party payors have become increasingly
sensitive to cost containment in recent years and place a high degree of
scrutiny on coverage and payment decisions for new technologies and
procedures.
Hearing aids, which do not involve surgery and, in certain cases, are exempt
from the requirement for 510(k) approval, are generally not reimbursed,
although a modest reimbursement is provided under certain insurance plans.
Traditionally, hearing aid users have paid for these devices directly. For
cochlear implants, however, which 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 loss.
The Company's strategy is to pursue reimbursement for the Soundbridge, once
a PMA is approved by the FDA, based on surgeon endorsement and demonstrated
performance and quality of life improvement. Quality of life issues are
included in the Company's clinical trial to provide data in support of this
reimbursement strategy. There can be no assurance that the Company will be
able to demonstrate improvement in quality of life or that reimbursement will
ever be available for the Company's products.
Certain third-party payors are moving toward a managed care system in which
they contract to provide comprehensive health care for a fixed cost per
person. The fixed cost per person established by these third-party payors may
be independent of the hospital's cost incurred for the specific case and the
specific devices used. Medicare and other third-party payors are increasingly
scrutinizing whether to cover new products and the level of reimbursement for
covered products. Because the Company's hearing prostheses are currently under
development and have not received FDA clearance or approval, uncertainty
exists regarding the availability of third-party reimbursement for procedures
that would use the Company's products. Failure by physicians, hospitals and
other potential users of the Company's products to obtain sufficient
reimbursement from third-party payors for the procedures in which the
Company's products 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 products. In addition,
third-party payors may deny reimbursement if they determine that the device
used in a procedure is unnecessary, inappropriate, experimental, used for a
non-approved indication or is not cost-effective. Potential purchasers must
determine that the clinical benefits of the Company's products justify the
additional cost or the additional effort required to obtain prior
authorization or coverage and the uncertainty of actually obtaining such
authorization or coverage.
Even after obtaining the necessary foreign regulatory approvals, market
acceptance of the Company's products and products currently under development
in international markets will be dependent, in part, upon the availability of
reimbursement within prevailing health care payment systems. Reimbursement and
health care payment systems in international markets vary significantly by
country, and include both government sponsored health care and private
insurance. The Company believes that in Europe, the primary source of funding
for products such as the Company's products is the various government
sponsored healthcare programs. Requirements for the granting of reimbursement
in many countries are not clearly specified and may involve the collection of
additional clinical data in support of submissions to the appropriate health
care administrations. There can be no assurance that any required data would
be available on a timely basis or that any international reimbursement
approvals will be obtained in a timely manner, if at all. Failure to receive
international reimbursement approvals could have a material adverse effect on
market acceptance of the Company's products in the EU as well as in
international markets in which such approvals are sought.
The Company believes that in the future reimbursement will be subject to
increased restrictions both in the United States and in international markets.
The Company believes that the overall escalating cost of medical products and
services will continue to lead to increased pressures on the health care
industry, both foreign and
21
<PAGE>
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 the 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.
Employees
At December 31, 1999, the Company had 68 employees. Of these employees, 31
were in research and development, including regulatory and clinical affairs,
23 were in manufacturing and quality assurance and 14 were in administration,
sales and marketing. None of the Company's employees is covered by a
collective bargaining agreement and the Company believes that it maintains
good relations with its employees.
Scientific Advisory Board
The Company established an Audiology Advisory Board consisting of five
leading audiologists. This board brings an audiological perspective to
clinical protocol issues, audiological testing and interpretation of results.
In addition to periodic meetings of the boards, members of the boards are
available on an individual basis to consult with the Company. The Company also
uses it's clinical investigator surgeons as advisors and from time to time
holds investigator meetings to discuss results, surgical techniques and
product enhancements.
ITEM 2. PROPERTIES
The Company's principal administrative, manufacturing and research and
development facility occupies approximately 30,500 square feet in San Jose,
California, pursuant to a lease that expires in December 2002. The Company has
established an office in Basel, Switzerland for the headquarters of its
European sales and marketing organization. The Company believes that its
facilities are adequate for its business as presently operated.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "SMPX". The following table sets forth, for the periods indicated, the
range of the low and high sales prices for the Company's Common Stock as
reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal 1998:
First Quarter (from February 13, 1998)...................... $17.50 $12.44
Second Quarter.............................................. $17.00 $10.25
Third Quarter............................................... $12.13 $ 3.13
Fourth Quarter.............................................. $ 7.00 $ 2.38
Fiscal 1999:
First Quarter............................................... $ 4.38 $ 1.81
Second Quarter.............................................. $ 6.50 $ 1.88
Third Quarter............................................... $ 4.13 $ 2.13
Fourth Quarter.............................................. $ 4.06 $ 2.75
</TABLE>
As of December 31, 1999, there were approximately 151 holders of record of
the Common Stock. On December 31, 1999, the last reported sale price on the
Nasdaq National Market for the Common Stock was $3.38.
The Company has not declared or paid any cash dividends on its Common Stock.
The Company presently intends to retain earnings, if any, for use in its
business and therefore does not anticipate paying cash dividends in the
foreseeable future.
On February 17, 1998, the Company completed the sale of 2,300,000 Common
Shares at a per share price of $12.00 in a firm commitment underwritten public
offering. The offering was effected pursuant to a Registration Statement on
Form S-1 (Registration No. 333-40339), which the United States Securities and
Exchange Commission declared effective on February 12, 1998. The offering was
underwritten by Cowen & Company and UBS Securities. On February 27, 1998 the
Company completed the sale of an additional 345,000 Common Shares at a per
share price of $12.00 pursuant to the exercise of the over-allotment option by
the underwriters. Of the $31,740,000 in aggregate proceeds raised by the
Company in connection with the February offering, (i) approximately $2,221,800
was paid to the underwriters in connection with underwriting discounts and
commissions and (ii) approximately $1,120,000 was paid by the Company in
connection with offering expenses, including legal, printing and filing fees.
On December 1, 1999, the Company completed the sale of 1,000,000 common shares
at a per share price of $5.00 to Siemens Audiologische Technik GmbH. From
February 17, 1998 to December 31, 1999, the Company has used the remaining
proceeds of these financings in the following manner:
<TABLE>
<S> <C>
Use of Proceeds:
Research & Development, including clinical trials............. $13,200,000
Development of sales and marketing organization............... $ 4,400,000
Leasehold improvements and capital expenditures............... $ 1,400,000
Working capital and general corporate......................... $ 9,300,000
Temporary investments:
Short-term investments........................................ $ 5,100,000
</TABLE>
All amounts represent estimates of direct or indirect payments of amounts to
third parties. No amounts were paid directly or indirectly for the above
purposes to directors or officers of the Company, to persons owning
ten percent or more of any class of equity securities of the Company, or to
affiliates of the Company.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues....................... $ 331 $ 597 $ -- $ -- $ --
-------- -------- ------- ------- -------
Costs and expenses:
Cost of goods sold........... 4,078 1,663 -- -- --
Research and development..... 7,848 8,322 6,401 5,399 3,307
Selling, general and
administrative.............. 5,847 5,633 2,065 1,047 625
-------- -------- ------- ------- -------
Total costs and expenses... 17,773 15,618 8,466 6,446 3,932
Loss from operations........... (17,442) (15,021) (8,466) (6,446) (3,932)
Non-operating income:
Interest income, net......... 763 1,375 475 337 280
-------- -------- ------- ------- -------
Net loss....................... $(16,679) $(13,646) $(7,991) $(6,109) $(3,652)
======== ======== ======= ======= =======
Basic and diluted net loss per
common share.................. $ (1.35) $ (1.24) $ (3.10) $ (2.79) $ (1.86)
======== ======== ======= ======= =======
Shares used in computing basic
and diluted net loss per
common share.................. 12,393 10,987 2,579 2,190 1,962
======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets.......................... $17,934 $28,695 $13,141 $11,951 $7,685
Working capital....................... $11,256 $21,791 $ 9,554 $10,069 $6,188
Long-term debt and capital lease
obligations.......................... $ 1,508 $ 2,098 $ 2,325 $ 596 $ 423
Stockholders' equity.................. $10,655 $23,875 $ 8,463 $10,238 $6,593
</TABLE>
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations which express that the company "believes",
"anticipates" or "plans to.........'' as well as other statements which are not
historical fact, are forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Actual events or results may
differ materially as a result of the risks and uncertainties described herein
and elsewhere including, in particular, those factors described under
""Business'' and ""Additional Factors That Might Affect Future Results.''
Symphonix is developing a family of proprietary semi-implantable and
implantable Soundbridges for the management of mild to severe hearing
impairment. The Company's family of Vibrant Soundbridges is based on its
patented core FMT technology.
The Company received the authorization to affix the CE Mark to the first
generation Vibrant Soundbridge and the second generation Vibrant P Soundbridge
in March 1998. Authorization to affix the CE Mark to the Vibrant HF
Soundbridge and the Vibrant D Soundbridge was received in July 1998 and in May
1999, respectively. The Company began selling activities for the Vibrant P
Soundbridge and for the Vibrant D Soundbridge in the European Union in March
1998 and in June 1999, respectively.
The Company has established a European sales and marketing organization
which, as of December 31, 1999, is comprised of ten (10) sales, marketing and
clinical support personnel with headquarters located in Basel, Switzerland. In
December 1999, the Company established a distribution partnership with Siemens
covering most of the markets in Europe. The Company believes this partnership
will significantly enhance its presence, especially within the audiology
community. The Company also has established distributors in Latin America,
primarily focused in Brazil, Argentina and Columbia. One sales manager, based
in San Jose, California, is responsible for their activity. In the United
States, the Company intends to have a direct sales force focused on both
surgeons and audiologists. In other international markets, including Japan,
the Company will seek to establish either a network of distributors or a
strategic partner.
The Company's initial selling efforts in Europe have been targeted primarily
at those ENT surgeons specializing in otology. While the Company intends to
continue to market its products to these specialists, it also plans to focus
on referring physicians, audiologists, the general population of ENT
physicians and potential patients in an attempt to increase the patient flow
to the otology centers. The Company is also attempting to gather clinical and
other data which it believes will be helpful in obtaining reasonable
reimbursement levels for its products. There can be no assurance that the
Company will be successful in its efforts to increase the number of patients
who become candidates for the Company's Soundbridge or in obtaining
reimbursement for its products.
In September 1996 the Company initiated clinical trials of the Vibrant
Soundbridge in the United States. On December 11, 1997, the FDA approved a
multi-center pivotal study for 55 subjects at up to 12 sites with the second
generation Vibrant P Soundbridge. As of January 31, 1999, the Company had
enrolled a total of 54 subjects in this pivotal study. During the year ending
December 31, 1998, the Company was selected by the FDA to participate in the
new, streamlined modular PMA process. Under the modular PMA process, modules
reflecting the content requirements of a traditional PMA are submitted as they
are completed, allowing them to be reviewed and approved in a sequential
manner. To date, the Company has submitted all planned modules of its PMA for
the Vibrant Soundbridge. There can be no assurance that the Company's
participation in the modular PMA program will lead to the timely approval of
the Vibrant Soundbridge, if at all. In November 1998, the FDA approved the
inclusion of the Vibrant HF Soundbridge in the existing pivotal trial, and in
January 1999 granted the Company permission to enroll an additional 15
subjects for purposes of evaluating the Vibrant HF Soundbridge.
25
<PAGE>
Symphonix has a limited operating history. Through December 31, 1999 the
Company had not generated significant revenue from product sales. The Company
expects to incur substantial losses through at least 2001. To date, the
Company's principal sources of funding have been net proceeds from its initial
public offering completed in February 1998, private equity financings
including an investment by Siemens Audiologische Technik GmbH, an equipment
lease financing and bank borrowings.
Results of Operations
Revenue. Revenues of $331,000 and $597,000 were recorded in the years ended
December 31, 1999 and 1998, respectively, for sales of the Vibrant Soundbridge
in Europe and Latin America. In addition, revenue of $30,000, representing the
difference between the purchase price and the fair value of the Company's
Common Stock purchased by Siemens Audiologische Technik GmbH in accordance
with a Marketing and Distribution agreement, was recorded during 1999. The
remaining deferred income will be amortized over the life of the agreement. No
revenue was recorded in 1997.
Cost of goods sold. Costs of goods sold were $4.1 million and $1.7 million
in the years ended December 31, 1999 and 1998, respectively, and represents
the direct cost of the products sold as well as warranty provisions and
production variances. Additionally, the Company incurred incremental product
enhancements and non-recurring charges in 1999 of approximately $1.0 million.
There was no cost of goods sold for 1997.
Research and Development Expenses. Research and development expenses were
$7.9 million, $8.3 million and $6.4 million, in the years ended December 31,
1999, 1998 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, preparation and filing of patent applications and the start-up of
manufacturing. Research and development expenses remained relatively flat from
1998 to 1999 in part due to the stabilization and maturity of the Vibrant
Soundbridge. The Company expects its research and development expenses to
increase in 2000, primarily due to the development of the Vibrant TI
soundbridge.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $5.8 million, $5.6 million and $2.1 million in
the years ended December 31, 1999, 1998 and 1997, respectively. Selling,
general and administrative expenses consist primarily of personnel, marketing,
legal and consulting costs. Expenses remained relatively flat from 1998 to
1999, due to the stability of the European sales and marketing organization.
The Company expects its selling, general and administrative expenses to
increase in 2000, primarily due to the development of the U.S. marketing and
selling organization in conjunction with the U.S. launch.
Deferred compensation of $2.3 million was recorded in 1997, representing the
difference between the exercise prices of certain options granted and the
deemed fair value of the Company's Common Stock on the grant dates. Deferred
compensation expense of $517,000, $556,000 and $191,000 attributed to such
options was amortized during the years ended December 31, 1999, 1998 and 1997,
respectively. During 1999, the Company reversed $260,000 of unrecognized
deferred compensation relating to employees that have terminated employment
with the Company. The remaining deferred compensation will be amortized over
the vesting period of the options (generally four years).
Interest Income, net. Interest income, net was $763,000, $1.4 million and
$475,000 in the years ended December 31, 1999, 1998 and 1997, respectively.
The decrease from 1998 to 1999 was due to the reduction in cash from
operations. The increase from 1997 to 1998 was generated from interest income
on net proceeds from the Company's February 1998 initial public offering.
Income Taxes. To date, the Company has not incurred any U.S. income tax
obligations. At December 31, 1999, the Company had net operating loss
carryforwards of approximately $32.5 million for federal and $21.3 million for
state income tax purposes, which will expire at various dates through 2014 and
2004, respectively, if not utilized. The principal differences between losses
for financial and tax reporting purposes are
26
<PAGE>
the result of the capitalization of research and development and start-up
expenses for tax purposes. United States and state tax laws contain provisions
that may limit the net operating loss carryforwards that can be used in any
given year, should certain changes in the beneficial ownership of the
Company's outstanding common stock occur. Such events could limit the future
utilization of the Company's net operating loss carryforwards.
Liquidity and Capital Resources
Since its inception, the Company has funded its operations and its capital
expenditures from net proceeds of its initial public offering completed in
February 1998 totaling $28.4 million, from the private sale of equity
securities totaling $31.5 million, from an equipment lease financing totaling
$1.3 million and from bank borrowings totaling $2.0 million, net. Included in
the $31.5 million private sale of equity securities was $5.0 million in 1999
to Siemens Audiologische Technik GmbH. At December 31, 1999, the Company had
$11.3 million in working capital, and its primary source of liquidity was
$14.8 million in cash and cash equivalents and short- and long-term
investments.
Capital expenditures, related primarily to the Company's research and
development and manufacturing activities, were $220,000, $1.6 million and
$898,000 in the years ended December 31, 1999, 1998 and 1997 respectively. The
decreased capital expenditures in 1999 from 1998 relate primarily to the
Company's new facility which was established in 1998. At December 31, 1999,
the Company did not have any material commitments for capital expenditures.
In October 1997 the Company entered into a lease agreement for a new
facility for a five year term commencing January 1998. During the quarter
ended March 31, 1998 the Company relocated its research and development and
administrative functions to the new facility. The Company completed the
relocation of its manufacturing activities to the new facility in April 1998.
Through December 31, 1999, the Company has made approximately $1.8 million in
capital expenditures, primarily attributable to leasehold improvements and
furniture and fixtures related to the new facility.
The Company has a loan agreement with a bank providing for borrowings of up
to $2.0 million and for the issuance of letters of credit up to $250,000. At
December 31, 1999, the Company had borrowings of $2.0 million and an
outstanding letter of credit in the amount of $195,000 under the loan
agreement. Borrowings under the loan agreement are repayable over four years
commencing in January 2000.
Symphonix used $12.5 million in cash for operations in 1999, which was flat
compared to 1998. The primary use of cash was to fund operating losses.
The Company will expend substantial funds in the future for research and
development, preclinical and clinical testing, capital expenditures and the
manufacturing, marketing and sale of its products. The timing and amount of
spending of such capital resources cannot be accurately predicted and will
depend on several factors, including: the availability of third party
reimbursement, the progress of the Company's research and development efforts
and preclinical and clinical activities, competing technological and market
developments, the time and costs of obtaining regulatory approvals, the time
and costs involved in filing, prosecuting and enforcing patent claims, the
progress and cost of commercialization of products currently under
development, market acceptance and demand for the Company's products in the
United States, if approved for marketing, and internationally and other
factors not within the Company's control. While the Company believes that its
existing capital will be sufficient to fund its operations and its capital
investments through 2000, there can be no assurance that the Company will not
require additional financing prior to that time. In addition, there can be no
assurance that such additional financing will be available on a timely basis
on terms acceptable to the Company, or at all, or that such financing will not
be dilutive to stockholders. If adequate funds are not available, the Company
could be required to delay development or commercialization of certain of its
products, license to third parties the rights to commercialize certain
products or technologies that the Company would otherwise seek to
commercialize for itself, or reduce the marketing, customer support or other
resources devoted to certain of its products, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
27
<PAGE>
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The issue arises if
date-sensitive software recognizes a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
During 1999 the Company completed its process which addressed year 2000
readiness of its systems and completed its process of identifying and making
inquiries of its significant suppliers and large public and private sector
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to solve their own Year 2000 issues.
The Company has not experienced any significant interruption in work or cash
flow related to the date change to the year 2000, either from its own
information systems or those of significant third parties with whom the
Company does business. The Company believes that the risk of significant
business interruption due to unanticipated problems with its own systems or
the systems of significant third parties is low based on our experience to
date. In the unlikely event that unforeseen Year 2000 related internal
disruptions occur, the Company believes that its existing disaster recovery
program, which includes the manual processing of certain key transactions,
would significantly mitigate the impact.
The Company's costs to address the Year 2000 issue were approximately
$50,000, all of which were incurred during 1999. These costs included
consulting fees and costs to remediate or replace hardware and software as
well as non-incremental costs resulting from redeployment of internal
resources. The Company's Year 2000 efforts did not have a significant impact
on other information technology projects.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 establishes methods of
accounting and reporting for derivative instruments and hedging activities
related to those instruments as well as other hedging activities, and is
effective for all fiscal quarters for all fiscal years beginning after June
15, 2000, as amended by SFAS 137. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. To date, the Company has
not engaged in derivative and hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, which
outlines the basic criteria that must be met to recognize revenue and provides
guidance for presentation of revenue and for disclosure related to revenue
recognition policies in financial statements filed with the SEC. The Company
believes that adopting SAB 101 will not have a material impact on the
Company's financial position and results of operations.
Additional Factors That Might Affect Future Results
History of Losses and Expectation of Future Losses.
At December 31, 1999, the Company had an accumulated deficit of $48.8
million. Since the Company's inception in 1994, substantially all of the
Company's resources have been dedicated to research and development, clinical
trials, establishment of a European sales and marketing organization and the
initiation of sales and marketing activities in Europe. In March 1998, the
Company received the authorization to affix the CE Mark to the Vibrant and
Vibrant P Soundbridges, permitting the initiation of commercial sales in the
European Union ("EU"). In May 1999, the Company received authorization to
affix the CE Mark to the Vibrant D Soundbridge. Although the Company has
commenced selling the Vibrant P and Vibrant D Soundbridges in Europe, through
December 31,1999 the Company has not generated significant revenues from these
sales. The Company received
28
<PAGE>
CE Mark approval for the Vibrant HF Soundbridge in July 1998. In the United
States, a regulatory application for commercial use of the Company's Vibrant P
and Vibrant D Soundbridges was submitted in September 1999. The Vibrant HF
Soundbridge will require additional clinical testing prior to the submission
of a regulatory application for commercial use. All of the Company's other
products will require additional development, and preclinical and clinical
testing prior to the submission of a regulatory application for commercial use
internationally and domestically. Since the Vibrant P and Vibrant D
Soundbridges only recently became available for sale in the EU and are not
currently available for sale in the United States, significant product
revenues will not be realized for at least several years, if ever. The Company
expects its operating losses to continue at least through the year 2001 as it
continues to expend substantial funds for clinical trials in support of
regulatory approvals, expansion of research and development activities and
establishment of commercial-scale manufacturing and sales and marketing
capabilities. There can be no assurance that any of the Company's Soundbridges
will be successfully commercialized internationally or in the United States or
that the Company will achieve significant revenues from product sales. In
addition, there can be no assurance that the Company will achieve or sustain
profitability in the future. The Company's results of operations may fluctuate
from quarter to quarter or year to year and will depend upon numerous factors,
including action relating to regulatory matters, progress of clinical trials,
the timing and scope of research and development efforts, the extent to which
the Company's products gain market acceptance or achieve reasonable
reimbursement levels, the timing of scale-up of manufacturing capabilities,
the timing of expansion of sales and marketing activities and competition.
Limited Clinical Testing Experience.
In the United States, the Company has completed its pivotal clinical trials
of the Vibrant P and Vibrant D Soundbridges. The Company has also received
approval of an IDE to conduct a clinical trial of the Vibrant HF Soundbridge.
The Company's totally-implantable Soundbridge, currently under development,
will require additional development, clinical trials and regulatory approval
prior to commercialization. The results from preclinical studies and early
clinical trials may not be indicative of results obtained in later clinical
trials, and there can be no assurance that clinical trials conducted by the
Company will demonstrate sufficient safety and efficacy to obtain requisite
approvals.
The rate of completion of the Company's clinical trials may be delayed by
many factors, including slower than anticipated patient enrollment or adverse
events occurring during clinical trials. Completion of preclinical and
clinical activities may take several years, and the length of time for
completion of the required studies is unpredictable. In addition, data
obtained from preclinical and clinical activities are susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval. No
assurance can be given that any of the Company's clinical trials will be
successfully completed on a timely basis, or at all, that additional clinical
trials will be allowed by the FDA or other regulatory authorities or that such
clinical trials will commence as planned. Any delays in the Company's clinical
trials would have a material adverse effect on the Company's business,
financial condition and results of operations. Success in preclinical studies
or early stage clinical trials does not assure success in later stage clinical
trials.
Reliance on FMT Technology.
The Company has concentrated its efforts primarily on the development,
implementation and acceptance of the FMT, the patented core direct drive
technology upon which all of the Company's Soundbridges are based. The
Company's Soundbridges employ a direct drive approach to the management of
hearing impairment, which is a novel development. There can be no assurance
that the Company's Soundbridges, based on the Company's FMT technology, will
prove to be safe and effective, or that if proven safe and effective, can be
manufactured at a reasonable cost or successfully commercialized.
No Assurance of Market Acceptance.
The market acceptance of the Company's Soundbridges will depend upon their
acceptance by the medical community and patients as clinically useful,
reliable and cost-effective compared to other devices. Clinical
29
<PAGE>
acceptance will depend on numerous factors, including the establishment of the
safety and the effectiveness of the Soundbridge's ability to drive the
ossicles directly and improve hearing over currently available hearing aids.
Clinical acceptance will also depend on the receipt of regulatory approvals in
the United States and the Company's ability to adequately train ear surgeons
on the techniques for implanting the Company's Soundbridges. There can be no
assurance that the Company's Soundbridges will be preferable alternatives to
existing devices, some of which, such as the acoustic hearing aid, do not
require surgery, or that the Company's Soundbridges will not be rendered
obsolete or noncompetitive by products under development by other companies.
Patient acceptance of the Company's Soundbridges will depend in part upon
physician, audiologist and surgeon recommendations as well as other factors,
including the effectiveness, safety, reliability and invasiveness of the
procedure as compared to established approaches. Prior to undergoing surgery
for the implantation of the Company's Soundbridge, a patient may speak with a
number of medical professionals, including the patient's primary care
physician, an audiologist, an ENT specialist, as well as surgeons who
specialize in ear surgery. The failure by any of these medical professionals
to favorably recommend the Company's products and the surgery required to
implant the Soundbridge could limit the number of potential patients who are
introduced to an ear surgeon as candidates for the Company's Soundbridges.
Even if the Company's Soundbridges are adopted by the medical community, a
significant market may not develop for the Company's products unless
acceptable reimbursement from health care payors is available. There can be no
assurance that the Company's Soundbridges will be accepted by the medical
community or consumers, that acceptable reimbursement from third-party payors
will be available or that market demand for such products will be sufficient
to allow the Company to achieve profitable operations. Failure of the
Company's Soundbridges, for whatever reason, to achieve significant adoption
by the medical community or consumers or failure of the Company's products to
achieve any significant market acceptance would have a material adverse effect
on the Company's business, financial condition and results of operations.
Future Capital Requirements; Uncertainty of Additional Funding.
The Company will expend substantial funds in the future for research and
development, preclinical and clinical testing, capital expenditures and the
manufacturing, marketing and sale of its products. The timing and amount of
spending of such capital resources cannot be accurately predicted and will
depend upon several factors, including the progress of its research and
development efforts and preclinical and clinical activities, competing
technological and market developments, the time and costs of obtaining
regulatory approvals, the time and costs involved in filing, prosecuting and
enforcing patent claims, the progress and cost of commercialization of
products currently under development, market acceptance and demand for the
Company's products in the United States, if approved for marketing, and
internationally and other factors not within the Company's control. On
February 17, 1998, the Company completed an initial public offering of
2,300,000 shares of common stock. On February 27, 1998, the Company completed
the sale of an additional 345,000 shares of common stock pursuant to the
exercise by the underwriters of an over allotment option. On December 1, 1999
the Company completed a private placement of 1,000,000 common shares with
Siemens Audiologische Technik GmbH. Net proceeds to the Company totaled
approximately $33.4 million. While the Company believes that the net proceeds
of the offering, together with its previously existing capital resources and
projected interest income, will be sufficient to fund its operations and its
capital investments through 2000, there can be no assurance that the Company
will not require additional financing prior to that time. In addition, there
can be no assurance that such additional financing will be available on a
timely basis on terms acceptable to the Company, or at all, or that such
financing will not be dilutive to stockholders. If adequate funds are not
available, the Company could be required to delay development or
commercialization of certain of its products, to license to third parties the
rights to commercialize certain products or technologies that the Company
would otherwise seek to commercialize for itself, or to reduce the marketing,
customer support or other resources devoted to certain of its products, any of
which could have a material adverse effect on the Company's business,
financial condition and results of operations.
30
<PAGE>
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.
Volatility of Stock
The market prices for securities of medical device companies have
historically been highly volatile. Announcements of technological innovations
or new products by the Company or its competitors, developments concerning
proprietary rights, including patents and litigation matters, publicity
regarding actual or potential results with respect to products under
development by the Company or others, regulatory developments in both the
United States and foreign countries and public concern as to the safety of new
technologies, changes in financial estimates by securities analysts or failure
of the Company to meet such estimates and other factors may have a significant
impact on the market price 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity
Instruments". The Company had no holdings of derivative financial or commodity
instruments at December 31, 1999. The Company is exposed to financial market
risks, including changes in interest rates and foreign currency exchange
rates. The fair value of the Company's investment portfolio or related income
would not be significantly impacted by either a 100 basis point increase or
decrease in interest rates due mainly to the short-term nature of the
Company's investment portfolio. The Company's fixed rate debt obligations are
subject to interest rate risk with minimal impact. An increase in interest
rates would not significantly affect the Company's net loss. Much of the
Company's revenue and all of its capital spending is transacted in U.S.
dollars. However, the Company does enter into these transactions in other
currencies, primarily certain European currencies. At December 31, 1999, the
Company performed sensitivity analyses to assess the potential effect of this
risk and concluded that near-term changes in interest rates and foreign
currency exchange rates should not materially adversely affect the Company's
financial position, results of operations or cash flows.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of December 31, 1999 and 1998 and
for the each of the three years in the period ended December 31, 1999,
together with the related notes and the report of PricewaterhouseCoopers LLP,
independent accountants, are on the following pages. Additional required
financial information is described in Item 14.
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Symphonix Devices, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 51 present fairly, in all material
respects, the financial position of Symphonix Devices, Inc. and its
subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14(a)(2) on page
51 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 26, 2000
32
<PAGE>
SYMPHONIX DEVICES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 7,998 $ 3,401
Short-term investments........................................ 6,150 19,430
Accounts receivable, net of allowance for doubtful accounts of
$55 in 1999 and $3 in 1998................................... 117 228
Inventories................................................... 662 761
Prepaid expenses and other current assets..................... 680 693
-------- --------
Total current assets...................................... 15,607 24,513
Property and equipment, net..................................... 1,554 2,100
Long term investments........................................... 695 2,004
Other assets.................................................... 78 78
-------- --------
Total assets.............................................. $ 17,934 $ 28,695
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable.............................................. $ 574 $ 684
Accrued compensation.......................................... 1,161 1,060
Other accrued liabilities..................................... 2,026 751
Current portion of capital lease obligation................... 90 227
Current portion of bank borrowing............................. 500 --
-------- --------
Total current liabilities................................. 4,351 2,722
Capital lease obligation, less current portion.................. 8 98
Deferred revenue................................................ 1,420 --
Bank borrowings, less current portion........................... 1,500 2,000
-------- --------
Total liabilities......................................... 7,279 4,820
-------- --------
Commitments (Note 6):
Stockholders' equity:
Convertible preferred stock, $.001 par value:
Authorized: 5,000,000 shares
Issued and outstanding: no shares in 1999 and 1998........... -- --
Common stock, $.001 par value:
Authorized: 50,000,000 shares
Issued and outstanding: 13,443,000 shares in 1999 and
12,201,000 shares in 1998................................... 13 12
Notes receivable from stockholders.............................. (1,079) (484)
Deferred compensation........................................... (740) (1,517)
Additional paid-in capital...................................... 61,346 58,040
Accumulated other comprehensive loss............................ (56) (26)
Accumulated deficit............................................. (48,829) (32,150)
-------- --------
Total stockholders' equity................................ 10,655 23,875
-------- --------
Total liabilities and stockholders' equity................ $ 17,934 $ 28,695
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
33
<PAGE>
SYMPHONIX DEVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Revenue........................................... $ 331 $ 597 $ --
======== ======== =======
Costs and expenses:
Costs of goods sold............................. 4,078 1,663 --
Research and development........................ 7,848 8,322 6,401
Selling, general and administrative............. 5,847 5,633 2,065
-------- -------- -------
Total costs and expenses...................... (17,773) (15,618) (8,466)
-------- -------- -------
Operating loss................................ (17,442) (15,021) (8,466)
Interest income................................... 821 1,486 581
Interest expense.................................. (58) (111) (106)
-------- -------- -------
Net loss...................................... $(16,679) $(13,646) $(7,991)
======== ======== =======
Basic and diluted net loss per common share... $ (1.35) $ (1.24) $ (3.10)
======== ======== =======
Shares used in computing basic and diluted net
loss per common share........................ 12,393 10,987 2,579
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
34
<PAGE>
SYMPHONIX DEVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(16,679) $(13,646) $ (7,991)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of deferred compensation........ 517 556 191
Depreciation and amortization................ 766 682 498
Changes in operating assets and liabilities:
Accounts receivable........................ 111 (228) --
Inventory.................................. 99 (761) --
Prepaid expenses and other current assets.. 13 240 (374)
Accounts payable........................... (110) 318 324
Accrued compensation....................... 101 172 213
Deferred revenue .......................... 1,420 -- --
Other accrued liabilities.................. 1,275 (27) 661
-------- -------- --------
Net cash used in operating activities.... (12,487) (12,694) (6,478)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments............ (4,650) (37,086) (10,009)
Sales of short-term investments................ 19,248 21,704 8,028
Purchases of property and equipment............ (220) (1,625) (898)
Change in other assets......................... -- (2) (68)
-------- -------- --------
Net cash provided by (used in) investing
activities.............................. 14,378 (17,009) (2,947)
-------- -------- --------
Cash flows from financing activities:
Proceeds from capital leases................... -- -- 63
Payments on capital lease obligations.......... (227) (322) (296)
Proceeds from bank borrowings.................. -- -- 2,000
Proceeds from issuance of preferred stock, net
of issuance costs............................. -- -- 5,990
Proceeds from issuance of common stock, net of
issuance costs................................ 3,342 28,514 35
Issuance of note receivable to stockholder..... (370) -- --
Payments received on notes receivable from
stockholders.................................. -- 15 --
-------- -------- --------
Net cash provided by financing
activities.............................. 2,745 28,207 7,792
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 4,636 (1,496) (1,633)
Effect of exchange rates on cash and cash
equivalents..................................... (39) (11) 2
Cash and cash equivalents, beginning of year..... 3,401 4,908 6,539
======== ======== ========
Cash and cash equivalents, end of year........... $ 7,998 $ 3,401 $ 4,908
======== ======== ========
Supplemental disclosure of cash flow information
and non-cash activities
Cash paid for interest......................... $ 58 $ 111 $ 106
======== ======== ========
Common stock issued in exchange for promissory
note.......................................... $ 225 $ -- $ 360
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
35
<PAGE>
SYMPHONIX DEVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three years ended December 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Preferred Notes
Stock Common Stock Receivable Total
-------------- ------------- from Deferred Paid-In Comprehensive Accumulated Stockholders'
Shares Amount Shares Amount Stockholders Compensation Capital Income (Loss) Deficit Equity
------ ------ ------ ------ ------------ ------------ ------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31,
1996............. 8,445 $ 8 2,384 $ 2 $ (139) $ -- $20,879 $ -- $(10,513) $ 10,237
Issuance of
Series D
preferred stock
net of issuance
costs .......... 750 1 5,989 5,990
Common stock
issued in
connection with
stock option
exercises ...... 401 1 (360) 394 35
Deferred
compensation
related to grant
of options...... (2,264) 2,264 --
Amortization of
deferred
compensation.... 191 191
Unrealized
losses on short-
term
investments..... (2) (2)
Translation
adjustments..... 2 2
Net loss........ (7,991) (7,991)
------ ---- ------ --- ------- ------- ------- ---- -------- --------
Balances,
December 31,
1997............. 9,195 9 2,785 3 (499) (2,073) 29,526 -- (18,504) 8,462
Common stock
issued in
connection with
the Company's
initial public
offering, net of
issuance costs
................ 2,645 2 28,397 28,399
Conversion of
preferred stock
to common stock
upon the closing
of the Company's
initial public
offering........ (9,195) (9) 6,682 7 2 --
Common stock
issued in
connection with
stock option
exercises ...... 65 40 40
Common stock
issued pursuant
to the Company's
Stock Purchase
Plan............ 24 75 75
Payment of
promissory
note............ 15 15
Amortization of
deferred
compensation.... 556 556
Change in
unrealized
losses on short-
term
investments..... (15) (15)
Translation
adjustments..... (11) (11)
Net loss........ (13,646) (13,646)
------ ---- ------ --- ------- ------- ------- ---- -------- --------
Balances,
December 31,
1998............. -- -- 12,201 12 (484) (1,517) 58,040 (26) (32,150) 23,875
Private
placement, net
of issuance
costs........... 1,000 1 3,159 3,160
Note receivable
issued to
stockholder..... (370) (370)
Common stock
issued in
connection with
stock option
exercises ...... 62 52 52
Common stock
issued pursuant
to the Company's
Stock Purchase
Plan............ 80 130 130
Common stock
issued in
connection with
stock option
exercises for
notes
receivable...... 100 (225) 225 --
Deferred
compensation and
related
amortization ... 777 (260) 517
Change in
unrealized
losses on
investments..... 9 9
Translation
adjustments..... (39) (39)
Net loss........ (16,679) (16,679)
------ ---- ------ --- ------- ------- ------- ---- -------- --------
Balances,
December 31,
1999............. -- $ -- 13,443 $13 $(1,079) $ (740) $61,346 $(56) $(48,829) $ 10,655
====== ==== ====== === ======= ======= ======= ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
36
<PAGE>
SYMPHONIX DEVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net loss...................................... $(16,679) $(13,646) $(7,991)
Change in unrealized gain (loss) on short-term
investments.................................. 9 (15) (2)
Translation adjustments....................... (39) (11) 2
-------- -------- -------
Comprehensive loss............................ $(16,709) $(13,672) $(7,991)
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
37
<PAGE>
SYMPHONIX DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Formation and Business of the Company:
Symphonix Devices, Inc. (the "Company") was incorporated on May 17, 1994 to
develop and manufacture implantable and semi-implantable hearing devices. The
Company sells products in Europe and South America through its direct sales
force and distributors.
The Company's commercial operations commenced during 1998 at which time it
emerged from the development stage. In the course of its development
activities, the Company has sustained operating losses and expects such losses
to continue at least through 2001. The Company will finance its operations
primarily through its cash, cash equivalents and short-term investments,
together with existing credit facilities and future revenues. There can be no
assurance that the Company will not require additional funding and should this
prove necessary, the Company may sell additional shares of its common or
preferred stock through private placement or further public offerings.
2. Summary of Significant Accounting Policies:
Basis of Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Investments:
All investments are classified as available-for-sale and therefore are
carried at fair market value. Unrealized gains and losses on such securities
are reported as a separate component of stockholders' equity. Interest income
is recorded using an effective interest rate, with associated premium or
discount amortized to "investment income." Realized gains and losses on sales
of all such securities are reported in earnings and computed using the
specific identification cost method. All investments with maturity dates
greater than 365 days are classified as long term.
Property and Equipment:
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, which is generally three to five years.
Amortization of leasehold improvements and property and equipment under
capital lease obligations is computed using the straight-line method over the
shorter of the remaining lease term or the estimated useful life of the
related assets, typically five years. Upon retirement or disposal of the
asset, the cost and related accumulated depreciation are removed from the
balance sheet and any gain or loss is reflected in Other Income.
Research and Development:
Research and development costs are charged to operations as incurred.
Concentration of Credit Risk and Other Risks and Uncertainties:
The Company's cash and cash equivalents are primarily maintained at two
financial institutions in the United States. Deposits held with banks may
exceed the amount of insurance provided on such deposits. Generally these
deposits may be redeemed upon demand and therefore, bear minimal risk.
38
<PAGE>
SYMPHONIX DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company performs ongoing credit evaluations of its customers and
maintains allowances for doubtful accounts. Historically the Company has not
experienced significant losses related to individual customers. At December
31, 1999, two customers accounted for approximately 30.5% and 21.7% of
accounts receivable, respectively. At December 31, 1998, three customers
accounted for approximately 22.7%, 19.1% and 18.4% of accounts receivable,
respectively.
The Company's products require approvals from the Food and Drug
Administration and international regulatory agencies prior to commercialized
sales. During 1999, the Company received approvals to market its Vibrant D &
Vibrant HF Soundbridges in the European Union. There can be no assurance that
the Company's products will receive additional required approvals. If the
Company was denied such approvals or such approvals were delayed, it would
have a materially adverse impact on the Company.
Fair value of Financial Instruments:
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate fair values due to their short maturities. Based on
the borrowing rates currently available to the Company for loans with similar
terms, the carrying values of the equipment line of credit and bank loan
approximate fair values. Estimated fair values for short-term investments,
which are separately disclosed elsewhere, are based on quoted market prices
for the same or similar instruments.
Income Taxes:
The Company accounts for income taxes under the liability method, whereby
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Foreign Currency Translation:
The Company's international subsidiaries use their local currency as their
functional currency. Assets and liabilities are translated at exchange rates
in effect at the balance sheet date and income and expense accounts at average
exchange rates during the year. Resulting translation adjustments are recorded
directly to a separate component of stockholders' equity. Foreign currency
transaction gains and losses are included in results of operations and have
been immaterial for all periods presented.
39
<PAGE>
SYMPHONIX DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Computation of Earnings per Share:
Basic earnings per share ("EPS") is computed by dividing net loss by the
weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur from common shares
issuable through stock options, warrants and other convertible securities, if
dilutive. The following table is a reconciliation of the numerator (net loss)
and the denominator (number of shares) used in the basic and diluted EPS
calculations and sets forth potential shares of common stock that are not
included in the diluted net loss per share calculation as their effect is
antidilutive (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Basic and diluted:
Net loss ...................................... $(16,679) $(13,646) $(7,991)
Weighted average common shares outstanding..... 12,393 10,987 2,579
-------- -------- -------
Net loss per common share ..................... $ (1.35) $ (1.24) $ (3.10)
======== ======== =======
Antidutive securities:
Convertible preferred stock.................... -- -- 9,195
Options to purchase common stock............... 1,704 660 567
Common stock subject to repurchase............. 92 -- --
Warrants....................................... 34 34 46
-------- -------- -------
1,830 694 9,808
======== ======== =======
</TABLE>
Revenue Recognition:
Revenue is recognized upon shipment of product to the customer. Upon
shipment, the Company provides for estimated product returns and estimated
costs that may be incurred for product warranties. Amounts received prior to
completion of the earnings process are recorded as deferred revenue and
recognized on a straight line basis over the life of the services to be
rendered.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined on
a standard cost basis that approximates the first-in, first-out (FIFO) method.
Appropriate consideration is given to obsolescence, excessive levels,
deterioration and other factors in evaluating lower of cost or market.
Reclassifications:
Certain amounts in the prior year's financial statements have been
reclassified to conform to the 1999 presentation. These reclassifications did
not change previously reported net loss, total assets or stockholders' equity.
Recent Accounting Pronouncement:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 establishes methods of
accounting and reporting for derivative instruments and hedging activities
related to those instruments as well as other hedging activities, and is
effective for all fiscal quarters for all fiscal years beginning after June
15, 2000, as amended by SFAS 137. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. To date, the Company has
not engaged in derivative and hedging activities.
40
<PAGE>
SYMPHONIX DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, which
outlines the basic criteria that must be met to recognize revenue and provides
guidance for presentation of revenue and for disclosure related to revenue
recognition policies in financial statements filed with the SEC. The Company
believes that adopting SAB 101 will not have a material impact on the
Company's financial position and results of operations.
3. Balance Sheet Detail:
Investments:
As of December 31, 1999, available-for-sale securities consisted of the
following (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------
Amortized Unrealized Estimated
Cost Gain (losses) Fair Value Maturity Dates
--------- ------------- ---------- ---------------
<S> <C> <C> <C> <C>
Certificate of Deposit.. $1,500 $ -- $1,500 01/2000
Commercial paper........ 4,650 -- 4,650 01/2000-02/2000
U.S. Government
agencies, long term.... 701 (6) 695 11/2001
------ ---- ------
$6,851 $ (6) $6,845
====== ==== ======
</TABLE>
As of December 31, 1998, available-for-sale securities consisted of the
following (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------
Amortized Unrealized Estimated
Cost Gain (losses) Fair Value
--------- ------------- ----------
<S> <C> <C> <C>
Certificate of Deposit................... $11,512 $ -- $11,512
Commercial paper......................... 3,500 -- 3,500
Medium term notes........................ 4,420 (2) 4,418
U.S. Government agencies, long term...... 2,019 (15) 2,004
------- ---- -------
$21,451 $(17) $21,434
======= ==== =======
</TABLE>
There were no realized gains or losses recognized on the disposal of
available-for-sale securities in 1999 and 1998.
Inventories:
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
December
31,
---------
1999 1998
---- ----
<S> <C> <C>
Raw Materials...................................................... $211 $418
Work-in-Process.................................................... 183 182
Finished Goods..................................................... 268 161
---- ----
$662 $761
==== ====
</TABLE>
41
<PAGE>
SYMPHONIX DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment:
Property and equipment include amounts for assets acquired under capital
leases of $511,000 and $1,187,000, with related accumulated amortization of
$420,000 and $1,107,000 at December 31, 1999 and 1998, respectively. Property
and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Furniture and Fixtures..................................... $ 465 $ 471
Machinery and equipment.................................... 2,156 2,006
Leasehold improvements..................................... 1,127 1,067
Software................................................... 185 170
------- -------
3,933 3,714
Less accumulated depreciation and amortization............. (2,379) (1,614)
------- -------
$ 1,554 $ 2,100
======= =======
</TABLE>
Accrued Liabilities:
Accrued liabilities comprise (in thousands):
<TABLE>
<CAPTION>
December
31,
-----------
1999 1998
------ ----
<S> <C> <C>
Professional fees................................................ $ 205 $146
Clinical trials.................................................. 711 396
Deferred revenue................................................. 363 --
Warranty......................................................... 248 --
Other............................................................ 499 209
------ ----
$2,026 $751
====== ====
</TABLE>
4. Capital Lease Obligations:
The Company has capital lease obligations under 7 lease lines that expire at
various dates through 2001. Under the terms of these lease lines, the Company
is responsible for property taxes and insurance. At December 31, 1999, the
future minimum payments under capital leases are as follows (in thousands):
<TABLE>
<S> <C>
2000................................................................... $ 97
2001................................................................... 8
----
Minimum lease payments................................................. 105
Less amount representing interest...................................... (7)
----
Principal amount of minimum lease payments............................. 98
Less current portion................................................... (90)
----
$ 8
====
</TABLE>
5. Bank Borrowings
The Company has a Loan Agreement with a bank providing for borrowings of up
to $2,000,000 and the issuance of letters of credit up to $250,000. The
principal amount is being repaid over four years. Borrowings
42
<PAGE>
SYMPHONIX DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
under the agreement bear interest at the bank's prime rate plus 0.75% and is
secured by substantially all of the Company's assets. The Company is required
to maintain certain levels of cash and stockholders' equity and to comply with
certain other financial covenants.
At December 31, 1999, the Company had borrowings of $2,000,000 and an
outstanding letter of credit in the amount of $195,000 under the Loan
Agreement.
Future payments of principal under the Loan Agreement are as follows (in
thousands):
<TABLE>
<S> <C>
2000.................................................................. 500
2001.................................................................. 500
2002.................................................................. 500
2003.................................................................. 500
------
$2,000
======
</TABLE>
6. Commitments:
The Company rents its primary facilities under an operating lease that
expires in December 2002. Under the terms of the lease, the Company is
responsible for certain taxes, insurance and maintenance expenses.
Future minimum rental payments under all operating leases as of December 31,
1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000.................................................................. 720
2001.................................................................. 635
2002.................................................................. 666
------
$2,021
======
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
$654,000, $750,000 and $162,000, respectively.
7. Stockholders' Equity:
Initial Public Offering
On February 17, 1998, the Company completed the sale of 2,300,000 shares of
its common stock at a price of $12 per share in a firm commitment underwritten
public offering. On February 27, 1998 the Company completed the sale of an
additional 345,000 shares at a price of $12 per share pursuant to an exercise
of an over-allotment option by the underwriters. Aggregate proceeds of these
sales of common stock, net of issuance costs were $28.4 million.
In connection with the initial public offering, the Company filed an Amended
and Restated Certificate of Incorporation which eliminated the existing
convertible preferred stock, changed the number of authorized shares of
preferred stock to 5,000,000 shares, $0.001 par value, and increased the
shares of common stock authorized to 50,000,000 shares.
Reincorporation in Delaware
In January 1998, the Company reincorporated in Delaware. Under the
reincorporation, each class and series of shares of the predecessor company
were exchanged for one share of identical class and series of stock of the
43
<PAGE>
SYMPHONIX DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Delaware successor company having a par value of $0.001 per share for both
common stock and preferred stock. The accompanying consolidated financial
statements have been adjusted retroactively to give effect to the
reincorporation.
Reverse Stock Split:
Share and per share data presented reflect a one-for-1.376 reverse stock
split of the Company's common stock and a corresponding change in the
preferred stock conversion ratios effective in February 1998. All common stock
and per share amounts in these financial statements have been adjusted
retroactively to give effect to the split.
Private Placement:
In December 1999, the Company consummated a private sale of 1,000,000 shares
of the Company's common stock to Siemens Audiologische Technik GmbH at a
purchase price of $5.00 per share in connection with a Marketing and
Distribution Agreement. The purchase price exceeded the fair market value of
the Company's common stock as reported on the Nasdaq National Market. The
difference between the sales price and the fair market value of the Company's
common stock has been recorded as deferred revenue and will be amortized to
revenue over the length of the contract. During 1999, the Company amortized
$30,000 to revenue relating to this agreement.
Upon certain future events the Company will sell common stock to Siemens
Audiologische Technik GmbH for gross proceeds of $5,000,000. The price per
share, within a predetermined range, will be based on the average of the
closing sales prices of the Company's common stock for 40 days immediately
preceding FDA premarket approval of the Company's product.
Warrants:
During 1997, the Company has issued warrants in connection with obtaining
its equipment lease line of credit to purchase up to 26,889 shares of common
stock at $1.38 per share and up to 6,722 shares of common stock at $5.50 per
share. The warrants are exercisable until October 2004. The fair value of
these warrants determined using the Black-Scholes valuation model was not
material, and accordingly, no value was ascribed to them for financial
reporting purposes.
Notes Receivable:
In 1997, 1996 and 1994, the Company issued 338,000, 207,000, 1,076,000
shares, respectively, of its common stock to one of the founders and other key
persons in exchange for promissory notes of $360,000, $124,000 and $30,000,
respectively. The 1997 and 1996 promissory notes bear annual interest ranging
from 6.36% to 6.84%, payable in the years 2001 and 2002. The 1994 promissory
notes bore annual interest of 5.36%, payable in the year 1999, but were repaid
by two principal payments of $15,000 made in each of 1994 and 1998. The
related shares are pledged as collateral for the notes.
During June 1999, the Company issued notes receivable to a key employee in
the amount of $370,000. The note bears annual interest at 5.19% and is due on
June 25, 2004. The note is secured by 1,025,582 shares of the Company's common
stock. Additionally in August 1999, a key employee exercised 100,000 options
to purchase common stock in exchange for a note receivable in the amount of
$225,000 and a restricted stock agreement. The note bears annual interest at
5.96% and is due upon the earlier of (i) August 2004, (ii) 30 days following
the sale of the common stock which is equal in value to the principal amount
of the note or (iii) 12 months following the date of termination of employment
with the Company. The restricted stock agreement grants the Company
44
<PAGE>
SYMPHONIX DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
repurchase rights which lapse upon attainment of full vesting, which is
scheduled to occur in August 2004. At December 31, 1999, 91,667 shares of
common stock are subject to repurchase by the Company. The related shares are
pledged as collateral for the note.
Deferred Compensation:
The difference between the exercise price and the deemed fair market value
of the Company's common stock at the date of issue of certain stock options,
totaling $2,264,000, has been recorded as deferred compensation as a component
of stockholders' equity. Of this amount, $517,000, $556,000 and $191,000 has
been recognized as expense in 1999, 1998 and 1997, respectively. During 1999,
the Company reversed $260,000 of unrecognized deferred compensation relating
to employees that have terminated employment with the Company. The remaining
$740,000 will be recognized as an expense as the shares and options vest over
periods of up to four years.
1997 Employee Stock Purchase Plan:
The Company adopted the 1997 Employee Stock Purchase Plan (the "Purchase
Plan") under which 275,000 shares of common stock have been reserved for
issuance. Eligible employees may purchase a limited number of common stock at
85% of the market value at certain plan-defined dates. During 1999 and 1998,
79,643 and 24,459 shares were purchased under the Purchase Plan, respectively.
1994 Stock Option Plan:
The 1994 Stock Option Plan (the "1994 Plan") provides for grants of
incentive stock options to employees (including officers and employee
directors) and nonstatutory stock options to employees (including officers and
employee directors) and consultants of the Company. The 1994 Plan is
administered by a committee appointed by the Board of Directors which
identifies optionees and determines the terms of options granted, including
the exercise price, number of shares subject to the option and the
exercisability thereof.
The terms of options granted under the 1994 Plan generally may not exceed
ten years. The term of all incentive stock options granted to an optionee who,
at the time of grant, owns stock representing more than 10% of the voting
power of all classes of stock of the Company or a parent or subsidiary of the
Company (a "Ten Percent Stockholder"), may not exceed five years, however.
Generally, options granted under the 1994 Plan vest and become exercisable
starting one year after the date of grant, with 25% of the shares subject to
the option becoming exercisable at that time and an additional 1/48th of such
shares becoming exercisable each month thereafter. Certain holders of options
granted under the 1994 Plan may exercise their unvested options prior to
complete vesting of shares, subject to such holder's entering a restricted
stock purchase agreement granting the Company an option to repurchase, in the
event of a termination of the optionee's employment or consulting
relationship, any unvested shares at a price per share equal to the original
exercise price per share for the option. The exercise price of incentive stock
options granted under the 1994 Plan must be at least equal to the fair market
value of the shares on the date of grant. The exercise price of nonstatutory
stock options granted under the 1994 Plan is determined by the Board of
Directors. The exercise price of any incentive stock option granted to a Ten
Percent Stockholder must equal at least 110% of the fair market value of the
common stock on the date of grant.
45
<PAGE>
SYMPHONIX DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Activity under the 1994 Plan is as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
Options Outstanding
Shares --------------------------------
Available Number of Exercise Aggregate
for Grant Shares Price Price
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1996....... 410 585 $0.14-$ 0.83 $ 339
Additional options reserved.... 375
Options granted................ (396) 396 $1.10-$ 8.81 803
Options exercised.............. (401) $0.14-$ 2.20 (394)
Options canceled............... 13 (13) $0.14-$ 1.10 (7)
------ ----- ------
Balance, December 31, 1997....... 402 567 $0.14-$ 8.81 741
Options granted................ (281) 281 $3.13-$10.50 1,145
Options exercised.............. (65) $0.14-$ 3.13 (40)
Options canceled............... 123 (123) $0.14-$10.50 (648)
------ ----- ------
Balance, December 31, 1998....... 244 660 $0.14-$ 4.13 1,198
Additional options reserved.... 1,500
Options granted................ (1,259) 1,259 $2.25-$ 3.88 3,225
Options exercised.............. -- (162) $0.14-$ 2.25 (277)
Options canceled............... -- (53) $0.73-$ 3.13 (66)
------ ----- ------
Balance, December 31, 1999....... 485 1,704 $0.14-$ 4.13 $4,080
====== ===== ======
</TABLE>
The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Options currently
Options outstanding exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (years) Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.14................. 77 4.93 $0.14 77 $0.14
$0.55-$0.83........... 111 6.45 $0.70 85 $0.69
$1.10-$2.20........... 126 7.61 $1.82 68 $1.76
$2.25................. 550 9.59 $2.25 46 $2.25
$2.56-$2.81........... 373 9.52 $2.66 22 $2.59
$3.13-$4.13........... 467 9.20 $3.28 81 $3.28
----- ---
1,704 8.91 $2.39 379 $1.62
===== ===
</TABLE>
At December 31, 1998 and 1997, outstanding options to purchase 214,000 and
215,000 shares were exercisable at weighted average exercise prices of $0.73
and $0.59 per share, respectively.
46
<PAGE>
SYMPHONIX DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has adopted the disclosure only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, the Company applies
Accounting Principles Board's Opinion No. 25 and related Interpretations in
accounting for its stock option plans. If the Company had elected, beginning
1996, to recognize compensation cost based on the fair value of the options
granted at grant date as prescribed by SFAS No. 123, net loss and basic and
diluted net loss per common share would have been increased to the proforma
amounts shown below (thousands except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net loss as reported.......................... $(16,679) $(13,646) $(7,991)
======== ======== =======
Net loss pro forma............................ $(17,152) $(13,828) $(8,032)
======== ======== =======
Basic and diluted net loss per common share as
reported..................................... $ (1.35) $ (1.24) $ (3.10)
======== ======== =======
Basic and diluted net loss per common share
proforma..................................... $ (1.38) $ (1.26) $ (3.11)
======== ======== =======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Expected dividend yield................................... 0.0% 0.0% 0.0%
Risk-free interest rate................................... 5.77% 5.2% 6.0%
Expected volatility....................................... 110.0% 73.0% 0.0%
Expected life (in years).................................. 5.0 5.0 5.0
===== ==== ===
</TABLE>
The weighted average fair values of employee stock options granted during
1999, 1998, and 1997 were, $2.14, $2.59 and $2.03, respectively. The weighted
average estimated fair value of the Purchase Plan options issued during 1999
and 1998 was $0.70 and $3.38, respectively.
The above proforma disclosures are not likely to be representative of the
effects on net income (loss) and basic and diluted net income (loss) per share
in future years, because they do not take into consideration pro forma
compensation expense related to grants made prior to 1996.
8. Income Taxes:
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999 and
1998 are presented below (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net operating loss carryforward.......................... $ 12,305 $ 9,631
Depreciation............................................. (87) 44
Capitalized start-up costs............................... 1,243 1,604
Research and development credits......................... 2,481 1,648
Deferred revenue......................................... 566 --
Accrued liabilities...................................... 873 332
Capitalized research and development..................... 437 --
Other.................................................... 33 --
Valuation allowance...................................... (17,851) (13,259)
-------- --------
$ -- $ --
======== ========
</TABLE>
47
<PAGE>
SYMPHONIX DEVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999, the Company has $32,544,000 for federal and
$21,257,000 for state net operating loss carryforwards which expire from 2009
through 2014 and 2002 through 2004, respectively, if not utilized.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. In the event the Company has had a change in
ownership, utilization of the carryforwards could be restricted.
9. Employee Benefit Plan:
During 1996, the Company established a Retirement Savings and Investment
Plan (the "Plan") under which employees may defer a portion of their salary up
to the maximum allowed under IRS rules. The Company has the discretion to make
contributions to the Plan. As of December 31, 1999, no Company contributions
have been made to the Plan.
10. 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 former President
and Chief Executive Officer.
11. Industry Segments:
The Company operates in one business segment; the design, manufacture, and
sale of implantable and semi-implantable hearing devices. Currently, the
Company markets its products to customers in the European Union and Latin
America.
Five customers individually accounted for 17.5%, 17.4%, 14.1%, 13.0% and
11.2%, respectively of the Company's revenue during 1999. Two customers
individually accounted for 18.9% and 14.7%, respectively, of the Company's
revenue in 1998.
Revenue and total long-lived assets by geographic area are as follows (in
thousands):
<TABLE>
<CAPTION>
Revenue Long-lived Assets
-------------- --------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Europe................................... $323 $544 $ -- $ 53 $ 106 $ 45
Latin America............................ 8 53 -- -- -- --
United States............................ -- -- -- 1,501 1,994 1,112
---- ---- ---- ------ ------ ------
$331 $597 $ -- $1,554 $2,100 $1,157
==== ==== ==== ====== ====== ======
</TABLE>
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements with the independent accountants on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information regarding Directors appearing under the
heading "Election of Directors" in the Registrant's proxy statement to be
filed with the Commission in connection with the annual meeting of
stockholders intended to be held on May 18, 2000, which information is hereby
incorporated by reference. The executive officers of the Registrant, and their
ages as of January 31, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Kirk B. Davis........... 42 President and Chief Executive Officer
Geoffrey R. Ball........ 36 Vice President, Chief Technical Officer and Director
Deborah A. Arthur....... 49 Vice President of Clinical Affairs
R. Michael Crompton..... 41 Vice President of Regulatory Affairs and Quality Assurance
Bob H. Katz............. 39 Vice President of Research and Development
Patrick J. Rimroth...... 45 Vice President of Operations
Gary M. Saxton.......... 39 Vice President, Sales and Marketing
William A. Perry........ 35 Vice President, European Marketing and Sales
</TABLE>
Kirk B. Davis has served as president and chief executive officer since
August. From October 1987 to August 1999, Abbott Laboratories employed Mr.
Davis most recently as Vice President and General Manager, critical care
products. From 1996 to 1998 he served as General Manager of Abbott
Laboratories UK operations and from 1994 to 1998 he served as Divisional Vice
President and Regional Director, Europe for Abbott. Mr. Davis has a BS degree
from Stanford University and an MBA degree from J.L. Kellogg Graduate School
of Management at Northwestern 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 MS degree in systems management from
the University of Southern California and a BS degree in human development and
performance from the University of Oregon.
Deborah A. Arthur has served as Vice President of Clinical Affairs of the
Company since August 1998. From 1990 to August 1998, Ms. Arthur was employed
by the Ear Nose and Throat Division of Smith & Nephew, Inc., a leading
supplier of ear, nose and throat medical devices. At Smith & Nephew, Ms.
Arthur served in a variety of management positions in clinical affairs,
regulatory affairs and quality assurance, including from June 1993 to July
1996 as Group Manager of Regulatory and Clinical Affairs, from July 1996 to
January 1998 as Group Manager of Regulatory and Clinical Affairs and Quality
Assurance, and from January 1998 to August 1998, as Director of Regulatory and
Clinical Affairs and Quality Assurance. Ms. Arthur holds a BS degree in speech
and hearing science from East Tennessee State University and an MA degree in
audiology from the University of Tennessee.
R. Michael Crompton has served as 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
49
<PAGE>
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 JD degree from the University of San Francisco and a BA degree
in biochemistry and a M.P.H. degree in biomedical sciences from the University
of California at Berkeley.
Bob H. Katz has served as 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 BA degree in business administration and a BS degree in
electrical engineering from Rutgers University, an MS degree in biomedical
engineering from Boston University and an MBA from Nova Southeastern
University.
Patrick J. Rimroth has served as Vice President of Operations of the Company
since March 1996 and as Vice President of Manufacturing, from November 1995 to
March 1996. From June 1994 to October 1995, Mr. Rimroth was Vice President of
Research and Development for Camino Neurocare, a medical device company. From
December 1988 to June 1994, Mr. Rimroth held multiple research and development
management positions with divisions of C.R. Bard, Inc., a medical device
company. Mr. Rimroth has a BS degree in biology and a B.S.E.E. degree in
electronic engineering from Purdue University.
Gary M. Saxton has served as Vice President of Sales and Marketing since
November 1999. From June 1998 to March 1999, Mr. Saxton was employed by
Cardiogenesis Corporation as Vice President of Marketing. From September 1994
to June 1998, Mr. Saxton held various marketing positions at Medtronic, Inc.
Mr. Saxton has a BS degree from the United States Military Academy at West
Point and an MBA from Harvard University.
William A. Perry has served as Vice President of European Marketing since
February 1999. From October 1996 to September 1998, Mr. Perry was Vice
President, Europe/Managing Director of Influence Medical Technologies GmbH, a
medical device company for ENT, gynecological and urological products. From
September 1994 to October 1998, Mr. Perry was the Director of Marketing &
Sales for Greater Europe for Indigo Medical. From June 1992 to August 1994,
Mr. Perry was employed as Regional Manager for Coherent GmbH. Mr. Perry has a
BS degree form Georgetown University and a Master of International Management
degree from the American Graduate School of International Management
(Thunderbird).
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information regarding executive compensation
appearing under the heading "Executive Compensation and Other Matters" in the
Registrant's proxy statement to be filed with the Commission in connection
with the annual meeting of stockholders currently planned to be held on May
18, 2000, which information is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information regarding security ownership appearing
under the heading "Record Date and Principal Share Ownership" in the
Registrant's proxy statement to be filed with the Commission in connection
with the annual meeting of stockholders currently planned to be held on May
18, 2000, which information is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information regarding appearing under the heading
"Certain Transactions" in the Registrant's proxy statement to be filed with
the Commission in connection with the annual meeting of stockholders to be
held on May 18, 2000, which information is hereby incorporated by reference.
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed in Part II of this Annual Report on
Form 10-K.
1. Financial Statements
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Accountants................................. 32
Consolidated Balance Sheet at December 31, 1999 and 1998.......... 33
Consolidated Statements of Operations for the years ended December
31, 1999, 1998 and 1997.......................................... 34
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997.......................................... 35
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997........................... 36
Consolidated Statements of Comprehensive Loss for the years ended
December 31, 1999, 1998 and 1997................................. 37
Notes to Consolidated Financial Statements........................ 38
</TABLE>
2. Financial Statement Schedules. The following consolidated financial
statement schedule of Symphonix Devices, Inc. for the year ended December 31,
1999 is filed as part of this Report and should be read in conjunction with
the consolidated financial statements:
<TABLE>
<CAPTION>
Description Page No.
----------- --------
<S> <C>
Schedule II--Valuation and Qualifying Accounts...................... 53
</TABLE>
Schedules not listed above have been omitted because they are not applicable
or are not required to be set forth therein is included in the consolidated
financial statements or notes thereto.
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on December 16, 1999, announcing that
on December 1, 1999, the Company consummated a private sale of 1,000,000
shares of its common stock to Siemens Audiologische Technik GmbH at a price of
$5.00 per share.
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
3.1* Certificate of Incorporation of Symphonix Devices, Inc., a Delaware
corporation, as currently in effect.
3.2* Bylaws of the Registrant, as currently in effect.
3.3* Certificate of Amendment of the Certificate of Incorporation of the
Registrant, amending Exhibit 3.1.
4.1* Specimen Common Stock Certificate.
10.1* Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
10.2* 1994 Stock Option Plan and forms of Stock Option Agreements
thereunder.
10.3* 1998 Employee Stock Purchase Plan.
10.4* Restated Investors Rights Agreement dated June 11, 1997 between the
Registrant and certain holders of the Registrant's securities.
10.5* Master Equipment Lease Agreement between the Registrant and Lighthouse
Capital Partners dated December 2, 1994.
10.6* Assignment by the Registrant to VibRx, Inc. dated March 14, 1997.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.7* Registrant's Series D Preferred Stock Purchase Agreement dated June
11, 1997.
10.8* Net Lease Agreement between Realtec Properties I, L.P., a
California limited partnership, and the Registrant dated July 28,
1994; letter agreements dated July 28, 1994 and August 17, 1994
and First Amendment dated April 17, 1997.
10.9* Lease between Silicon Valley Properties, L.L.C., a Delaware limited
liability partnership, and the Registrant dated October 27, 1997.
10.10* Form of Option Vesting Agreement between the Registrant and its
officers.
10.11* License Agreement dated June 1, 1995 between Baptist Medical Center
of Oklahoma, Inc. and the Registrant.
10.12* Loan and Security Agreement dated December 30, 1997 between the
Registrant and Silicon Valley Bank.
10.13(1) Loan Modification Agreement dated December 24, 1998 between the
Registrant and Silicon Valley Bank.
10.14(1) Premium Contribution Plan Effective November 1, 1998, as Amended
and Restated on January 1, 1999.
10.15(1) Form of Distribution Agreement.
10.16**(2) Joint Development and Supply Agreement dated January 16, 1998
between the Registrant and Topholm & Westermann Aps and the
subsequent Amendment thereto effective November 30, 1998.
10.17(3) Loan and Security Agreement with an attached Non-Recourse Secured
Promissory Note dated June 29, 1999 between the Registrant and
Harry S. Robbins.
10.18(4) OEM and Supply Agreement dated June 4, 1999 between the Registrant
and Siemens Audiologische Technik GMbH ("Siemens").
10.19(5) Marketing and Distribution Agreement dated November 2, 1999 between
the Registrant and Siemens.
10.20(5) Common Stock Purchase Agreement dated December 1, 1999 between the
Registrant and Siemens.
21.2 List of Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
24.1 Power of Attorney (see page 54).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Filed as an Exhibit to the Registrant's Registration Statement on Form S-1
(File No. 333-40339) and incorporated herein by reference.
** Confidential treatment requested.
(1) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
(2) Filed as exhibits to the Registrant's report on Form 10-Q for the fiscal
quarter ending March 31, 1999, and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's report on Form 10-Q for the
quarter ending June 30, 1999 and incorporated herein by reference.
(4) Filed as an exhibit to the Registrants report on Form 10-Q for the fiscal
quarter ended September 30, 1999 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's report on Form 8-K filed with the
Securities and Exchange Commission on December 20, 1999 and incorporated
herein by reference.
52
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Thousands)
<TABLE>
<CAPTION>
Balance at Balance at
beginning end of
of period Additions Deductions period
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1999...... $ 3 $52 -- $55
Year ended December 31, 1998...... -- 3 -- 3
Year ended December 31, 1997...... -- -- -- --
</TABLE>
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized, in the City of San
Jose, State of California, on the 10th day of April, 2000.
SYMPHONIX DEVICES, INC.
By: /s/ Kirk B. Davis _________
Kirk B. Davis
President, Chief Executive Officer
and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kirk B. Davis, and each of them, his attorneys-
in-fact, and agents, each with the power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and conforming all that said attorneys-
in-fact and agents of any of them, or his or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Kirk B. Davis President, Chief Executive April 10, 2000
____________________________________ Officer and Director
Kirk B. Davis
/s/ Kirk B. Davis Chief Financial and April 10, 2000
____________________________________ Accounting Officer
Kirk B. Davis
/s/ Geoffrey R. Ball Vice President and CTO April 10, 2000
____________________________________
Geoffrey R. Ball
/s/ B. J. Cassin Director April 10, 2000
____________________________________
B. J. Cassin
/s/ Hans Mehl Director April 10, 2000
____________________________________
Hans Mehl
/s/ James Corbett Director April 10, 2000
____________________________________
James Corbett
/s/ Petri T. Vainio Director April 10, 2000
____________________________________
Petri T. Vainio
</TABLE>
54
<PAGE>
EXHIBIT 21.2
LIST OF SUBSIDIARIES
1. Symphonix Devices Ltd.
2. Symphonix Devices AG
3. Symphonix Devices GmBH
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-90917) of Symphonix Devices, Inc. of our report
dated January 26, 2000 relating to the consolidated financial statements and
financial statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
April 13, 2000
55
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,998
<SECURITIES> 6,150
<RECEIVABLES> 172
<ALLOWANCES> 55
<INVENTORY> 662
<CURRENT-ASSETS> 15,607
<PP&E> 3,933
<DEPRECIATION> 2,379
<TOTAL-ASSETS> 17,934
<CURRENT-LIABILITIES> 4,351
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 59,474
<TOTAL-LIABILITY-AND-EQUITY> 17,934
<SALES> 331
<TOTAL-REVENUES> 331
<CGS> 4,078
<TOTAL-COSTS> 17,773
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 16,679
<INCOME-TAX> 0
<INCOME-CONTINUING> 16,679
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,679
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.35
</TABLE>
