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Table of Contents
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002.
 
 
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 NO. 000-23767
 
 
SYMPHONIX DEVICES, INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
  
77-0376250
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
 
2331 ZANKER ROAD
SAN JOSE, CALIFORNIA 95131-1107
(Address of principal executive offices, including zip code)
 
(408) 232-0710
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No ¨
 
As of June 30, 2002; 35,827,000 shares of the Registrant’s Common Stock were outstanding.
 

Table of Contents
 
SYMPHONIX DEVICES, INC.
 
TABLE OF CONTENTS
 
PART I.     FINANCIAL INFORMATION
     
Item 1.
   
Financial Statements (unaudited)
     
       
1
       
2
       
3
       
4
       
5
Item 2.
      
7
Item 3.
      
20
PART II.    OTHER INFORMATION
     
Item 1.
      
20
Item 2.
      
20
Item 3.
      
20
Item 4.
      
20
Item 5.
      
21
Item 6.
      
21
 

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PART I.    FINANCIAL INFORMATION
 
Item 1.    Financial Statements
 
SYMPHONIX DEVICES, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
    
June 30,
2002
     
December 31,
2001
  
    
(unaudited)
         
ASSETS
  
Current assets:
                  
Cash and cash equivalents
   
$
1,636
 
   
$
1,343
 
Short-term investments
   
 
4,060
 
   
 
10,774
 
Restricted cash
   
 
549
 
   
 
—  
 
Accounts receivable, net
   
 
274
 
   
 
329
 
Inventories
   
 
794
 
   
 
656
 
Prepaid expenses and other current assets
   
 
580
 
   
 
566
 
    
  
Total current assets
   
 
7,893
 
   
 
13,668
 
Property and equipment, net
   
 
1,002
 
   
 
1,313
 
Restricted cash
   
 
385
 
   
 
174
 
    
  
Total assets
   
$
9,280
 
   
$
15,155
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
  
Current liabilities:
                  
Accounts payable
   
$
526
 
   
$
451
 
Accrued compensation
   
 
444
 
   
 
976
 
Other accrued liabilities
   
 
1,786
 
   
 
2,708
 
Current portion of bank borrowings
   
 
500
 
   
 
500
 
    
  
Total current liabilities
   
 
3,256
 
   
 
4,635
 
Deferred revenue
   
 
549
 
   
 
732
 
Bank borrowings, less current portion
   
 
250
 
   
 
500
 
    
  
Total liabilities
   
 
4,055
 
   
 
5,867
 
    
  
Stockholders’ equity:
                  
Common stock
   
 
36
 
   
 
36
 
Notes receivable from stockholders
   
 
(400
)
   
 
(400
)
Additional paid-in capital
   
 
92,109
 
   
 
92,107
 
Accumulated other comprehensive income
   
 
68
 
   
 
260
 
Accumulated deficit
   
 
(86,588
)
   
 
(82,715
)
    
  
Total stockholders’ equity
   
 
5,225
 
   
 
9,288
 
    
  
Total liabilities and stockholders’ equity
   
$
9,280
 
   
$
15,155
 
    
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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SYMPHONIX DEVICES, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
    
Three months ended
June 30,
     
Six months ended
June 30,
  
    
2002
     
2001
     
2002
     
2001
  
Revenue
   
$
513
 
   
$
435
 
   
$
993
 
   
$
1,011
 
    
  
  
  
Costs and expenses:
                                    
Cost of goods sold
   
 
233
 
   
 
1,135
 
   
 
869
 
   
 
2,323
 
Research and development
   
 
502
 
   
 
1,870
 
   
 
1,378
 
   
 
3,521
 
Selling, general and administrative
   
 
1,649
 
   
 
2,658
 
   
 
2,972
 
   
 
5,501
 
    
  
  
  
Total costs and expenses
   
 
2,384
 
   
 
5,663
 
   
 
5,219
 
   
 
11,345
 
    
  
  
  
Operating loss
   
 
(1,871
)
   
 
(5,228
)
   
 
(4,226
)
   
 
(10,334
)
Interest income
   
 
121
 
   
 
190
 
   
 
387
 
   
 
476
 
Interest expense
   
 
(12
)
   
 
(29
)
   
 
(34
)
   
 
(62
)
    
  
  
  
Net loss
   
$
(1,762
)
   
$
(5,067
)
   
$
(3,873
)
   
$
(9,920
)
    
  
  
  
Basic and diluted net loss per common share
   
$
(0.05
)
   
$
(0.24
)
   
$
(0.11
)
   
$
(0.47
)
    
  
  
  
Shares used in computing basic and diluted net loss per common share
   
 
35,730
 
   
 
21,061
 
   
 
35,663
 
   
 
21,018
 
    
  
  
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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SYMPHONIX DEVICES, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
    
Three months ended
June 30,
     
Six months ended
June 30,
  
    
2002
     
2001
     
2002
     
2001
  
Net loss
   
$
(1,762
)
   
$
(5,067
)
   
$
(3,873
)
   
$
(9,920
)
Change in unrealized gain on short-term investments
   
 
(44
)
   
 
42
 
   
 
(174
)
   
 
105
 
Translation adjustments
   
 
(9
)
   
 
1
 
   
 
(18
)
   
 
8
 
    
  
  
  
Comprehensive loss
   
$
(1,815
)
   
$
(5,024
)
   
$
(4,065
)
   
$
(9,807
)
    
  
  
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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SYMPHONIX DEVICES, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
    
Six months ended
June 30,
  
    
2002
     
2001
  
Cash flows from operating activities:
                  
Net loss
   
$
(3,873
)
   
$
(9,920
)
    
  
Adjustments to reconcile net loss to cash used in operating activities:
                  
Amortization of deferred compensation
   
 
—  
 
   
 
34
 
Depreciation and amortization
   
 
328
 
   
 
398
 
Amortization of premium on short-term investments
   
 
46
 
   
 
76
 
Gain on sale of short-term investments
   
 
(48
)
   
 
—  
 
Changes in operating assets and liabilities:
                  
Accounts receivable
   
 
55
 
   
 
(56
)
Inventories
   
 
(138
)
   
 
340
 
Prepaid expenses and other current assets
   
 
(14
)
   
 
(77
)
Accounts payable
   
 
75
 
   
 
(164
)
Accrued compensation
   
 
(532
)
   
 
(371
)
Deferred revenue
   
 
(183
)
   
 
(189
)
Other accrued liabilities
   
 
(922
)
   
 
(535
)
    
  
Net cash used in operating activities
   
 
(5,206
)
   
 
(10,464
)
    
  
Cash flows from investing activities
                  
Purchases of short-term investments
   
 
—  
 
   
 
(26,879
)
Sales and maturities of short-term and long-term investments
   
 
6,542
 
   
 
12,010
 
Purchases of property and equipment
   
 
(17
)
   
 
(613
)
Increase in restricted cash
   
 
(760
)
   
 
(222
)
Change in other assets
   
 
—  
 
   
 
2
 
    
  
Net cash provided by (used in) investing activities
   
 
5,765
 
   
 
(15,702
)
    
  
Cash flows from financing activities
                  
Payments on bank borrowings
   
 
(250
)
   
 
(250
)
Proceeds from issuance of common stock
   
 
2
 
   
 
262
 
Payments on stockholders notes receivable
   
 
—  
 
   
 
21
 
    
  
Net cash provided by (used in) financing activities
   
 
(248
)
   
 
33
 
    
  
Net increase (decrease) in cash and cash equivalents
   
 
311
 
   
 
(26,133
)
Effect of exchange rates on cash and cash equivalents
   
 
(18
)
   
 
8
 
Cash and cash equivalents, beginning of period
   
 
1,343
 
   
 
29,535
 
    
  
Cash and cash equivalents, end of period
   
$
1,636
 
   
$
3,410
 
    
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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SYMPHONIX DEVICES, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.    Basis of Presentation:
 
The accompanying unaudited condensed consolidated financial statements as of June 30, 2002 of Symphonix Devices, Inc. (the “Company” or “Symphonix”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. Operating results for the six month period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2002, or any future interim period.
 
These financial statements and notes should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2001 and footnotes thereto, included in the Company’s Annual Report on Form 10-K.
 
These financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has sustained significant losses for the last several years. The Company will require additional funding and may sell additional shares of its common stock or preferred stock through private placement or further public offerings. There can be no assurance that the Company will be able to obtain additional debt or equity financing, if and when needed, on terms acceptable to the Company. Any additional equity or debt financing may involve substantial dilution to the Company’s stockholders, restrictive covenants or high interest costs. The failure to raise needed funds on sufficiently favorable terms could have a material adverse effect on the Company’s business, operating results and financial condition. The Company’s long-term liquidity also depends upon its ability to increase revenues from the sale of its products and achieve profitability. The failure to achieve these goals could have a material adverse effect on the operating results and financial condition of the Company.
 
2.    Computation of Basic and Diluted Net Loss per Common 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, except per share data):

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SYMPHONIX DEVICES, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 
    
Three months ended June 30,
     
Six months ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
Numerator—Basic and Diluted
                                    
Net loss
   
$
(1,762
)
   
$
(5,067
)
   
$
(3,873
)
   
$
(9,920
)
    
  
  
  
Denominator—Basic and Diluted
                                    
Weighted average common shares outstanding
   
 
35,763
 
   
 
21,119
 
   
 
35,699
 
   
 
21,079
 
Weighted average unvested common shares subject to repurchase
   
 
(33
)
   
 
(58
)
   
 
(36
)
   
 
(61
)
    
  
  
  
Total
   
 
35,730
 
   
 
21,061
 
   
 
35,663
 
   
 
21,018
 
    
  
  
  
Basic and diluted net loss per common share
   
$
(0.05
)
   
$
(0.24
)
   
$
(0.11
)
   
$
(0.47
)
    
  
  
  
Antidilutive Securities:
                                    
Options to purchase common stock
   
 
5,454
 
   
 
2,450
 
   
 
5,454
 
   
 
2,450
 
Common stock subject to repurchase
   
 
29
 
   
 
54
 
   
 
29
 
   
 
54
 
Warrants
   
 
7
 
   
 
7
 
   
 
7
 
   
 
7
 
    
  
  
  
    
 
5,490
 
   
 
2,511
 
   
 
5,490
 
   
 
2,511
 
    
  
  
  
 
3.    Inventories:
 
Inventories comprise (in thousands):
 
    
June 30, 2002
     
December 31,
2001
Raw materials
   
$
352
     
$
227
Work in progress
   
 
365
     
 
340
Finished goods
   
 
77
     
 
89
    
    
    
$
794
     
$
656
    
    
 
4.    Restricted Cash:
 
As of June 30, 2002, the Company held $750,000 in a certificate of deposit with a financial institution to comply with existing loan covenants as outlined in the amended loan agreement. The amount required to be held in a certificate of deposit will be reduced as the Company makes payments on the outstanding loan balance. In addition, the Company has outstanding letters of credit in the amount of $184,000 which are collateralized by certificates of deposit of this amount.
 
5.    Recent Accounting Pronouncements
 
In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 143, (“SFAS 143”), “Accounting for Asset Retirement Obligations,” which is effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 applies to all entities. The Company believes that the adoption of SFAS 143 will not have a material impact on the consolidated financial position or results of operations of the Company.

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SYMPHONIX DEVICES, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 
In April of 2002, the FASB issued Statement of Financial Accounting Standards No. 145 (“SFAS 145”), “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” which is effective for fiscal years beginning after May 15, 2002. Under SFAS 145, gains and losses from the extinguishment of debt should be classified as extraordinary items only if they meet the criteria of Accounting Principles Board Opinion No. 30. SFAS also addresses financial accounting and reporting for capital leases that are modified in such a way as to give rise to a new agreement classified as an operating lease. The Company believes that the adoption of SFAS 145 will not have a material impact on the consolidated financial position or results of the operations of the Company.
 
In June of 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities,” which is effective for exit or disposal activities initiated after December 31, 2002. SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Under SFAS 146, a liability is required to be recognized for a cost associated with an exit or disposal activity when the liability is incurred. SFAS 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a retirement or disposal activity covered by FASB Statements No. 143 and 144. The Company believes that the adoption of SFAS 146 will not have a material impact on the consolidated financial position or results of the operations of the Company.
 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
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 “Factors That May Affect Future Results.”
 
Overview
 
Symphonix has developed a family of proprietary implantable Soundbridges for the management of mild to severe hearing impairment. Our family of Vibrant Soundbridges is based on our patented core Floating Mass Transducer, or FMT, technology. Late in 2000, we received approval from the Food and Drug Administration, or FDA, to commercially market our products in the United States. Subsequent to FDA approval, our products were launched to the otology community. Otologists are ear surgeons within the ear, nose and throat, or ENT, group of doctors.

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Table of Contents
 
Symphonix has established a United States sales and marketing organization which, as of June 30, 2002, was comprised of fifteen sales, marketing and clinical support personnel. Symphonix has initiated marketing efforts focused on otologists, audiologists—the health professionals who assess hearing problems and recommend hearing devices—and directly to those suffering hearing loss.
 
Symphonix received the authorization to affix the CE Mark to the first generation Vibrant Soundbridge and the second generation Vibrant P, Model 302 Soundbridge in March 1998. Symphonix received authorization to affix the CE Mark to the Soundbridge and the Vibrant D, Model 304 Soundbridge in July 1998 and in May 1999, respectively. Symphonix began selling the Vibrant P, Model 302 Soundbridge and the Vibrant D, Model 304 Soundbridge in the European Union in March 1998 and in June 1999, respectively. In August 2000, Symphonix received FDA approval for its premarket approval application, or PMA, for the Vibrant P, Model 302 and Vibrant D, Model 304 Soundbridges. In October 2000, Symphonix received its device license for the Vibrant Soundbridge from Health Canada. Symphonix was authorized to begin marketing the Vibrant D, Model 404 in Europe in May 2000 and received Premarket Approval by the FDA in January 2001. Symphonix has recently completed a clinical trial for adults with a mild hearing loss. Symphonix has filed a PMA supplement to expand its application for adults with a mild to severe sensorineural hearing loss and expects approval of this supplement in late 2002.
 
In December 1999, Symphonix established a distribution partnership with Siemens Audiologische Technik GmbH, or Siemens, covering most of the markets in Europe. As of January 1, 2001, Siemens was granted full distributorship of the European market. Symphonix believes this partnership has significantly enhanced its presence, especially within the audiology community.
 
Symphonix’s initial selling efforts in Europe have been targeted primarily at those ENT surgeons specializing in otology. Symphonix intends to continue to market its products to these specialists; however, with the Siemens agreement, it is also focusing 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.
 
Symphonix has a limited operating history. Through June 30, 2002 Symphonix had not generated significant revenue from product sales. Symphonix expects to incur substantial losses through at least 2002. To date, Symphonix’s principal sources of funding have been net proceeds from its initial public offering completed in February 1998, private equity financings including investments by Siemens, an equipment lease facility and bank borrowings.

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Results of Operations
 
Revenue.    Revenue was $0.5 million in the three months ended June 30, 2002 compared to $0.4 million in the three months ended June 30, 2001. Revenue was $1.0 million in the six months ended June 30, 2002 and June 30, 2001. Revenue in all periods was the result of selling activities to our distributor in Europe and direct sales in the United States. Revenue in the six months ended June 30, 2002 and 2001 included $192,000 and $189,000, respectively, representing the amortization of the difference between the purchase price and fair value of the Company’s common stock purchased by Siemens in connection with a Marketing and Distribution Agreement. The remaining deferred income will be amortized over the life of the agreement.
 
Cost of Goods Sold.    Cost of goods sold decreased to $0.2 million for the three months ended June 30, 2002 from $1.1 million for the three months ended June 30, 2001 and decreased to $0.9 million for the six months ended June 30, 2002 from $2.3 million for the six months ended June 30, 2001. Cost of goods sold represents the direct cost of the products sold as well as manufacturing variances and accrued warranty. The decreases in cost of goods sold for both the three months and six months ended June 30, 2002 are the result of reductions in warranty costs, lower manufacturing overhead and direct labor costs. Warranty costs have decreased significantly due to the fact that we have cycled through most of the installed base of our older version audio processor and have replaced it with our newer audio processor that is substantially more reliable. Due to continued implementation of serviceability and reliability improvements we expect that our warranty costs will continue to decline in the future.
 
Research and Development Expenses.    Research and development expenses decreased to $0.5 million in the three months ended June 30, 2002 compared to $1.9 million in the three months ended June 30, 2001. Research and development expenses decreased to $1.4 million for the six months ended June 30, 2002 compared to $3.5 million for the six months ended June 30, 2001. Decreases in research and development spending are due to the completion of a number of key research and development milestones during 2001 and 2002 and reflects the reduced level of investment in the totally-implantable Vibrant Soundbridge. These factors resulted in lower headcount, consulting and project costs during the three months and six months ended June 30, 2002 compared to the same periods in 2001. Research and development expenses consist primarily of personnel costs, professional services, materials, supplies and equipment in support of product development, clinical trials, regulatory submissions, and the preparation and filing of patent applications.
 
Selling, General and Administrative Expenses.    Selling, general and administrative expenses were $1.6 million in the three months ended June 30, 2002 compared to $2.7 million in the three months ended June 30, 2001 and were $3.0 million for the six months ended June 30, 2002 compared to $5.5 million for the six months ended June 30, 2001. Decreases in selling, general and administrative spending are primarily due to certain marketing activities in support of the Company’s product introduction post FDA approval that occurred in 2001 and not in 2002. Selling, general and administrative expenses consist primarily of personnel costs, promotional costs, legal and consulting costs.
 
Interest Income (Expense).    Interest income, net of expense, decreased to $0.1 million in the three months ended June 30, 2002 from $0.2 million in the three months ended June 30, 2001 and was $0.4 million for the six months ended June 30, 2002 and June 30, 2001. The decrease in net interest income for the three months ended June 30, 2002 compared to the same period ended June 30, 2001 was due to the decrease in the Company’s cash and short-term investment balances as well as a decrease in interest rates. Interest earned in the future will depend on the Company’s funding cycles and prevailing interest rates.

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Income Taxes.    To date, the Company has not incurred any U.S. income tax obligations. At December 31, 2001, the Company had net operating loss carryforwards of approximately $74.9 million for federal and $39.0 million for state income tax purposes, which will expire at various dates through 2021 and 2011, respectively, if not utilized. The principal differences between losses for financial and tax reporting purposes are the result of the capitalization of research and development and start-up expenses for tax purposes. Federal and state tax laws contain provisions that may limit the net operating loss carryforwards that can be used in any given year, should certain changes in the beneficial ownership of the Company’s outstanding common stock occur. Such events could limit the future of the Company’s net operating loss carryforwards.
 
Liquidity and Capital Resources
 
Since inception, the Company has funded its operations and its capital investments from proceeds from its initial public offering completed in February 1998 totaling $28.4 million, from the private sale of equity securities totaling approximately $62.5 million, from an equipment lease financing totaling $1.3 million and from bank borrowings totaling $2.0 million. At June 30, 2002, the Company had $4.6 million in working capital, and its primary source of liquidity was $5.7 million in cash and cash equivalents and short-term investments. Additionally, the Company had $0.9 million of short-term and long-term restricted cash held in certificates of deposit as collateral for a bank loan and letters of credit.
 
Symphonix used $5.2 million in cash for operations in the six months ended June 30, 2002, compared to $10.5 million in the six months ended June 30, 2001 primarily in funding its operating losses. This reduction is due to expense reductions implemented by Symphonix in late 2001 and continued in 2002.
 
Capital expenditures, primarily related to the Company’s research and development and manufacturing activities, were $17,000 and $613,000 in the six months ended June 30, 2002 and 2001, respectively. The reduction in capital expenditures is due to the completion of key milestones in research and development during 2001 and 2002. At June 30, 2002, the Company did not have any material commitments for capital expenditures.
 
The Company has a loan agreement with a bank that provided for borrowings of up to $2.0 million and for the issuance of letters of credit up to $250,000. At June 30, 2002, the Company had borrowings outstanding of $750,000, outstanding letters of credit in the amount of $184,000 and no amounts available for future borrowings under the loan agreement. Borrowings under the loan agreement are repayable over four years commencing in January 2000.

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Table of Contents
 
Although Symphonix has reduced its spending on research and development, preclinical and clinical testing, capital expenditures and the manufacturing, marketing and sale of its products during the three months ended June 30, 2002 as compared to recent prior quarters, these expenditures could increase in the future. The timing and amount of spending of such capital resources cannot be accurately predicted and will depend on several factors, including: market acceptance and demand for Symphonix’s products in the United States and internationally, the availability of third party reimbursement, the progress of Symphonix’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, and other factors not within Symphonix’s control. While Symphonix believes that its existing capital will be sufficient to fund its operations and its capital investments through 2002, Symphonix needs to complete an additional financing no later than early 2003 to fund its ongoing operations. However, additional financing may not be available on a timely basis on terms acceptable to Symphonix, or at all. If adequate funds are not available, Symphonix could be required to license to third parties the rights to commercialize certain products or technologies that Symphonix would otherwise seek to commercialize for itself, or reduce the marketing, customer support or other resources devoted to certain of its products, or cease operations.
 
Recent Accounting Pronouncements
 
In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 143, (“SFAS 143”), “Accounting for Asset Retirement Obligations,” which is effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 applies to all entities. The Company believes that the adoption of SFAS 143 will not have a material impact on the consolidated financial position or results of operations of the Company.
 
In April of 2002, the FASB issued Statement of Financial Accounting Standards No. 145 (“SFAS 145”), “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” which is effective for fiscal years beginning after May 15, 2002. Under SFAS 145, gains and losses from the extinguishment of debt should be classified as extraordinary items only if they meet the criteria of Accounting Principles Board Opinion No. 30. SFAS also addresses financial accounting and reporting for capital leases that are modified in such a way as to give rise to a new agreement classified as an operating lease. The Company believes that the adoption of SFAS 145 will not have a material impact on the consolidated financial position or results of the operations of the Company.
 
In June of 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities,” which is effective for exit or disposal activities initiated after December 31, 2002. SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Under SFAS 146, a liability is required to be recognized for a cost associated with an exit or disposal activity when the liability is incurred. SFAS 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a retirement or disposal activity covered by FASB Statements No. 143 and 144. The Company believes that the adoption of SFAS 146 will not have a material impact on the consolidated financial position or results of the operations of the Company.

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Factors That May Affect Future Results
 
WE MAY NOT BE ABLE TO SECURE ADDITIONAL FUNDING TO SUPPORT OUR SUBSTANTIAL FUTURE CAPITAL REQUIREMENTS.
 
We will expend substantial funds in the future for research and development, preclinical and clinical testing, capital expenditures and the manufacturing, marketing and sale of our products. The timing and amount of spending of such capital resources cannot be accurately predicted and will depend upon several factors not within our control, including:
 
 
•
 
market acceptance and demand for our products in the United States and internationally;
 
 
•
 
competing technological and market developments;
 
 
•
 
the progress of our research and development efforts and preclinical and clinical activities;
 
 
•
 
the time and costs involved in obtaining regulatory approvals;
 
 
•
 
the time and costs involved in filing, prosecuting and enforcing patent claims; and
 
 
•
 
the progress and cost of commercialization of products currently under development.
 
We believe that our cash, cash equivalents, short-term investments and restricted cash of approximately $6.6 million at June 30, 2002 will be sufficient to fund our operations and capital investments through 2002. However, we will require additional financing after that time. Such additional financing may not be available on a timely basis or on terms acceptable to us, or at all. If adequate funds are not available, our business could fail.
 
SYMPHONIX MAY BE DELISTED ON THE NASDAQ SMALLCAP MARKET.
 
The NASDAQ SmallCap Market is a NASDAQ regulated exchange with certain maintenance requirements. One such maintenance requirement is a minimum share price of $1.00. As of July 30, 2002 our share price was $0.38. While we believe that in August of 2002 the Nasdaq will grant us a six-month waiver of this requirement, there can be no assurance that this waiver will be granted or that we would be able to comply with the requirement after the six-month period if the waiver were granted. Additionally, we can provide no assurance that in the future we will be able to meet the other maintenance requirements of the NASDAQ SmallCap Market.
 
A delisting from the NASDAQ SmallCap Market could impair our ability to raise additional working capital. If we are able to raise additional capital, the terms may not be favorable and your investment may be diluted. A delisting may impair the liquidity of our common stock and may make it difficult for you to sell your shares, and you may lose some or all of your investment.

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WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOWS, AND WE MAY NEVER BE PROFITABLE.
 
We have incurred losses every year since we began operations in 1994. At June 30, 2002, we had an accumulated deficit of $86.6 million. This deficit resulted primarily from expenses we incurred from dedicating substantially all of our resources to research and development, clinical trials and establishment of a U.S. sales and marketing organization. The Vibrant P, Model 302 and Vibrant D, Model 304 Soundbridges became available for sale in the European Union in 1998 and in the United States and Canada in 2000. Symphonix was authorized to begin marketing the Vibrant D, Model 404 in Europe in May 2000 and received Premarket Approval by the FDA in January 2001. However, we have not generated significant revenues from product sales to date. We may never realize significant product revenues. Even if we do achieve significant product revenues, we may never be profitable. We expect our operating losses to continue for the foreseeable future.
 
SINCE THIRD-PARTY REIMBURSEMENT IS NOT WIDELY AVAILABLE FOR PROCEDURES USING OUR SOUNDBRIDGE PRODUCTS, OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE.
 
In the United States and abroad, patients generally rely on third-party payors, principally Medicare, Medicaid, private health insurance plans, health maintenance organizations and other sources of reimbursement, to pay health care expenses, including reimbursement of all or part of the cost of the procedure in which our medical device is being used. These third-party payors are increasingly attempting to limit both the coverage and the level of reimbursement of procedures involving new devices. Currently, we have had only a small number of cases covered by third-party payors. If third-party payors do not establish adequate levels of reimbursement for procedures using our products, we may not achieve market acceptance.
 
IF OUR SOUNDBRIDGE PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, OUR BUSINESS MAY FAIL.
 
We have sold the semi-implantable Vibrant Soundbridge in Europe since 1998 and in the United States since 2000 and, as of June 30, 2002, have sold approximately 950 units. This product has not yet achieved market acceptance and may never achieve market acceptance. Market acceptance of our current and future Soundbridge products will depend upon their acceptance by the medical community and patients as safe, effective, and cost-effective compared to other devices. Our Soundbridge products may not be preferable alternatives to existing or future products, some of which, such as the acoustic hearing aid, do not require surgery. Patient acceptance of our Soundbridge products will depend in part upon physician, audiologist and surgeon recommendations as well as other factors, including the effectiveness, safety, reliability and invasiveness of the procedure as compared to established approaches. Prior to undergoing surgery for the implantation of our Soundbridge, a patient may speak with a number of medical professionals, including the patient’s primary care physician, an audiologist, an ear, nose and throat specialist, as well as surgeons who specialize in ear surgery. The failure by any of these medical professionals to favorably recommend our products and the surgery required to implant the Soundbridge could limit the number of potential patients who are introduced to an ear surgeon as candidates for our Soundbridge products. If our Soundbridge products do not achieve market acceptance, our business may fail.

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IF WE FAIL TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE OUR NEXT GENERATION OF VIBRANT SOUNDBRIDGE PRODUCTS, WE MAY NOT ACHIEVE PROFITABILITY.
 
Although we have offered the semi-implantable Vibrant Soundbridge for sale in Europe since 1998 and in the U.S. since late 2000, we have not realized significant revenue. Our success depends on our ability to successfully commercialize an improved semi-implantable Soundbridge and may also depend on the success of a totally implantable Soundbridge. With our focus on marketing the semi-implantable Soundbridge and limited investment in new products, our business may be negatively impacted by this limited investment in product development.
 
IF WE DO NOT RECEIVE AND MAINTAIN REGULATORY APPROVALS FOR NEW PRODUCTS, WE WILL NOT BE ABLE TO MANUFACTURE OR MARKET NEW PRODUCTS.
 
Approval from the FDA is necessary to manufacture and market medical devices in the United States. Other countries have similar requirements. Since we have not realized significant revenues from sales of our current products, we must receive and maintain regulatory approval for new products or our business will fail.
 
The process that medical devices must undergo to receive necessary approval is extensive, time-consuming and costly, and there is no guarantee that regulatory authorities will approve any of our product candidates.
 
WE FACE INTENSE COMPETITION IN OUR CURRENT AND POTENTIAL MARKETS AND IF WE CANNOT DEMONSTRATE THE SUPERIORITY OF OUR PRODUCTS, WE MAY FAIL TO ACHIEVE PROFITABILITY.
 
The medical device industry and the acoustic hearing aid market are subject to intense competition in the United States and abroad. We believe our products will compete primarily with hearing aids. Principal manufacturers of acoustic hearing aids include Siemens Hearing Instruments, Inc., Starkey Laboratories, Inc., GN ReSound, Inc., Oticon, Inc., Widex Hearing Aid Co., Inc., Sonic Innovations, Inc. and Phonak, Inc. Our products may not be as reliable or effective as established hearing aid products. If our products are not perceived as high quality, reliable and effective alternatives to conventional hearing aids, we may not successfully compete with established hearing aid products. Our competitors may also develop technologies and products in the future that are more reliable and effective and less expensive than those being developed by us or that do not require surgery.
 
Several companies have active research and development and marketing programs related to direct drive devices, which employ a middle ear implant designed to vibrate the small bones in the middle ear for sensorineural hearing loss. This type of hearing loss is the most common form of hearing loss that affects the majority of the 28 million people in the United States who suffer from hearing loss. Otologics, LLC, has developed a semi-implantable direct drive device for sensorineural hearing loss called the Middle Ear Transducer. This device has begun the FDA regulatory process and initiated multicenter clinical trials. Otologics has recently obtained the CE Mark in Europe that allows the company to market and sell its product in Europe. Symphonix believes that St. Croix has begun clinical trials in Europe and has recently received an IDE approval to begin clinical studies on its fully implantable piezoelectric device for sensorineural hearing loss. Soundtec, Inc., has completed clinical trials in the United States on a hybrid implantable/ear canal based hearing aid and has recently obtained FDA approval to market their product in the U.S. In addition, some large medical device companies, some of which are currently marketing implantable medical devices, may develop programs in hearing management. Many of these companies have substantially greater financial, technical, manufacturing, marketing and other resources than we have. If we fail to compete effectively with any or all of these companies and products, we will not achieve profitability.

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OUR LACK OF SALES, MARKETING AND DISTRIBUTION EXPERIENCE COULD DELAY AND INCREASE THE COSTS OF INTRODUCING OUR SOUNDBRIDGE PRODUCTS INTO THOSE MARKETS WHERE WE HAVE RECEIVED REGULATORY APPROVALS.
 
In the United States, a direct sales force is concentrating our product marketing efforts on approximately 400 specialists in ear surgery and a targeted group of professional audiologists. In Europe, our sales and marketing effort is conducted through a distribution partnership with Siemens.
 
We may fail to build a direct sales force or marketing organization that is cost effective or successful. In addition, there can be no assurance that we will be able to enter into distribution agreements similar to our agreement with Siemens on a timely basis on terms acceptable to us, or at all, or that potential distributors will develop adequate resources to sell our products. If we fail to establish an adequate direct sales force domestically and in select international markets, or to enter into successful distribution relationships, we will have difficulty selling our products and our business may fail.
 
WE HAVE LIMITED MANUFACTURING EXPERIENCE, AND MAY BE UNABLE TO EXPAND OUR MANUFACTURING CAPABILITIES SUFFICIENTLY, WHICH COULD LIMIT OUR ABILITY TO DEVELOP AND DELIVER SUFFICIENT QUANTITIES OF PRODUCTS IN A TIMELY MANNER.
 
We currently manufacture our products in small quantities for commercial sales, laboratory testing and for clinical trials. The manufacture of our Soundbridge products is a complex operation involving a number of separate processes, components and assemblies. We have no experience manufacturing our products in the volumes or with the yields that will be necessary for us to achieve significant commercial sales, and there can be no assurance that we can establish high volume manufacturing capacity or, if established, that we will be able to manufacture our products in high volumes with commercially acceptable yields. We will need to expend significant capital resources and develop manufacturing expertise to establish commercial-scale manufacturing capabilities. Our inability to successfully manufacture or commercialize our Soundbridge products in a timely manner may harm our competitive position and market success.

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IF SIEMENS DOES NOT PERFORM ITS DUTIES UNDER OUR AGREEMENTS, OUR ABILITY TO COMMERCIALIZE OUR PRODUCTS MAY BE IMPAIRED.
 
We depend on Siemens Audiologische Technik GmbH to market and distribute our product in Europe. For the three months ended June 30, 2002, the products sold under our marketing and distribution collaboration with Siemens in Europe accounted for approximately $0.2 million or 50.8%, of our total product revenues. The marketing and distribution agreement that governs this arrangement remains effective until December 1, 2004, and is subject to automatic renewal for successive one-year periods thereafter unless terminated by either Symphonix or Siemens with at least 12 months’ prior written notice. The marketing and distribution agreement may be terminated sooner if Symphonix or Siemens fails to cure a material breach within 30 days’ of notice of the breach, upon insolvency or bankruptcy of Symphonix or Siemens, or if Symphonix is acquired.
 
We also depend on Siemens to provide integrated circuits and software for use in our Soundbridge products. The supply agreement that governs this arrangement remains effective until September 30, 2004, and is subject to automatic renewal for successive one-year periods thereafter unless terminated by either Symphonix or Siemens with at least three months’ prior written notice. The supply agreement may also be terminated sooner if Symphonix or Siemens fails to cure a material breach within 30 days’ of notice of the breach. In addition to marketing and distributing our products in Europe, Siemens also manufactures and distributes its own acoustic hearing aids. Since the hearing aids manufactured and distributed by Siemens are competitive products to our Soundbridge products, Siemens could have an incentive to breach or terminate our agreements. Termination or breach by Siemens of either its marketing and distribution agreement or supply agreement with us could delay or stop the commercialization of our products.
 
WE RELY ON SEVERAL SOLE SOURCE OR LIMITED SOURCE SUPPLIERS, AND OUR PRODUCTION WILL BE SERIOUSLY HARMED IF THESE SUPPLIERS ARE NOT ABLE TO MEET OUR DEMAND AND ALTERNATIVE SOURCES ARE NOT AVAILABLE.
 
A number of components and sub-assemblies, such as silicone, signal processing electronics implant packaging, as well as sterilization services are provided by single source suppliers. Furthermore, the key analog and digital signal processing microcircuits of the Vibrant P, Model 302, Vibrant D, Model 304 and Vibrant D, Model 404 Soundbridges are provided by sole source suppliers. None of our suppliers is contractually obligated to continue to supply us nor are we contractually obligated to buy from a particular supplier. For some of these components and sub-assemblies, there are relatively few alternative sources of supply, and we cannot quickly establish additional or replacement suppliers for such components and sub-assemblies. In addition, additional approvals will be required form the FDA before we can significantly modify our manufacturing processes or change the supplier of a critical component. Because of the long lead time for some components and subassemblies that are currently available from a single source, a supplier’s inability or failure to supply such components or subassemblies in a timely manner or our decision to change suppliers could have a material adverse effect on our business, financial condition and results of operation.

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IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR COMPETITORS COULD DEVELOP AND MARKET PRODUCTS WITH SIMILAR FEATURES THAT MAY REDUCE DEMAND FOR OUR PRODUCTS.
 
Our success depends in part on our ability to protect our issued and pending patents, trade secrets and other intellectual property. The strength of this protection is uncertain. Our competitors could challenge, invalidate or circumvent our issued patents as well as any future patents. Even if upheld, our issued patents may not exclude competitors or otherwise provide competitive advantages to us.
 
In addition, a competitor may obtain patents that will interfere with our ability to make, use or sell our products either in the United States or in international markets. There may be pending applications, which if issued, might provide proprietary rights to third parties relating to products or processes used or proposed to be used by us. We may be required to obtain licenses to patents or proprietary rights of others. Further, the laws of some foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. Litigation or regulatory proceedings, which could result in substantial cost and uncertainty to us, may also be necessary to enforce our patent or other intellectual property rights or to determine the scope and validity of other parties’ proprietary rights. We may not have the financial resources to defend our patents from infringement or claims of invalidity.
 
We also rely upon trade secrets and other unpatented proprietary technology. Our competitors may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to or disclose our proprietary technology. Our policy is to require each of our employees, consultants, investigators and advisors to execute a confidentiality agreement upon commencement of an employment or consulting relationship with us. However, these agreements may not provide meaningful protection for our proprietary information in the event of unauthorized use or disclosure of such information.
 
Title 35, Section 287 of the United States Code limits the enforcement of patents relating to the performance of surgical or medical procedures on a body. This law precludes medical practitioners and health care entities, which practice these procedures, from being sued for patent infringement. Therefore, depending upon how these limitations are interpreted by the courts, they could have a material adverse effect on our ability to enforce any of our proprietary methods or procedures deemed to be surgical or medical procedures on a body. In some countries other than the United States, patent coverage relating to the performance of surgical or medical procedures is not available. Therefore, patent coverage in such countries will be limited to the Floating Mass Transducer, the patented core direct drive technology upon which all of our Soundbridge products are based, or to narrower aspects of the Floating Mass Transducer.
 
The medical device industry in general has been characterized by substantial litigation. Litigation regarding patent and other intellectual property rights, whether with or without merit, could be time-consuming and expensive to respond to and could distract our technical and management personnel. Symphonix has filed a complaint against Soundtec, Inc., the Central Ear Research Institute (CERI) and three senior Soundtec executives alleging actions that include misappropriation of trade secrets, breach of contract and inducing breach of contract. Central to the complaint is Symphonix’s contention that Soundtec and its three executives utilized Symphonix’s confidential, proprietary and trade secret information to develop and market the Direct System™, Soundtec’s implantable middle ear hearing device. Prior to their tenure at Soundtec, the three executives named in the complaint were employed by CERI, which, in December 1994, entered into an agreement to undertake a research and development project with Symphonix on the development of an implantable hearing device. The agreement permanently transferred exclusive rights to Symphonix for all technology developed during the research period. It further required that CERI disclose and permanently transfer rights to Symphonix for all improvements invented, developed or otherwise acquired by CERI for five years after termination of the agreement. Two of the named executives in the complaint executed this agreement on CERI’s behalf. Soundtec was founded in March 1997, five months after CERI terminated its agreement with Symphonix. Among other requests, Symphonix is seeking to restrain Soundtec from selling its Direct System device for a period of two years and to collect related damages.

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We may also become involved in litigation to enforce our patents, such as the Soundtec litigation initiated by us in late 2001, or to defend against claims of infringement. If any relevant claims of third-party patents are held as infringed and not invalid in any litigation or administrative proceeding, we could be prevented from practicing the subject matter claimed in such patents, or would be required to obtain licenses from the patent owners of each such patent, or to redesign our products or processes to avoid infringement. In addition, in the event of any possible infringement, there can be no assurance that we would be successful in any attempt to redesign our products or processes to avoid such infringement or in obtaining licenses on terms acceptable to us, if at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure by us to redesign our products or processes or to obtain necessary licenses could prevent us from manufacturing and selling our products, which would have a material adverse effect on our business, financial condition and results of operations. As in the case of the Soundtec litigation, costly and time-consuming litigation brought by us may be necessary to enforce patents issued to us, to protect our trade secrets or know-how, or to determine the enforceability, scope and validity of the proprietary rights of others.
 
IF WE CANNOT RETAIN OR HIRE KEY PERSONNEL, OUR BUSINESS WILL SUFFER.
 
Our future success depends in significant part upon the continued service of key sales and marketing, management, and technical personnel. Competition for such personnel is intense. There can be no assurance that we can retain our key sales and marketing, managerial, and technical personnel or that we can attract, assimilate or retain other highly qualified sales and marketing, managerial, and technical personnel in the future. The loss of key personnel, especially if without advance notice, or the inability to hire or retain qualified personnel could impair our ability to commercialize our Vibrant Soundbridge products and develop future products.
 
COMPLICATIONS MAY RESULT FROM THE USE OF OUR SOUNDBRIDGE PRODUCTS, AND INSURANCE MAY BE INSUFFICIENT OR UNAVAILABLE TO COVER POTENTIALLY SIGNIFICANT PRODUCT LIABILITY EXPENSES IF WE ARE SUED.
 
Our business involves the inherent risk of product liability claims. We maintain limited product liability insurance at coverage levels which we believe to be commercially reasonable and adequate given our current operations. However, this insurance may not be available in the future on commercially reasonable terms, or at all. Even if it is available, it may not be adequate to cover liabilities that may arise. If we are sued for an injury caused by our products, the resulting liability could result in significant expense, which could harm our business, financial condition and cash flows.

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OUR INTERNATIONAL SALES EXPOSES US TO FOREIGN CURRENCY AND POLITICAL RISKS.
 
We may expand our operations outside of the United States and may enter additional international markets, which would require significant management attention and financial resources and subject us further to the risks of operating internationally. These risks include:
 
 
•
 
unexpected changes in regulatory requirements;
 
 
•
 
delays resulting from difficulty in obtaining export licenses for certain technology;
 
 
•
 
tariffs and other barriers and restrictions;
 
 
•
 
the burdens of complying with a variety of foreign laws and regulations; and
 
 
•
 
difficulty in staffing and managing international operations.
 
We would also be subject to general political and economic risks if we expand our international operations, such as political instability, changes in diplomatic and trade relationships and general economic fluctuations in specific countries or markets.
 
We cannot predict whether quotas, duties, taxes, or other charges or restrictions will be imposed by the United States, the European Union, Japan, or other countries upon the import or export of our products in the future, or what effect any such actions would have on our business, financial condition or results of operations. There can be no assurance that regulatory, geopolitical and other factors will not adversely affect our business in the future or require us to modify our current business practices.
 
In addition, because most of our international sales, and a large portion of the associated expenses, are denominated in foreign currencies, gains and losses on the conversion to U.S. dollars of accounts receivable and accounts payable arising from international operations may contribute to fluctuations in our operating results. Further, fluctuations in currency exchange rates may negatively impact our ability to compete in terms of price against products denominated in local currencies. To date, we have not found it appropriate to hedge the risks associated with fluctuations in exchange rates. However, even if we undertake such transactions in the future, they may fail.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk
 
The Company considered the provisions of Financial Reporting Release No. 48 “Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments”. The Company had no holdings of derivative financial or commodity instruments at June 30, 2002. The Company is exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. The fair value of the Company’s investment portfolio or related income would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due mainly to the short-term nature of the Company’s investment portfolio. The Company’s fixed rate debt obligations are subject to interest rate risk but due to the minimal amount of debt, the risk is insignificant. An increase in interest rates would not significantly affect the Company’s net loss. Much of the Company’s revenue and all of its capital spending is transacted in U.S. dollars. However, the Company does enter into transactions in other currencies, primarily certain European currencies. Gains and losses on the conversion to U.S. dollars of accounts receivable and accounts payable resulting from these transactions may contribute to fluctuations in our operating results. However, these transactions in other currencies were not material relative to transactions in U.S. dollars. At June 30, 2002, 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.
 
PART II.    OTHER INFORMATION
 
Item 1.    Legal Proceedings.
 
None
 
Item 2.    Changes in Securities and Use of Proceeds.
 
None
 
Item 3.    Defaults upon Senior Securities.
 
None
 
Item 4.    Submission of Matters to a Vote of Security Holders.
 
The Annual Meeting of Stockholders of Symphonix was held on April 24, 2002. The following matters were voted upon at the meeting:
 
(i)    The following nominees were elected to hold office as Class I directors until 2005:
 
Nominee
   
Votes For
     
Votes Withheld
Martin Friedman
   
32,008,401
     
357,730
Geoffrey R. Ball
   
32,009,356
     
356,775
Roger Radke
   
32,009,056
     
357,075

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(ii)    The approval of an amendment to the Company’s 1994 Stock Option Plan (the “Option Plan”) to increase the number of shares reserved for issuance thereunder by 1,000,000 shares to a new total of 6,499,273 shares.
 
Votes For: 24,833,579
 
Votes Against: 778,861
 
Abstentions: 15,735
 
Broker Non-votes: 6,737,956
 
(iii)    The approval of an amendment to the Company’s 1997 Employee Stock Purchase Plan (the “Purchase Plan”) to increase the number of shares reserved for issuance thereunder by 1,000,000 shares to a new total of 1,475,000 shares.
 
Votes For: 25,337,680
 
Votes Against: 274,190
 
Abstentions: 16,305
 
Broker Non-votes: 6,737,956
 
(iv)    The ratification of PricewaterhouseCoopers LLP as independent accountants of Symphonix for the fiscal year ending December 31, 2002.
 
Votes For: 32,338,771
 
Votes Against: 13,060
 
Abstentions: 14,300
 
Item 5.    Other Information.
 
None
 
Item 6.    Exhibits and Reports on Form 8-K.
 
(a)    Exhibits
 
Exhibit
   
Description
99.1
   
Certification of this Form 10-Q by our CEO and CFO

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(b)    Reports on Form 8-K.
 
None
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this 10-Q report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date: August 13, 2002
  
SYMPHONIX DEVICES, INC.
   
/s/    KIRK B. DAVIS
   
Kirk B. Davis
   
President and Chief Executive Officer
   
/s/    TERENCE J. GRIFFIN
   
Terence J. Griffin
   
Vice President Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
 

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