AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 28, 1996
REGISTRATION NO. 333-04315
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CARDIOPULMONARY CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 3842 06-1240435
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
200 CASCADE BOULEVARD
MILFORD, CONNECTICUT 06460
(203) 877-1999
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
JAMES W. BIONDI, M.D.
CARDIOPULMONARY CORP.
200 CASCADE BOULEVARD
MILFORD, CONNECTICUT 06460
(203) 877-1999
FACSIMILE: (203) 877-3401
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
Copies to
PAUL JACOBS, ESQ. STEVEN A. WILCOX, ESQ.
FULBRIGHT & JAWORSKI L.L.P. ROPES & GRAY
666 FIFTH AVENUE ONE INTERNATIONAL PLACE
NEW YORK, NEW YORK 10103 BOSTON, MASSACHUSETTS 02110
(212) 318-3000 (617) 951-7000
FACSIMILE: (212) 752-5958 FACSIMILE: (617) 951-7050
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
CARDIOPULMONARY CORP.
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Cross-Reference Sheet
(Between Items of Form S-1 Registration Statement and Prospectus)
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<TABLE>
<CAPTION>
FORM S-1 ITEM AND CAPTION PROSPECTUS CAPTIONS
- ------------------------- -------------------
<S> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of Prospectus .... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus ........................... Inside Front Cover Page; Additional Information; Outside
Back Cover Page
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed Charges ........ Prospectus Summary; Risk Factors
4. Use of Proceeds ................................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price ................ Outside Front Cover Page; Underwriting
6. Dilution ....................................... Dilution
7. Selling Security Holders ....................... Not Applicable
8. Plan of Distribution ........................... Outside and Inside Front Cover Pages; Underwriting
9. Description of Securities to be Registered ..... Capitalization; Description of Capital Stock
10. Interests of Named Experts and Counsel ......... Legal Matters; Experts
11. Information With Respect to the Registrant ..... Outside and Inside Front Cover Pages; Prospectus
Summary; Risk Factors; Use of Proceeds; Dividend
Policy; Capitalization; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Principal Stockholders; Certain
Transactions; Description of Capital Stock;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities ............................... Not Applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JUNE 28, 1996
2,000,000 SHARES
CARDIOPULMONARY CORP.
COMMON STOCK
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Cardiopulmonary Corp. ("Cardiopulmonary" or the "Company") hereby offers
2,000,000 shares of Common Stock (the "Common Stock"). Prior to this offering,
there has been no public market for the Common Stock. It is currently
anticipated that the initial public offering price of the Common Stock will be
between $9.00 and $11.00 per share. See "Underwriting" for information regarding
the factors considered in determining the initial public offering price. The
Company has applied to have the Common Stock approved for quotation on the
Nasdaq National Market under the symbol "CPCP."
----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 6-12.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
- --------------------------------------------------------------------------------
Per Share .......... $ $ $
- --------------------------------------------------------------------------------
Total (3) .......... $ $ $
================================================================================
(1) Does not include additional compensation to the Representatives of the
Underwriters. The Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $700,000.
(3) The Company has granted to the Underwriters a 30 day option to purchase up
to an aggregate of 300,000 additional shares of Common Stock solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $ , $ and $ , respectively. See
"Underwriting."
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The Common Stock is offered by the several Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to the
right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares will be made in New York, New York, on or
about , 1996.
ADVEST, INC. CRUTTENDEN ROTH
INCORPORATED
The date of this Prospectus is , 1996
<PAGE>
THE VENTURI VENTILATOR
[PHOTOGRAPH OF
VENTURI VENTILATOR]
The Company's Venturi ventilator incorporates proprietary "smart" software and
pneumatic hardware to continuously control patient airway flow and pressure
throughout all phases of the respiratory cycle, including the active control of
exhalation.
The Venturi is controlled through an active, full-color, integrated graphics
display and touchscreen that depicts the patient's respiratory status. The
Venturi displays a comprehensive set of widely used and clinically established
respiratory parameters and waveforms.
[PHOTOGRAPH OF
CONTROL DISPLAY]
The Company has not yet begun commercial sales of the Venturi ventilator.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. The Company is a development stage company
completing the development and testing of its initial product. To date the
Company has made no commercial sales of any product nor has it produced any
product in commercial quantities.
THE COMPANY
Cardiopulmonary Corp. designs, develops and assembles advanced,
software-driven ventilators which it believes represent a new generation of life
support technology for the treatment of intensive care and anesthesia patients.
The Company's first product, the Venturi ventilator, incorporates proprietary
"smart" software and pneumatic hardware to continuously control patient airway
flow and pressure throughout all phases of the respiratory cycle, including the
active control of exhalation. These unique features enable continuous automatic
adjustment within and between individual breaths to tune therapy to
patient-specific demands and to supplement the patient's spontaneous breathing
efforts without suppressing or mechanically overriding the patient's natural
drive to breathe. The Company believes that these features will fundamentally
change the practice of applied respiratory care by reducing the work of
breathing, accelerating weaning from mechanical ventilatory support and reducing
ventilator dependence. As a result, the Company believes the Venturi will
improve clinical results, shorten the length of hospital stays and reduce
treatment costs.
Respiratory dysfunction represents one of the most prevalent and costly
conditions in healthcare. The National Center for Health Statistics reports that
lung disease affects some 25 million people and is the third leading cause of
death in the United States. Furthermore, the cumulative effects of air
pollution, smoking, and the increasing incidence of the acquired
immunodeficiency syndrome (AIDS), together with the aging of the United States
population, are expected to cause a significant increase in the need for
respiratory care. Mechanical ventilation is required for the treatment of acute
respiratory failure due to primary lung disease and for a variety of secondary
causes of respiratory failure, including heart attacks, circulatory failure,
strokes, sepsis and trauma. In addition, patients undergoing general anesthesia
and surgery require temporary ventilation to sustain breathing during surgery
and/or in the immediate post-operative period. The American Society of
Anesthesiology estimates that 22 million surgical procedures are performed in
the United States each year; a significant portion of these procedures requires
general anesthesia.
The Company has entered into an exclusive distribution agreement with
Kontron Instruments Ltd. for the promotion, sales, servicing and distribution of
Venturi products in Europe and certain other jurisdictions. Kontron is a
subsidiary of Kontron Instruments Holding N.V., a leading manufacturer and
distributor of medical and scientific instruments with over $175 million in
annual sales and an established critical care sales force which includes
approximately 60 European sales representatives. To date, Kontron has funded
most of the expenditures relating to European regulatory approvals for the
Venturi, and through direct investments owns approximately 12% of the Company
prior to this offering. Subject to certain termination rights, the distribution
agreement with Kontron calls for Kontron to purchase specified quantities of the
Venturi ventilator through the end of 1997, after which time the parties have
agreed to negotiate in good faith concerning a new purchase schedule. In
addition, Kontron has agreed to expend a total of at least $1,000,000 for
promotion, advertisement and selling of the Venturi, the timing of which
expenditure is based on the receipt by the Company of certain regulatory
approvals for the Venturi. The Company currently is supplying demonstration
units to Kontron and expects to begin commercial sales efforts through Kontron
in the second half of 1996. See "Business--Distribution Agreement with Kontron."
The Company's objective is to become a leading provider of advanced
ventilatory support and other critical care systems in the United States and
internationally. The important elements of the Company's strategy are to (i)
establish the Company's Venturi system as a new standard of care in advanced
ventilatory support, (ii) focus initial sales efforts on leading teaching
hospitals and clinical opinion leaders, (iii) initiate clinical marketing
studies to validate certain key benefits of the Venturi, (iv) establish
international presence through Kontron and other strategic alliances, (v)
establish a direct sales force and selected distributor network in the United
States, and (vi) leverage core ventilation technologies to create new products
and maintain product leadership.
The Venturi has received Section 510(k) pre-market clearance from the U.S.
Food and Drug Administration and has passed IEC 601 safety tests administered by
the British Standards Institution. As a result, the Company may begin
3
<PAGE>
commercial sales of the Venturi in the United States and most European countries
other than Germany and France, where specific regulatory applications are
pending. The European and United States product launches for the Venturi
presently are scheduled for the second half of 1996. In addition, the Venturi's
software and hardware have been specifically designed as a platform to
accommodate future enhancements for ventilation, patient monitoring and
anesthesia delivery, subject to regulatory approval.
Cardiopulmonary Corp. was incorporated under the laws of Delaware in March
1988. The Company's executive offices and manufacturing facilities are located
at 200 Cascade Boulevard, Milford, Connecticut 06460 and its telephone number is
(203) 877-1999.
THE OFFERING
Common Stock offered .............................. 2,000,000 shares
Common Stock outstanding after offering ........... 5,892,166 shares (1)
Use of proceeds ................................... Development of future
products; working capital
to finance production of
ventilators for sale to
Kontron and other
purchasers; establishing a
marketing and sales force;
expanding production
facilities; and for other
general corporate purposes.
Proposed Nasdaq National Market symbol ............ CPCP
- ----------
(1) Based upon shares outstanding as of June 27, 1996. Excludes 600,000 shares
reserved for issuance under the Company's 1994 Stock Option Plan and
100,000 shares reserved for issuance under the Company's Stock Option Plan
for Non-Employee Directors. As of June 27, 1996, options to purchase an
aggregate of 398,400 shares of Common Stock had been granted under the
Company's 1994 Stock Option Plan at a weighted average exercise price of
$2.43 per share. As of June 27, 1996, 110,300 of these options were vested;
the remainder are subject to vesting restrictions which lapse at various
times from 1996 to 2000. As of June 27, 1996, options to purchase 40,000
shares of Common Stock had been granted under the Non-Employee Director
Stock Option Plan at an exercise price of $0.63 per share, all of which are
subject to vesting restrictions which lapse at various times from 1996 to
2000. See "Management -- Stock Options." Also excludes 475,300 shares
reserved for issuance upon exercise of outstanding warrants exercisable for
$5.00 per share, 4,000 shares reserved for issuance upon exercise of
warrants issued in connection with the Company's bank financing and 100,000
shares reserved for issuance upon exercise of warrants to be issued to the
Representatives of the Underwriters exercisible at 120% of the initial
public offering price (the "Representatives' Warrants"). See
"Underwriting."
Except as otherwise indicated, all information in this Prospectus (i) gives
effect to a five-into-two reverse stock split effected in May 1996, (ii) gives
effect to the automatic conversion upon the closing of this offering of all
outstanding shares of the Company's Series A Convertible Preferred Stock, Series
B Convertible Preferred Stock and Series C Convertible Preferred Stock into
2,612,407 shares of Common Stock and (iii) assumes no exercise of the
Underwriters' over-allotment option. See "Description of Capital Stock" and
"Underwriting."
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR PERIOD
THREE MONTHS ENDED FROM INCEPTION
YEAR ENDED DECEMBER 31, MARCH 31, (MARCH 4, 1988)
------------------------- ------------------ THROUGH
1993 1994 1995 1995 1996 MARCH 31, 1996
---- ---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Costs and expenses:
Research and development ................ $542 $1,075 $1,718 $301 $525 $5,930
General and administrative .............. 72 184 580 127 272 2,104
---- ------ ------ ---- ---- ------
Loss from operations ..................... 614 1,259 2,298 428 797 8,034
Net interest (income) expense ............ 79 (38) 32 (4) 102 221
---- ------ ------ ---- ---- ------
Net loss ................................. $693 $1,221 $2,330 $424 $899 $8,255
==== ====== ====== ==== ==== ======
Unaudited pro forma net loss
per share (1) ........................... $ 0.55 $0.10 $0.19
====== ===== =====
Shares used in computing unaudited
pro forma net loss per share (1) ........ 4,109 4,109 4,109
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED (2)
------ ---------------
BALANCE SHEET DATA:
<S> <C> <C>
Cash and cash equivalents ..................................... $ 525 $19,375
Total assets .................................................. 1,081 19,922
Long-term obligations and redeemable
convertible preferred stock .................................. 7,344 6
Accumulated (deficit) ......................................... (8,879) (8,924)
Common stock and other stockholders' equity (deficit)(3)....... (8,313) 19,097
</TABLE>
- ----------
(1) Unaudited pro forma net loss per share is determined by dividing the net
loss attributable to common stockholders by the weighted average number of
shares of Common Stock and Common Stock equivalents outstanding during the
period, assuming the automatic conversion of all outstanding shares of
Preferred Stock into 2,612,407 shares of Common Stock upon the closing of
this offering. See Note 1 of Notes to the Company's Financial Statements.
The Company has entered into employment agreements with certain management
members, effective upon the closing of this offering. Had these agreements
been in effect since January 1, 1995, unaudited pro forma net loss per
share would have been $0.59 for 1995 and $0.11 and $0.20 for the three
months ended March 31, 1995 and 1996, respectively.
(2) Reflects the issuance of convertible notes in the aggregate principal
amount of $80,000 in April 1996, of which $18,320 was ascribed to
detachable warrants issued in conjunction with such notes, the issuance of
177,000 shares of Common Stock and the conversion of all outstanding notes
into 298,300 shares of Common Stock on May 20, 1996. See Note 8 and Note 10
of Notes to the Company's Financial Statements. Also reflects the
conversion of all outstanding shares of Preferred Stock into 2,612,407
shares of Common Stock upon the closing of this offering. See Note 9 of
Notes to the Company's Financial Statements. Also gives effect to the sale
of 2,000,000 shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $10.00 per share, after deducting
the estimated underwriting discounts and commissions and estimated offering
expenses payable by the Company. See "Use of Proceeds" and
"Capitalization."
(3) The Company has never declared or paid cash dividends on its Common Stock.
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following information should be considered carefully by potential purchasers in
evaluating the Company, its business and the shares of Common Stock offered
hereby. This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed below, as
well as those discussed elsewhere in the Prospectus.
DEVELOPMENT STAGE COMPANY. The Company is a development stage company
completing the development and testing of its initial product, the Venturi
ventilator. To date, the Company has been dependent primarily upon loans and
equity investments to finance its operations. As a development stage company,
the Company's operations are subject to all risks inherent in the establishment
of a new business enterprise. The likelihood of success of the Company must be
considered in light of the problems, expenses, difficulties, complications and
delays frequently encountered in connection with the establishment of a new
business and the development and introduction of new products. These include,
but are not limited to, factors relating to competition, marketability of the
Company's products, the need to expand production and distribution and the
ability to establish and sustain product quality. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 1 of
Notes to the Company's Financial Statements.
RISK OF DEPENDENCE UPON SINGLE PRODUCT; POSSIBLE ADVERSE EFFECT OF
POTENTIAL DELAYS. The Venturi is currently the Company's only product and is
expected to account for substantially all of the Company's revenue for the
foreseeable future. The Venturi has not been used extensively on patients
outside of an academic setting nor sold commercially, nor has the Company
produced the Venturi in commercial quantities. The Company's efforts are subject
to the risks inherent in the development of innovative products, including the
risk that the product will be found to be ineffective or unsafe, or will
otherwise fail to receive necessary regulatory clearances, or that the product,
if safe and effective, will be difficult to manufacture on a large scale or will
be uneconomical to market. See "Business -- Products." No assurance can be given
that the Company will be able to produce the Venturi in commercial quantities at
acceptable costs or without delays, or that it will be able to market the
Venturi successfully. Any failure of the device to achieve acceptable market
performance or the identification of technical deficiencies could lead to delays
in the introduction and market acceptance of the product and could jeopardize
the viability of the Company. The Company has received 510(k) clearance for the
Venturi from the United States Food and Drug Administration (the "FDA"); the
Venturi has passed IEC 601 medical electrical equipment safety tests
administered by the British Standards Institution; and the Company presently
plans to begin commercial sales efforts in Europe and the United States during
the second half of 1996. However, the Company will need to obtain additional
regulatory approvals before the Venturi can be sold in a number of significant
international markets, including France and Germany, and may encounter delays in
obtaining such approvals or other regulatory delays relating to the commercial
production of the Venturi. There can be no assurance that any additional
approvals will be received in a timely manner or at all. Failure to receive such
approvals or any such delay could have a material adverse effect upon the
Company's business, financial condition and results of operations. See "Business
- -- Government Regulation."
UNCERTAINTY OF MARKET ACCEPTANCE. There can be no assurance that the
Venturi will gain market acceptance. Clinicians will not use the Company's
products unless they determine, based on experience, clinical data, and other
factors, that the Venturi is an attractive alternative to current ventilators.
To date, the Venturi has only been used in the treatment of approximately 50
patients, and no published studies exist to support the Company's claims of
superior performance and cost reduction. The Company believes that the
publication of such studies and recommendations and endorsements by influential
clinicians will be essential for market acceptance of the Venturi. There can be
no assurance that any such study will be completed and published on a timely
basis, if at all, that results of such studies will support the Company's claims
or that recommendations or endorsements by influential clinicians will be
obtained. In addition, purchase decisions are greatly influenced by healthcare
administrators who are subject to increasing pressures to reduce costs.
Healthcare administrators must determine that the Venturi and the Company's
potential products are cost-effective alternatives to current ventilators and
other intensive care equipment. Hospitals that have a significant investment in
existing ventilators or established relationships with other vendors may be
reluctant to accept the Venturi system even if its clinical usefulness and
cost-effectiveness are demonstrated. Any of these problems or delays in
achieving market acceptance would have a material adverse effect on the
Company's
6
<PAGE>
business, financial condition and results of operations. See "Business --
Products," "-- Products Under Development" and "-- Sales, Marketing and
Distribution."
LIMITED PRODUCTION EXPERIENCE; NEED TO IMPROVE PRODUCTION CAPABILITIES. The
Company has only limited experience in producing the Venturi. As a result, the
Company has no experience producing its product in the quantities necessary to
achieve significant commercial sales, and there can be no assurance that
reliable commercial assembly operations can be achieved at a reasonable cost and
without significant delays. If the Company encounters production difficulties,
including problems involving production yields, quality control and assurance,
or supplies of components, it could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Business
- -- Production."
As the Company begins to implement its marketing and operations plan fully,
it will need to expand its production capacity and improve and refine its
assembly process and quality control systems. As currently configured, the
Company's facilities will accommodate only limited ventilator production. As a
result, the Company anticipates that it will need to expand its production
facilities or establish alternate facilities as it expands from the development
stage, and intends to spend a portion of the proceeds from this offering for
that purpose. See "Use of Proceeds." There can be no assurance that the Company
will complete expansion of its production facilities in a timely manner, that
the Company will not encounter unanticipated production problems or delays or
that the increased capacity will be sufficient to satisfy demand for its
products. Any production constraint could adversely affect potential customers'
perception of the Company and cause them to seek alternative products. In
addition, the anticipated expansion of the Company's production facilities may
result in a significant increase in operating expenses, and if revenue is not
generated to offset these additional expenses, there would be a material adverse
effect on the Company's business, financial condition and results of operations.
HISTORY OF LOSSES; UNCERTAIN PROFITABILITY. The Company has experienced net
losses in each year since its incorporation in 1988. The Company had net losses
of approximately $2,330,000 for the year ended December 31, 1995, $899,000 for
the three months ended March 31, 1996 and $8,255,000 for the period from
inception (March 4, 1988) through March 31, 1996. There can be no assurances
that the Company will achieve or maintain profitability in the future. See
"Management's Discussion and Analysis of Financial Condition and the Results of
Operations."
DEPENDENCE ON AND RELATIONSHIP WITH KEY FOREIGN DISTRIBUTOR. Sales of
testing and demonstration units to Kontron, the exclusive distributor of the
Company's products in a number of foreign countries, accounted for all of the
Company's sales to date. (Because Kontron has the right to return testing and
demonstration products at a stipulated depreciated value in the event that the
distribution agreement is terminated, the related revenues have been deferred
for financial accounting purposes.) Subject to certain termination rights, the
distribution agreement with Kontron calls for Kontron to purchase specified
quantities of Venturi ventilators through the end of 1997, after which time the
parties have agreed to negotiate in good faith concerning a new purchase
schedule. There can be no assurance that the Company will be able to meet the
production schedule called for in the distribution agreement with Kontron. The
distribution agreement may be terminated by Kontron upon the occurrence of
certain specified events. The termination or significant reduction by Kontron of
its business with the Company would have a material adverse effect upon the
Company's business, financial condition and results of operations. See "Business
- -- Distribution Agreement With Kontron," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 12 of Notes to the
Company's Financial Statements.
LIMITED DIRECT MARKETING, TRAINING AND SERVICE EXPERIENCE. The Company
currently has no direct marketing and sales organization and no United States
distribution arrangements. The Company's ability to sell its products in the
United States will depend, among other things, on its ability to develop such a
sales force or to enter into marketing and distribution agreements with
specialty respiratory distributors or other medical device distributors. There
can be no assurance that any such sales force that may be established by the
Company will be able to market and distribute the Company's products
successfully. There can be no assurance that Kontron or any third party
distributors with which the Company enters into marketing and distribution
agreements in the United States will be able to market the products effectively.
See "Business -- Sales, Marketing and Distribution." In addition, as of the date
of this Prospectus, the Company has not yet established a training and service
program adequate to meet the expected demand for its products. Because the
Venturi product line includes significant software components, the Company will
need to develop training and support programs to instruct users how to operate
the product. Failure to develop sales, marketing, distribution, service or
training programs could have a material adverse effect upon the Company's
business, financial condition and results of operations.
7
<PAGE>
SIGNIFICANT COMPETITION. The Company is engaged in a highly competitive
industry. Competition from medical device manufacturers in the United States and
abroad is intense and expected to increase. Many of these companies have
substantially greater capital resources, research and development staffs and
facilities, and greater experience in obtaining regulatory approvals and in
production, marketing and distribution of products, than does the Company. There
can be no assurance that the Company's competitors will not succeed in
developing products that are more effective than those that are being developed
or sold by the Company. In addition, because competition based on price is
expected to become increasingly important in the healthcare industry, the
Company may be required to adjust its pricing policies in accordance with market
conditions and may otherwise be limited with respect to the prices it is able to
charge for its products. See "Business -- Sales, Marketing and Distribution" and
"Business -- Competition."
RISK OF RAPID TECHNOLOGICAL CHANGE. Because the attractiveness of the
Company's products is based in large part on the Company's proprietary software,
demand for the Company's products will be affected by rapidly changing
technology, evolving industry standards and new product introductions. The
introduction of products embodying new software may present opportunities for
potential competitors of the Company to render the Company's products less
attractive or obsolete and unmarketable. Even if the Company's present and
future products prove effective and obtain regulatory approval, there can be no
assurance that others will not develop products employing new scientific
advances or using similar or new techniques which are less expensive, more
reliable or have some combination of such advantages which would render the
Company's products uncompetitive. See "Business -- Competition." Should the
Company be unable, for technological or other reasons, to develop products that
are technologically competitive, responsive to customer needs and competitively
priced, there would be a material adverse effect upon the Company's business,
financial condition and results of operations.
DEPENDENCE UPON KEY EMPLOYEES; NEW MANAGEMENT TEAM; ATTRACTION AND
RETENTION OF KEY PERSONNEL. The Company's business is dependent to a substantial
extent upon its Chief Executive Officer, James W. Biondi, M.D. The loss of the
services of Dr. Biondi would have a material adverse effect upon the Company.
The Company has entered into a three-year employment agreement with Dr. Biondi
containing non-competition provisions, and the Company carries $1,500,000 of
insurance on the life of Dr. Biondi. See "Management -- Employment Agreements."
The Company's business is also dependent to a substantial extent upon Douglas M.
Johnston, Vice President, Research and Development, Gerhardt P. Schroeder, Vice
President, Engineering, and Donald D. Gilmore, Director of Software Development.
The Company has entered into two-year employment agreements with each of these
key employees containing non-competition provisions. In addition, the Company's
Chief Financial Officer and Vice President, Sales have joined the Company during
the first quarter of 1996. The Company's success will depend to a significant
extent on the ability of its executive officers and key employees to operate
effectively, both individually and as a team. The Company believes its future
success will depend, among other things, upon its ability to attract and retain
qualified managerial and scientific personnel. Competition among companies in
the medical devices area is intense, and there can be no assurance that the
Company will be able to attract and retain such personnel on acceptable terms.
The failure to attract and retain such personnel or to develop such expertise
could have a material adverse effect upon the Company's business, financial
condition and results of operations. See "Management."
POSSIBLE ADVERSE EFFECTS OF GOVERNMENT REGULATION. The medical devices to
be manufactured and marketed by the Company and the Company's ongoing research
and development activities are subject to regulation by numerous governmental
authorities, including the United States Food and Drug Administration and
corresponding state and foreign agencies. In the United States, the development,
manufacture, marketing and promotion of medical devices are regulated by the FDA
under the Federal Food, Drug, and Cosmetic Act (the "FFDCA"). Unless exempted by
regulation, the FFDCA and the regulations implemented thereunder require that
devices such as the Venturi receive FDA clearance or approval prior to marketing
in the United States. The Venturi ventilator has been cleared by the FDA under a
premarket notification procedure known as a "510(k) Submission."
The FFDCA requires the filing of a new 510(k) Submission when, among other
things, there is a major change or modification in the intended use of the
device or a change or modification, including product enhancements, to a legally
marketed device that could significantly affect its safety or effectiveness. A
device manufacturer is responsible for making the initial determination as to
whether a proposed change to a cleared device or to its intended use
necessitates the filing of a new 510(k) Submission. The addition of software
features to the cleared Venturi product would require the filing of a new 510(k)
Submission if such addition made a major change or modification to the
8
<PAGE>
Venturi that could significantly affect the safety or effectiveness of the
product or change or modify the product's intended use.
If the Company determines that any modifications that it may make to its
FDA-cleared devices do not require a new 510(k) Submission, there can be no
assurance that the FDA would agree with the Company's determinations and would
not require the Company to submit a new 510(k) for any modifications made to the
device. If the FDA requires the Company to submit a new 510(k) for any
modifications to a cleared device, the Company may be prohibited from marketing
the device as modified until the 510(k) is cleared by the FDA. There can be no
assurance that the Company will obtain 510(k) clearance on a timely basis, if at
all, for any devices or modifications for which it files a future 510(k)
Submission. Moreover, the clearances, if granted, could limit the uses for which
the product could be marketed.
Some of the Company's products under development may not qualify for
clearance pursuant to a 510(k) Submission, but instead may require FDA approval
under a premarket approval application ("PMA") procedure. PMAs generally involve
more extensive prefiling testing than 510(k) Submissions, including clinical
testing, and a longer FDA review process, which can take a number of years and
require the expenditure of substantial resources. The Company has limited
experience in conducting clinical testing and obtaining regulatory approvals.
There can be no assurance that FDA approval of future clinical study protocols
or PMAs would be forthcoming in a timely manner, if at all, or that FDA's
approval of a PMA, if granted, would not limit the uses for which the product
could be marketed.
Many countries regulate the manufacture, marketing, and use of medical
devices in ways similar to the United States. The Company intends to market its
products in some of those countries and intends to pursue product clearance,
approval, or registration procedures in such countries. The Venturi ventilator
product has passed IEC 601 medical electrical equipment safety tests
administered by the British Standards Institution. The Company has not yet
received clearances or approvals in Germany, France and certain other countries
in which it proposes to sell this product. There can be no assurance that such
approvals will be obtained. Moreover, there can be no assurance that the Company
will receive clearances or approvals of future products from foreign regulatory
authorities on a timely basis, if at all.
Failure to obtain, or delays in obtaining, requisite governmental
clearances or approvals, or failure to obtain clearances or approvals of the
scope requested, could delay or preclude the Company from marketing such
products, could limit the commercial use of the products, and could allow
competitors to introduce competing products prior to the Company and thereby
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company is also subject to strict domestic and foreign regulations and
supervision regarding the manufacturing, marketing, labeling, distribution, and
promotion of its products. This includes periodic inspections of the Company's
manufacturing facility by the FDA to determine compliance with Good
Manufacturing Practice ("GMP") regulations, which may become more stringent in
the future. There can be no assurance that the Company will be able to attain or
maintain compliance with GMP requirements.
In addition, laws and regulations governing the manufacture and marketing
of medical devices in the United States and in foreign jurisdictions may be
amended or modified from time to time and the interpretation and administration
of present and future laws and regulations by the FDA, other regulatory
authorities and courts are subject to change, which could have a material
adverse effect upon the Company's business, financial condition and results of
operations.
Noncompliance with applicable requirements can result in, among other
things, rejection or withdrawal of premarket clearance or approval for devices,
recall or seizure of products, total or partial suspension of production,
injunctions, and civil and criminal penalties. The FDA also has the authority to
request repair, replacement or refund of the cost of any devices manufactured or
sold by the Company. Any of these sanctions could have a material adverse effect
on the Company's business, financial condition and results of operations.
See "Business -- Government Regulation."
RISKS RELATING TO PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY
TECHNOLOGY. The Company seeks to protect its proprietary rights in its
technology and products through patent applications, trade secrets and
non-disclosure and confidentiality agreements. The Company's ability to compete
effectively with other companies will depend, in part, on its ability to
maintain the proprietary nature of its technologies and products.
9
<PAGE>
The Company has developed technology and proprietary know-how for which
either patents have been issued or patent applications are pending. Patent
applications are currently pending in the United States relating to the
Venturi's pneumatic system and its control system and software. In addition, the
Company has filed applications relating to the Venturi's pneumatic system in
Europe under the Patent Cooperation Treaty ("PCT") and plans to submit
applications relating to the Venturi's control system under the PCT by the end
of 1996. Certain of the Company's products under development are protected by
two United States patents and two international patents covering ventilation
methods and hardware design. There can be no assurance that any of the Company's
patent applications will result in issued patents, that any issued patents will
provide any competitive advantage or that patents will not be challenged,
circumvented or invalidated.
The Company also relies on unpatented trade secrets and proprietary
know-how. There can be no assurance that others may not independently develop or
otherwise acquire the same or similar trade secrets and know-how or otherwise
gain access to the Company's proprietary technology or disclose such technology,
or that the Company can meaningfully protect its rights to its unpatented
technology. In the absence of patent protection, the Company's business may be
adversely affected by competitors who independently develop substantially
equivalent technology.
Third parties may hold or be issued patents to, or may otherwise acquire
the rights to, technology necessary or potentially useful to the Company. There
can be no assurance that needed or potentially useful licenses will be available
in the future on acceptable terms or at all. Failure of the Company to obtain
licenses to use such technologies could delay or prevent the introduction of
products. Litigation relating to the infringement of the patents of others could
result in substantial costs to the Company. Litigation which could result in
substantial costs to the Company may also be necessary to enforce any patents
issued to the Company or to determine the scope and validity of others'
proprietary rights.
In addition, the Company has applied to register the "Venturi" mark in the
United States. There can be no assurance that any Company mark will not be
challenged, invalidated or circumvented, or that any pending trademark
application will issue to registration. See "Business -- Patents and Proprietary
Information."
RELIANCE UPON KEY SUPPLIERS. The Company acquires the components of its
products from third-party suppliers. Several components used in the Company's
products are currently available from only one source and others are available
from only a limited number of sources. There can be no assurance that the
Company will continue to be able to obtain items from these suppliers on
satisfactory terms or at all. If the Company were unable to obtain sufficient
components, it could suffer delays or reductions in product shipments or cost
increases which could have a material adverse effect upon the Company's
business, financial condition and results of operations. The Company believes
that it could obtain all necessary items from alternative sources if required
but that a change in sole source suppliers would disrupt production, create
delays or reductions in product shipments or increase component costs. See
"Business -- Production."
NEED TO FINANCE OPERATIONS. The Company will require substantial funds to
conduct the necessary research and development and testing of its products under
development, to obtain regulatory approvals for marketing these products, to
establish its direct sales force and to implement its marketing programs. There
can be no assurance that the Company will be able to establish long term bank
financing arrangements on satisfactory terms, if at all. There can be no
assurance that additional financing will be available when needed or on terms
acceptable to the Company. If adequate funds are not available, the Company may
be required to delay, scale back or eliminate one or more of its development
programs or otherwise impede the development, manufacture or sale of the Venturi
ventilator or future products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 2 of Notes to the Company's Financial Statements.
POTENTIAL FOR PRODUCT LIABILITY CLAIMS. The testing, marketing and sale of
medical devices entail an inherent risk that product liability claims will be
asserted against the Company. Because most of the Company's products are
intended to be used on patients who are physiologically unstable and may be
severely ill, the Company may be exposed to serious potential product liability
claims. From time to time, patients on whom the Company's products are being
used are likely to sustain injury or death related to their medical condition or
treatment, which could lead to product liability claims against the Company. A
product liability claim or a product recall could have a material adverse effect
on the Company's business, financial condition and results of operations. There
can be no assurance that the Company will be able to maintain product liability
insurance coverage or obtain additional coverage on acceptable terms, or that
such insurance will provide adequate coverage against any potential claims. See
"Business -- Legal Proceedings and Product Liability."
10
<PAGE>
RELIANCE ON FOREIGN SALES; FOREIGN CURRENCY FLUCTUATION. All of the
Company's product sales to date have been to Kontron for use in clinical studies
and as demonstration units outside the United States. Although sales to Kontron
are denominated in U.S. dollars, Kontron's resales to end users generally will
be denominated in other currencies, and the Company's distribution agreement
with Kontron provides that the Company and Kontron shall negotiate in good faith
with respect to price adjustments if the exchange rate of the U.S. dollar with
respect to the European Currency Unit (ECU) varies by more than 7.5% from that
in effect on the date a price is agreed. Consequently, the Company's revenues
from sales to Kontron may be adversely affected by fluctuations in currency
exchange rates. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE. Prior to
this offering, there has been no public market for the Common Stock. The initial
public offering price will be determined through negotiations between the
Company and the Representatives. See "Underwriting." There is no assurance that
an active trading market will develop or be sustained after completion of this
offering, or that the market price of the Common Stock will not decline below
the initial public offering price. The market prices for securities of emerging
companies such as the Company have historically been highly volatile. Future
announcements concerning the Company or its competitors, including financial
results, the results of testing, technological innovations, new commercial
products, governmental regulations, developments concerning proprietary rights,
litigation or public concern as to product safety, may have a significant impact
on the market price of the Company's Common Stock.
DILUTION. This offering involves immediate dilution of $6.78 per share to
new investors. Additional dilution will occur upon the exercise of outstanding
stock options. See "Dilution" and "Management -- Stock Options." In addition,
upon consummation of this offering, there will be outstanding options and
warrants to purchase an aggregate of 917,700 shares of Common Stock (excluding
the Representatives' Warrants), at exercise prices ranging from $0.23 to $9.00
per share. To the extent that outstanding options or warrants are exercised,
further dilution to the interests of the Company's stockholders will occur.
Moreover, the terms upon which the Company will be able to obtain additional
equity may be adversely affected since the holders of the outstanding options
and warrants can be expected to exercise them at a time when the Company would,
in all likelihood, be able to obtain any needed capital on terms more favorable
to the Company than those provided by such securities. See "Management -- Stock
Options" and "Certain Transactions."
NO DIVIDENDS. For the foreseeable future, the Company expects to retain
earnings, if any, to finance the expansion and development of its business. Any
future payment of dividends will be within the discretion of the Company's Board
of Directors, and will depend, among other factors, on the earnings, capital
requirements and operating and financial condition of the Company. See "Dividend
Policy."
POSSIBLE ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE. Future sales of
Common Stock in the public market by existing stockholders following this
offering could adversely affect the market price for the Common Stock. The
Company and its directors and executive officers and certain other stockholders
holding an aggregate of 3,619,166 of the 3,892,166 shares of Common Stock
outstanding prior to this offering have agreed that, without the prior written
consent of the Representatives, they will not directly or indirectly offer to
sell, sell or otherwise dispose of any of their shares of Common Stock, or any
securities convertible into or exchangeable for Common Stock, for a period of
180 days from the date of this Prospectus, subject to certain limited
exceptions. Upon expiration of lock-up agreements with the Representatives 180
days after the date of this Prospectus (or earlier upon the written consent of
the Representatives), 2,737,488 of such 3,892,166 shares may be sold in the
public market subject to the volume and other limitations contained in Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"). In
addition, upon expiration of such lock-up agreements, pursuant to Rule 701 of
the Securities Act, an additional 159,900 shares issuable upon the exercise of
options may be sold in reliance on Rule 144 without having to comply with the
holding period requirements of Rule 144 and, in the case of non-affiliates,
without having to comply with the public information, volume limitation, manner
of sale or notice provisions of Rule 144. Certain holders of Common Stock and
warrants exercisable for Common Stock, including the Representatives' Warrants,
have registration rights with respect to such shares and the shares of Common
Stock issuable upon the exercise of such warrants. See "Principal Stockholders,"
"Management -- Stock Options," "Shares Eligible for Future Sale" and
"Underwriting."
RISK OF BROAD MANAGEMENT DISCRETION IN APPLICATION OF PROCEEDS. A
significant portion of the estimated net proceeds from this offering will be
allocated to the development costs of future products, working capital and
11
<PAGE>
general corporate purposes. Accordingly, the Company will have broad discretion
as to the application of the net proceeds of this offering and may allocate a
large percentage of net proceeds to uses which the stockholders may not deem
desirable. There can be no assurance that the proceeds can or will yield a
significant return. See "Use of Proceeds."
CONCENTRATION OF OWNERSHIP. The Company's directors and executive officers
and their affiliates will own beneficially an aggregate of approximately 40.8%
of the Company's outstanding shares of Common Stock after this offering
(approximately 38.9% if the Underwriters' over-allotment option is exercised in
full). As a result, these stockholders, acting together, would have significant
influence over all matters requiring approval by the stockholders of the
Company, including the election of directors. See "Principal Stockholders."
POSSIBLE ADVERSE IMPACT OF ISSUANCE OF PREFERRED STOCK; CERTAIN
ANTI-TAKEOVER EFFECTS. The Board of Directors of the Company has authority to
issue up to 1,000,000 shares of Preferred Stock, and to fix the rights,
preferences, privileges and restrictions of those shares without any further
vote or action by the stockholders. The potential issuance of Preferred Stock
may have the effect of delaying, deferring or preventing a change in control of
the Company, may discourage bids for the Common Stock at a premium over the
market price of the Common Stock and may adversely affect the market price of,
and the voting and other rights of, the holders of Common Stock. The Company
currently has no plans to issue shares of Preferred Stock. See "Description of
Capital Stock -- Preferred Stock." In addition, certain provisions of the
Company's charter may make the Company less attractive to a potential acquiror.
See "Description of Capital Stock -- Certain Anti-Takeover Effects."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby are estimated to be approximately $17,900,000
($20,690,000 if the Underwriters' over-allotment option is exercised in full)
based on an assumed initial public offering price of $10.00 per share and after
deducting estimated underwriting discounts and offering expenses. The Company
expects to use approximately $5,000,000 of the net proceeds for development
costs of future products, approximately $3,000,000 of the net proceeds for
working capital to finance production of ventilators for sale to Kontron and
other purchasers and the establishment of a marketing and sales force and
approximately $1,000,000 of the net proceeds of this offering to expand its
production facilities. The Company expects to use the balance of the net
proceeds of this offering (approximately $8,900,000) for general corporate
purposes. See "Business -- Manufacturing" and "Business -- Sales, Marketing and
Distribution." The exact allocation of the proceeds and the timing of such
expenditures will depend upon various factors, including market acceptance of
the Venturi ventilator and progress of regulatory approvals.
Pending use of the net proceeds, the Company intends to invest the funds in
United States government securities, cash and short-term, interest-bearing,
investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company anticipates that all the Company's earnings, if any, will be
retained for the foreseeable future to finance the operation and expansion of
its business. The payment of any future dividends will be within the discretion
of the Company's Board of Directors and will depend, among other factors, upon
the earnings, capital requirements and operating and financial condition of the
Company.
13
<PAGE>
DILUTION
As of March 31, 1996, the Company had a net tangible book value of
$(1,114,000) or $(0.33) per share. Subsequent to March 31, 1996, the Company
issued convertible notes in the aggregate principal amount of $80,000, of which
$18,320 was ascribed to detachable warrants issued in conjunction with the
notes, and issued 475,300 shares of Common Stock, including 298,300 shares
issued upon the conversion of all outstanding notes on May 20, 1996
(collectively, the "Subsequent Financing Transactions"). See Note 8 and Note 10
of Notes to the Company's Financial Statements. The pro forma net tangible book
value would be $1,058,000 or $0.27 per share after giving effect to the
Subsequent Financing Transactions.
After giving effect to the Subsequent Financing Transactions and the sale
of the 2,000,000 shares offered by the Company hereby at an assumed initial
public offering price of $10.00 per share, after deducting estimated
underwriting discounts and offering expenses, the pro forma net tangible book
value of the Company at March 31, 1996 would have been approximately $18,958,000
or $3.22 per share. This represents an immediate increase in the pro forma net
tangible book value of $2.95 per share to existing stockholders and an immediate
dilution in net tangible book value of $6.78 per share to the persons purchasing
shares of Common Stock in this offering ("New Investors"). The following table
illustrates this per share dilution.
Assumed initial public offering price per share ............... $10.00
Pro forma net tangible book value before the offering (1) .... $0.27
Increase per share attributable to New Investors ............. 2.95
-----
Pro forma net tangible book value after the offering .......... 3.22
------
Dilution per share to New Investors (2) ....................... $ 6.78
======
The following table summarizes, as of March 31, 1996, the difference
between the existing stockholders and New Investors, with respect to the number
of shares of Common Stock purchased from the Company, the total consideration
paid and the average price per share (assuming an initial public offering price
of $10.00 per share).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders (3) .............. 3,892,166 66.1% $ 9,627,000 32.5% $ 2.47
New Investors .......................... 2,000,000 33.9% 20,000,000 67.5% $10.00
--------- ----- ----------- -----
Total ................................ 5,892,166 100.0% $29,627,000 100.0%
========= ===== =========== =====
</TABLE>
- ----------
(1) Pro forma net tangible book value per share (tangible assets less total
liabilities) of the Company divided by the number of shares of Common Stock
outstanding as of March 31, 1996.
(2) Dilution is determined by subtracting the estimated net tangible book value
per share after completion of this offering from the assumed public
offering price paid by New Investors for a share of Common Stock.
(3) Includes the Subsequent Financing Transactions.
The foregoing computations give effect to the automatic conversion upon the
closing of this offering of all outstanding shares of the convertible preferred
stock. The foregoing computations exclude 310,400 shares of Common Stock
issuable upon exercise of options outstanding as of March 31, 1996 at a weighted
average exercise price of $1.40 per share. As of March 31, 1996, 110,300 of
these options were vested; the remainder are subject to vesting restrictions
which lapse at various times from 1996 to 2000. To the extent these options are
exercised, there will be further dilution to New Investors. These computations
also exclude (i) 128,000 shares of Common Stock issuable upon the exercise of
options granted subsequent to March 31, 1996 at an exercise price of $4.38 per
share, (ii) 282,300 shares issuable upon exercise of warrants outstanding as of
March 31, 1996, (iii) an additional 197,000 shares issuable upon the exercise of
warrants issued subsequent to March 31, 1996 and (iv) 100,000 shares issuable
upon the exercise of the Representatives' Warrants. See "Management -- Stock
Options," "Certain Transactions," "Underwriting" and Note 8 of Notes to the
Company's Financial Statements.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996, actual and as adjusted to give effect to the sale by the Company
of the 2,000,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $10.00 per share and the application of the net
proceeds therefrom. This table should be read in conjunction with the Company's
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------
ACTUAL AS ADJUSTED (1)
---------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Notes payable and capital lease obligation .................... $ 1,243 $ 12
Redeemable convertible preferred stock, $.01 par value:
Series A -- 3,200,000 shares authorized; 3,030,501 shares
issued and outstanding at issuance cost plus accumulated
accretion of $27,503 at March 31, 1996,
none outstanding as adjusted ................................ 3,339 --
Series B -- 2,200,000 shares authorized; 2,196,183 shares
issued and outstanding at issuance cost plus accumulated
accretion and dividends of $458,307 at March 31, 1996,
none outstanding as adjusted ................................ 2,403 --
Series C -- 1,350,000 shares authorized; 1,304,348 shares
issued and outstanding at issuance cost plus accumulated
accretion and dividends of $138,526 at March 31, 1996,
none outstanding as adjusted ................................ 1,596 --
--------- -------
Total redeemable convertible preferred stock .............. 7,338 --
Common stock and other stockholders' equity (deficit):
Common stock, $.01 par value; 10,000,000 shares authorized;
804,459 shares issued and outstanding at March 31, 1996;
5,892,166 shares issued and outstanding as adjusted (2) ..... 8 59
Additional paid-in capital ................................... 558 27,962
Accumulated deficit .......................................... (8,879) (8,924)
--------- -------
Total common stock and other stockholders' equity
(deficit) ................................................ (8,313) 19,097
--------- -------
Total capitalization ...................................... $ 268 $19,109
========= =======
</TABLE>
- ----------
(1) Reflects the issuance of convertible notes in the aggregate principal
amount of $80,000 in April 1996, of which $18,320 was ascribed to
detachable warrants issued in conjunction with the notes, and the issuance
of 177,000 shares of Common Stock and the conversion of all outstanding
notes into 298,300 shares of Common Stock on May 20, 1996. See Note 8 and
Note 10 of Notes to the Company's Financial Statements. Also reflects the
conversion of all outstanding redeemable convertible preferred stock into
2,612,407 shares of Common Stock upon the closing of this offering and the
issuance of 2,000,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $10.00 per share and the application of a
portion of the net proceeds therefrom, after deducting underwriting
discounts and estimated offering expenses. See "Use of Proceeds."
(2) Excludes (i) 600,000 shares of Common Stock reserved for issuance under the
Company's 1994 Stock Option Plan as of March 31, 1996, of which 270,400
shares were subject to currently outstanding options (54,300 of which were
vested as of March 31, 1996 and the remainder of which vest at various
times from 1996 to 2000), and (ii) 100,000 shares of Common Stock reserved
for issuance under the Company's Non-Employee Director Stock Option Plan,
of which 40,000 shares are subject to currently outstanding options, none
of which were vested as of March 31, 1996. See Note 10 of Notes to the
Company's Financial Statements. Also excludes (i) 282,300 shares reserved
as of March 31, 1996 for issuance upon exercise of outstanding warrants,
(ii) 197,000 shares issuable upon the exercise of warrants issued
subsequent to March 31, 1996, (iii) 128,000 shares of Common Stock reserved
for issuance under the Company's 1994 Stock Option Plan pursuant to options
granted subsequent to March 31, 1996 and (iv) 100,000 shares issuable upon
the exercise of the Representatives' Warrants. See "Underwriting." The
stockholders of the Company have approved an amendment of the Company's
Certificate of Incorporation, that will be filed immediately following the
consummation of this offering, that will delete all references to Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock. See "Description of Capital Stock."
15
<PAGE>
SELECTED FINANCIAL DATA
The following table presents certain selected financial data for the
Company for each of the years in the five-year period ended December 31, 1995
and for the three-month periods ended March 31, 1995 and 1996 and the period
from inception (March 4, 1988) to March 31, 1996. The selected financial data
presented below at and for each of the fiscal years ended December 31, 1994 and
1995 have been derived from, and are qualified by reference to, financial
statements audited by Price Waterhouse LLP, independent accountants. The
selected financial data presented below at and for each of the three years ended
December 31, 1993 have been derived from financial statements audited by
Deloitte & Touche LLP, independent accountants. The balance sheet at December
31, 1994 and 1995 and the related statements of operations and cash flows for
the three years ended December 31, 1995 and notes thereto appear elsewhere
herein. The selected financial data as of March 31, 1996 and for the three
months ended March 31, 1995 and 1996, and for the period from inception (March
4, 1988) through March 31, 1996, have been derived from unaudited financial
statements; however, in the opinion of management, such data include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such data. The results of operations for the three-month
period ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the full year. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Financial Statements and the Notes
thereto included elsewhere in this Prospectus.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR PERIOD
FROM
INCEPTION
THREE MONTHS ENDED (MARCH 4,
YEAR ENDED DECEMBER 31, MARCH 31, 1988) THROUGH
--------------------------------------------- ------------------ MARCH 31,
1991 1992 (1) 1993 (1) 1994 1995 1995 1996 1996
---- -------- -------- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Costs and expenses:
Research and development ... $ 669 $ 637 $542 $1,075 $1,718 $301 $525 $5,930
General and administrative . 372 255 72 184 580 127 272 2,104
------ ------ ---- ------ ------ ---- ---- ------
Loss from operations ........ 1,041 892 614 1,259 2,298 428 797 8,034
Interest (income) ........... (40) (4) (14) (38) (34) (4) (11) (273)
Interest expense ............ 91 130 93 -- 66 -- 113 494
------ ------ ---- ------ ------ ---- ---- ------
Net loss .................... $1,092 $1,018 $693 $1,221 $2,330 $424 $899 $8,255
====== ====== ==== ====== ====== ==== ==== ======
Unaudited pro forma net loss
per share (2) .............. $ 0.55 $0.10 $0.19
====== ===== =====
Shares used in computing
unaudited pro forma net
loss per share (2) ......... 4,109 4,109 4,109
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------ MARCH 31,
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .............. $ 502 $ 43 $1,688 $ 428 $1,257 $ 525
Total assets ........................... 731 202 1,858 614 1,802 1,081
Long-term obligations and redeemable
convertible preferred stock ........... 1,639 1,644 5,288 5,527 7,269 7,344
Accumulated (deficit) .................. (2,111) (3,134) (3,837) (5,297) (7,904) (8,879)
Common stock and other stockholders'
(deficit)(3)........................... (2,101) (3,123) (3,650) (5,068) (7,350) (8,313)
</TABLE>
- ----------
(1) During the period from June 1992 to July 1993 the Company reduced certain
of its expenditures due to a decreased level of funding.
(2) Unaudited pro forma net loss per share is determined by dividing the net
loss attributable to common stockholders by the weighted average number of
shares of Common Stock and Common Stock equivalents outstanding during the
period, assuming the conversion of all outstanding shares of Preferred
Stock into 2,612,407 shares of Common Stock upon the closing of this
offering. See Note 1 of Notes to the Company's Financial Statements.
The Company has entered into employment agreements with certain management
members, effective upon the closing of this offering. Had these agreements
been in effect since January 1, 1995, unaudited pro forma net loss per
share would have been $0.59 for 1995 and $0.11 and $0.20 for the three
months ended March 31, 1995 and 1996, respectively.
(3) The Company has never declared or paid cash dividends on its Common Stock.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements of the Company and notes thereto appearing elsewhere in
this Prospectus. This Prospectus contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
The Company's actual results could differ materially. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed below, as well as those discussed elsewhere in the Prospectus.
OVERVIEW
The Company is a development stage enterprise. Since its inception in March
1988, the Company has been engaged in the design, development, pre-commercial
assembly and testing of the Venturi ventilator. The Venturi received Section
510(k) pre-market clearance from the U.S. Food and Drug Administration in
October 1995 and passed IEC 601 medical electrical equipment safety tests
administered by the British Standards Institution in March 1996.
The Company's initial sales of demonstration and testing units are being
made to Kontron Instruments Ltd., the exclusive distributor of the Venturi in
Europe and certain other jurisdictions. In addition, the Company has relied upon
Kontron to fund most of the expenses to date relating to European regulatory
approvals for the Venturi. During the year ended December 31, 1995 and the three
month period ended March 31, 1996, the Company shipped testing and demonstration
products to Kontron totaling $183,000 and $83,000, respectively. Because Kontron
has the right to return these testing and demonstration products at a stipulated
depreciated value in the event that the distribution agreement is terminated,
the related revenues have been deferred. See Note 12 of Notes to the Company's
Financial Statements. The Company expects to begin commercial sales to Kontron
during the second half of 1996.
The Company has incurred ongoing losses from operations since inception
through March 31, 1996; it had cumulative losses totalling $8,255,000 as of
March 31, 1996. To date, substantially all of the Company's expenditures have
related to the design, development, pre-commercial assembly and testing of the
Venturi ventilator. The Company expects that selling, general and administrative
expenses will increase in connection with the creation of the Company's sales
and marketing organization, the expansion of its facilities and staff and the
commercial launch of the Venturi.
The Company presently expects to begin commercial sales efforts respecting
the Venturi in the second half of 1996, and the Venturi is expected to account
for substantially all of the Company's revenue for the foreseeable future. The
Company's efforts are subject to the risks inherent in the development of
innovative products, including the risk that the product will be found to be
ineffective or unsafe, or will otherwise fail to receive necessary regulatory
clearances, or that the product, if safe and effective, will be difficult to
manufacture on a large scale or will be uneconomical to market. No assurance can
be given that the Company will be able to produce the Venturi in commercial
quantities at acceptable costs or without delays, or that it will be able to
market the Venturi successfully. Any failure of the device to achieve acceptable
market performance or the identification of technical deficiencies could lead to
delays in the introduction and market acceptance of the product and could
jeopardize the viability of the Company. In addition, the Company will need to
obtain additional regulatory approvals before the Venturi can be sold in a
number of significant international markets, including France and Germany, and
may encounter delays in obtaining such approvals or other regulatory delays
relating to the commercial production of the Venturi. See "Risk Factors."
RESULTS OF OPERATIONS
Three-Month Period Ended March 31, 1996 and 1995
During the three month period ended March 31, 1996, the Company shipped
testing and demonstration products to Kontron totaling $83,000. Because Kontron
has the right to return testing and demonstration products at a stipulated
depreciated value in the event that the distribution agreement is terminated,
the related revenue has been deferred. No products were shipped in the
comparable period in 1995.
Research and development expenses were $525,000 in the three-month period
ended March 31, 1996 compared with $301,000 in the comparable period in 1995.
The increase in these expenses was primarily attributable to the increased
number of personnel and related costs for additional design in preparation of
assembly operations.
17
<PAGE>
General and administrative expenses were $272,000 in the three-month period
ended March 31, 1996, compared with general and administrative expenses of
$127,000 in the comparable period in 1995. The increase in these expenses
resulted primarily from increases in personnel, additional legal, professional
and consulting fees and insurance premiums.
The Company received interest income of $11,000 in the three-month period
ended March 31, 1996 and $4,000 in the comparable period in 1995. The increase
in interest income was due to higher balances of cash and cash equivalents on
hand during the three-month period ended March 31, 1996 compared to the
comparable period in 1995 as a result of the proceeds from the issuance of
$1,372,000 of convertible notes and warrants in December 1995. The Company
incurred interest expense in the three-month period ended March 31, 1996 of
$113,000 relating primarily to convertible notes issued in December 1995,
including $85,000 related to the amortization of the value of related warrants.
See Note 8 of Notes to the Company's Financial Statements.
Years Ended December 31, 1995, 1994 and 1993
Prior to July 1995, the Company shipped no products as the primary focus of
the Company was research and development on the Venturi ventilator. Beginning in
July 1995, the Company shipped testing and demonstration products to Kontron;
these shipments totalled $183,000 for the year ended December 31, 1995. Because
Kontron has the right to return testing and demonstration products at a
stipulated depreciated value in the event the distribution agreement is
terminated, the related revenue has been deferred.
Research and development expenses were $1,718,000 in 1995, $1,075,000 in
1994 and $542,000 in 1993. The increase in 1995 over 1994 was primarily
attributable to increases in personnel and related costs for additional product
research and increases in related materials and supplies. The increase in 1994
over 1993 was primarily attributable to additional expenditures in connection
with personnel, materials and supplies and outside services. In addition,
research and development expenditures were limited during the period from
January to July 1993 due to a decreased level of funding.
General and administrative expenses were $580,000 in 1995, $184,000 in 1994
and $72,000 in 1993. The increase from 1995 to 1994 resulted primarily from
increases in personnel and related costs and additional professional fees. The
increase from 1994 to 1993 resulted primarily from a temporary reduction of
management staff during the period from January to July 1993 due to a decreased
level of funding.
The Company received interest income of $34,000 in 1995, $38,000 in 1994
and $14,000 in 1993 and incurred interest expense of $66,000 in 1995 and $93,000
in 1993. The interest income was derived from the investment of the net proceeds
from the issuance of $1,372,000 of convertible notes and warrants in December
1995, $1,457,000 of preferred stock in March 1995 and $1,944,000 of preferred
stock in July 1993. Interest expense in 1995 resulted from the convertible notes
issued in December 1995, and interest expense in 1993 resulted from $1,381,000
in bridge loans which were converted into equity concurrently with the July 1993
financing.
LIQUIDITY AND CAPITAL RESOURCES
The Company's needs for funds generally have increased from period to
period as it has increased the scope of its research and development activity
and began shipments of testing and demonstration units. From inception through
March 31, 1996, the Company has funded these needs with approximately $7.8
million obtained through private placements of its equity securities and loans,
principally from stockholders. In addition, in April 1996, the Company issued a
note and warrants and received net proceeds of approximately $80,000, and in May
1996 the Company issued common stock and warrants and received net proceeds of
approximately $867,000.
As of March 31, 1996 and December 31, 1995, the Company's principal source
of liquidity was cash and cash equivalents totalling $525,000 and $1,257,000
respectively. The Company had no material commitments for capital expenditures
at December 31, 1995 or March 31, 1996.
The Company plans to finance its capital needs principally from the net
proceeds of this offering and interest thereon and its existing capital
resources. The Company's working capital and capital requirements will depend on
numerous factors, including the level of sales, the progress of the Company's
research activities and the level of resources that the Company devotes to the
developmental, clinical, regulatory and marketing aspects of its products. As it
expands from the development stage, the Company expects to expand its production
facilities or establish
18
<PAGE>
alternate facilities and to hire additional production, marketing and sales
personnel. The Company believes that the financial resources available to it,
including its current working capital and the net proceeds from this offering,
will be sufficient to finance its planned operations and capital expenditures at
least through the end of 1997. The Company further believes that the level of
financial resources available to it is an important competitive factor and,
accordingly, may seek to raise additional capital through public or private
equity or debt financings in the future. Failure to raise such capital may
adversely affect the Company's operations and prospects. The Company plans to
continue development and testing of the Venturi and is actively designing new
products, including the Venturi MS, the Venturi AS and the Venturi CS. See
"Business -- Research and Development."
In June 1996 the Company established a $500,000 bank revolving bridge line
of credit which expires on September 15, 1996. It is secured by substantially
all of the Company's assets (including intangibles) and provides for interest of
two and one-half percentage points over the lender's prime rate. In connection
with the line of credit, the Company issued the bank a warrant to purchase 4,000
shares of the Company's Common Stock for an exercise price per share equal to
the low end of the range of the initial public offering price in this
Prospectus, subject to adjustment in the event this offering is not completed
prior to August 31, 1996. To date the Company has not drawn against this line of
credit. The Company may from time to time seek additional bank financing
following completion of this offering, although there can be no assurance that
such financing will be obtained.
The distribution agreement between the Company and Kontron provides for
negotiated price adjustments based on fluctuations in the exchange rate of the
U.S. dollar with respect to the European Currency Unit. See "Business --
Distribution Agreement with Kontron." Other international sales may expose the
Company to risks from currency fluctuations. In instances in which future
transactions are denominated in foreign currencies, the Company may seek to
hedge its foreign currency exposure. To date, the Company has had no foreign
currency exposure. See "Risk Factors -- Reliance on Foreign Sales; Foreign
Currency Fluctuation."
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $3,274,000 and $2,674,000 for federal and state income tax
reporting purposes, respectively. In addition, at December 31, 1995, the Company
had federal research and development credit carryforwards of approximately
$238,000. The utilization of these net operating loss carryforwards and credit
carryforwards may be limited based upon changes in ownership of the Company. See
Note 11 of Notes to the Company's Financial Statements.
EFFECT OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("FAS 123"), which established financial accounting and reporting
standards for stock-based employee compensation plans. Companies are encouraged,
rather than required, to adopt a new method that accounts for stock compensation
awards based on their fair value using an option pricing model. Alternatively,
companies may make pro forma disclosures of net income as if the fair value
based method of accounting required by this standard had been applied. The
Company has elected to adopt FAS 123 in 1996 through disclosure only.
19
<PAGE>
BUSINESS
GENERAL
Cardiopulmonary Corp. designs, develops and assembles advanced,
software-driven ventilators which it believes represent a new generation of life
support technology for the treatment of intensive care and anesthesia patients.
The Company's first product, the Venturi ventilator, incorporates proprietary
"smart" software and pneumatic hardware to continuously control patient airway
flow and pressure throughout all phases of the respiratory cycle, including the
active control of exhalation. These unique features enable continuous automatic
adjustment within and between individual breaths to tune therapy to
patient-specific demands and to supplement the patient's spontaneous breathing
efforts without suppressing or mechanically overriding the patient's natural
drive to breathe. The Company believes that these features will fundamentally
change the practice of applied respiratory care by reducing the work of
breathing, accelerating weaning from mechanical ventilatory support and reducing
ventilator dependence. As a result, the Company believes the Venturi will
improve clinical results, shorten the length of hospital stays and reduce
treatment costs.
The Company has entered into an exclusive distribution agreement with
Kontron Instruments Ltd. for the promotion, sales, servicing and distribution of
Venturi products in Europe and certain other jurisdictions. Kontron is a
subsidiary of Kontron Instruments Holding N.V., a leading manufacturer and
distributor of medical and scientific instruments with over $175 million in
annual sales and an established critical care sales force which includes
approximately 60 European sales representatives. To date, Kontron has funded
most of the expenditures relating to European regulatory approvals for the
Venturi, and through direct investments owns approximately 12% of the Company
prior to this offering. Subject to certain termination rights, the distribution
agreement with Kontron calls for Kontron to purchase specified quantities of the
Venturi ventilator through the end of 1997, after which time the parties have
agreed to negotiate in good faith concerning a new purchase schedule. In
addition, Kontron has agreed to expend a total of at least $1,000,000 for
promotion, advertisement and selling of the Venturi, the timing of which
expenditure is based on the receipt by the Company of certain regulatory
approvals for the Venturi. See "Business -- Distribution Agreement with
Kontron." The Company currently is supplying demonstration units to Kontron and
expects to begin commercial sales efforts through Kontron in the second half of
1996.
The Venturi has received Section 510(k) pre-market clearance from the U.S.
Food and Drug Administration and has passed IEC 601 safety tests administered by
the British Standards Institution. As a result, the Company may begin commercial
sales in the United States and most European countries other than Germany and
France, where specific regulatory applications are pending. The European and
United States product launches for the Venturi presently are scheduled for the
second half of 1996.
INDUSTRY BACKGROUND
Market Overview
Respiratory dysfunction represents one of the most prevalent and costly
conditions in healthcare. The National Center for Health Statistics reports that
lung disease affects some 25 million people and is the third leading cause of
death in the United States. Furthermore, the cumulative effects of air
pollution, smoking, and the increasing incidence of the acquired
immunodeficiency syndrome (AIDS), together with the aging of the United States
population, are expected to cause a significant increase in the need for
respiratory care.
Mechanical ventilation is required for the treatment of acute respiratory
failure due to primary lung disease and for a variety of secondary causes of
respiratory failure, including heart attacks, circulatory failure, strokes,
sepsis and trauma. According to HCIA Inc., approximately 730,000 patients
required mechanical ventilation for acute respiratory failure in the United
States in 1994. Based upon 1996 studies which indicated an average duration of
ventilatory support of 18 days, patients suffering acute respiratory failure
require approximately 13 million patient days of advanced ventilatory support
each year. Furthermore, patients undergoing general anesthesia and surgery
require temporary ventilation to sustain breathing during surgery and/or in the
immediate post-operative period. The American Society of Anesthesiology
estimates that 22 million surgical procedures are performed in the United States
each year; a significant portion of these procedures requires general
anesthesia.
Mechanical ventilation for acute respiratory failure is generally provided
in hospital intensive care units. The American Hospital Association estimated
that in 1992 there were approximately 100,000 ICU beds in some 6,500
20
<PAGE>
hospitals in the United States. Based upon the industry data described above and
the American Hospital Association's 1994 estimated average bed utilization of
66% in acute care hospitals, the Company estimates that there is an installed
base of approximately 50,000 intensive care ventilators in the United States.
According to a 1994 article, the total cost of ICU care in the United States was
approximately $55 billion in 1992. In addition, studies have shown that hospital
charges were higher in patients receiving mechanical ventilation than in other
patients in the ICU and that mechanically ventilated patients consume a
disproportionate share of ICU resources. As a result, any reduction in average
duration of ventilatory support or the resources required to maintain such
support would represent a significant direct cost benefit, particularly for
healthcare providers operating under capitated payment contracts and Medicare's
diagnosis-related group reimbursement system.
Current Status of Mechanical Ventilator Technology
A ventilator is a mechanical device which facilitates the exchange of
oxygen and carbon dioxide between the atmosphere and the patient. Mechanical
ventilation has evolved from methods of temporary support during anesthesia and
surgery to become one of the most important treatments in the management of
critically ill patients. Ventilators are used as primary life supportive therapy
for patients unable to accomplish effective, spontaneous breathing due to
serious medical illness, such as acute respiratory distress, acute circulatory
failure, chronic obstructive pulmonary disease, sepsis and multi-organ failure.
Although the respiratory needs of critically ill patients change
constantly, the current generation of ventilators provides relatively static
ventilatory support. Current systems supply oxygen and other gases to a patient
based upon preset parameters (such as breathing rate, tidal volume, pressure or
flow) with limited ability for automatic adjustment. As a result, current
ventilators often mechanically override the patient's spontaneous respiratory
effort or require the use of sedatives or narcotics to extinguish the natural
drive to breathe. The clinician's ability to improve treatment also is hampered
by the limited ability of current ventilators to optimize patient-ventilator
interaction. The management of a patient under these conditions requires
constant vigilance and intervention by a clinician, including frequent manual
adjustments to the ventilatory controls. In addition, conventional mechanical
ventilation provides assistance only during inhalation, which leads to higher
work of breathing and the potential for gas trapping in the lungs.
Due to these technological limitations, the Company believes that patients
are often either under- or over-ventilated, leading to increased work of
breathing, diaphragmatic fatigue, altered pulmonary gas exchange, respiratory
muscle atrophy and mechanical overdistention of the lung. The Company believes
these conditions may lead to increased respiratory complications and may impede
the ability to wean a patient from the ventilator, resulting in prolonged
ventilator dependence, suboptimal patient outcomes and increased treatment
costs.
THE CARDIOPULMONARY SOLUTION: PATIENT-SPECIFIC, "SMART" VENTILATION
Cardiopulmonary has developed its core ventilation technology to address
key clinical problems, technological limitations and high treatment costs that
the Company believes are associated with current ventilators. The Company's
basic premise is that patient outcomes in ventilation can be improved only if
the ventilator is able to respond automatically and continuously adapt to the
changing needs of the critically ill patient. The Company has designed the
Venturi to achieve these objectives. The Company believes that the Venturi will
advance the standard of ventilatory care and lead to improved patient outcomes,
reduced length of stay and treatment cost savings through:
O IMPROVED PATIENT-VENTILATOR INTERACTION: The Venturi's precise
monitoring and fast pneumatic response improve synchrony between
patient effort and ventilatory response, reducing the work of
breathing and ventilator dependence.
O AUTOMATIC WEANING: The Venturi promotes spontaneous breathing by
providing automatic withdrawal of mechanical ventilatory support
commensurate with the improved clinical status of the patient,
reducing clinician time and consequently lowering treatment costs.
O ACTIVE CONTROL OF EXHALATION: To date, ventilator technology has
focused on assisting inhalation. The Company believes the Venturi's
unique ability to actively control exhalation will minimize gas
trapping in the lungs (a phenomenon known as "intrinsic PEEP" or
"auto-PEEP"), reduce the risks of barotrauma (injury due to
overpressurization of the lung), increase gas exchange, and improve
patient comfort.
O PATIENT SIMULATION: The Venturi permits the clinician to predict the
effects of proposed changes to treatment settings in a computer
simulation using current patient data without disrupting the ongoing
care
21
<PAGE>
regimen. The Company believes this feature will improve safety
and reduce the risk of complications during ventilator adjustment.
O DATA MANAGEMENT AND OUTCOMES MEASUREMENT: The Venturi records and
maintains individual patient ventilation data through the use of its
customized database, allowing clinicians to compare historical
physiologic data with current patient settings and responses. The
Venturi software architecture will permit the assembly of an outcomes
database for the development of optimal treatment protocols which the
Company believes ultimately will enable healthcare providers to better
manage the cost of care.
STRATEGY
The Company's objective is to become a leading provider of advanced
ventilatory support and other critical care systems in the United States and
internationally. The important elements of the Company's strategy are to:
Establish the Company's Venturi system as a new standard of care in
advanced ventilatory support. The Company intends to establish the Venturi
ventilator as an essential interventional platform at the bedside of
critically ill patients. The Company believes that the advanced clinical
features of its products will allow the delivery of superior patient care
and the reduction of overall treatment costs.
Focus on leading teaching hospitals and clinical opinion leaders. The
Company is focusing its initial product marketing and sales efforts on
major teaching hospitals and key opinion leaders in pulmonary and critical
care medicine and anesthesiology in the United States and in Europe. The
Company believes that the support of well-respected clinicians will
contribute to market acceptance and stimulate product demand by validating
the performance of the Venturi ventilators.
Initiate clinical marketing studies to validate certain key
benefits. The Company believes that published peer-reviewed studies
validating the safety, key clinical benefits and claims of superior
performance of the Venturi and future products will constitute an important
element of its marketing efforts. The Venturi currently is undergoing
clinical marketing studies at Yale-New Haven Hospital. The Company plans to
begin additional clinical marketing studies during the second half of 1996
at Polyclinica di Milano in Italy, Medizinsche Hochschule Hannover in
Germany, Hopital Henri Mondor in Creteil, France, Gloucester Royal
Infirmary in England and Duke University Medical Center, and plans to
initiate additional studies in the future.
Establish international presence through Kontron and other strategic
alliances. The Company plans to work closely with Kontron to market the
Venturi in Europe and certain other jurisdictions. The Company believes
this relationship will facilitate the penetration of the European market
through Kontron's established sales and marketing force and service
network. The Company also intends to establish similar strategic alliances
or distributor relationships in the Pacific Rim, South America and other
key international markets to assist with regulatory requirements and to
market, distribute and service its products.
Establish a direct sales force and selected distributor network. In
the United States, the Company is establishing a direct sales force, which
initially will focus on leading teaching hospitals, and a network of
respiratory specialty distributors to support the efforts of the direct
sales force in generating sales to other hospitals and subacute healthcare
providers.
Leverage core ventilation technologies to create new products and
maintain product leadership. The Company plans to use the Venturi
ventilator as a technological platform for its future products. As a
result, the Company believes it can reduce the development time and cost
required for these products. In addition, the Company has designed the
Venturi to accommodate software and modular component upgrades which will
enable field upgrades of existing products. The Company believes these
upgrades will allow it to maintain a technological leadership position by
adding new therapeutic options for respiratory care to the capabilities of
the existing Venturi platform, subject to obtaining necessary regulatory
clearances.
PRODUCTS
The Venturi Ventilator
The Company's Venturi ventilator is a portable system that provides
advanced life support for patients with acute respiratory failure. It features
proprietary, patient-focused, "smart" ventilation which improves the dynamic
22
<PAGE>
interaction between patient demand and ventilator response. The Company's
Venturi ventilator offers numerous advanced clinical features, including:
Proprietary "smart" software. The Venturi's proprietary "smart"
software is shared by two computers. The first implements the desired
therapy by controlling the system's pneumatics, and the second runs a color
graphical, object-oriented touchscreen interface and provides redundant
capability for system operation. The software accepts and implements a
broad range and a high level of instructions from the clinician. The
Venturi permits clinicians to invent and implement protocols, and to reuse
and adapt proven protocols to different patients. Once the clinician has
selected or "programmed" a protocol, the Venturi's software continuously
adapts the Venturi to automatically remain in synchrony with the patient
during changing breathing patterns. The Company believes the automatic
control of ventilation represents a significant advance in respiratory
care.
Pneumatic system. The pneumatic drive mechanism in the Venturi's
respiratory control system is a dual venturi tube driven by a single
proportional valve. In the forward direction, the Venturi tube generates
pressure to the outside of the breathing bag that contains the gases to be
delivered to the patient (these gases can be any blend of air and oxygen,
and can include other diagnostic and therapeutic gases such as helium or
nitric oxide). Reversing the flow through the venturi tube lowers airway
pressure and allows the patient to exhale freely, providing exhalation
assistance to promote higher airway flow and more complete exhalation. The
Company believes that the Venturi ventilator's proprietary pneumatic system
provides several significant clinical advantages, including lower lung
pressure, faster respiratory cycles, reduced gas trapping and better gas
exchange. Among other benefits, the Company believes these clinical
improvements will encourage spontaneous breathing, and consequently allow
earlier weaning from ventilatory support.
Monitoring. To offer the clinician flexibility in the control of
ventilation and the monitoring of patient response, the Venturi
incorporates an active, full color, integrated graphics display and
touchscreen that depicts the patient's respiratory status. The Venturi
displays a comprehensive set of widely used and clinically established
respiratory parameters and waveforms, including standard waveforms
depicting primary respiratory mechanics such as pressure, volume, and flow,
in conjunction with selected secondary data such as the continuous display
of flow-volume and pressure-volume relations. The Venturi also permits
remote monitoring by means of computer and telecommunications networks.
Data management and outcomes measurement. The Venturi records and
maintains individual patient ventilatory data with its proprietary database
system, allowing clinicians to compare historical treatment data with
current patient settings and responses. The Venturi software architecture
also permits a user to assemble a customized outcomes database to develop
optimal treatment protocols, which the Company believes ultimately will
contribute to reductions in the cost of care and help users remain
competitive in a managed care environment.
Proprietary patient simulator. The Venturi permits the clinician to
predict the effects of proposed changes to a patient's treatment settings
in a computer simulation using current patient data without disrupting the
ongoing care regimen. Thus, a clinician can test proposed changes before
applying them to a patient to determine optimal, patient-specific settings.
Software operating system with open architecture and
telecommunications capability. The Company has developed a proprietary
software system with an open architecture design which allows the
flexibility to change and/or upgrade the Venturi's functionality. The
Company believes the Venturi's software structure will allow the Company to
test and distribute new methods of ventilation, thus facilitating the
implementation of new therapeutic strategies for respiratory care, subject
to obtaining necessary regulatory clearances. Furthermore, the system's
data management capabilities and ability to connect to computer and
telecommunications networks will enable healthcare providers to integrate
the Venturi with other information management systems.
Disposable integrated breathing circuit, humidifier and reservoir. The
Venturi provides temperature control and humidification of the breathing
gas. By integrating all of the system components that come into contact
with the patient, including the humidifier, into one disposable circuit,
the Company believes the Venturi will reduce the risk of patient-to-patient
cross contamination and the costs of cleaning and sterilization. As the
number of patients with advanced cases of acquired immunodeficiency
syndrome (AIDS), tuberculosis and hepatitis who require ventilatory support
increases, this feature will offer important patient care and safety
benefits. In addition, this integrated circuit reduces work of breathing by
eliminating flow-restricted demand
23
<PAGE>
valves and protective filters within the breathing circuit as required by
existing ventilators. The Company anticipates that sale of its proprietary
disposable breathing circuits will provide an additional source of revenue.
Portability with full pneumatic and electrical capability. The Venturi
is a portable system that includes batteries and gas tanks to provide
complete electrical and pneumatic capability for one hour or more of
uninterrupted, full scale ventilation without recharging. As a result, the
Venturi can be moved throughout the hospital with the patient. This
alleviates the need to interrupt life support to switch a patient to a
temporary ventilatory support system during patient transfer, which has
been shown to be a high risk event for a ventilated patient. This also
allows care institutions the flexibility to bring advanced ventilatory
support to any bedside without moving the patient. These features make the
Venturi suitable for a wide range of healthcare facilities, including
flexible environments such as subacute care facilities and outpatient
surgery facilities, and reduces the need for healthcare providers to
purchase separate transport ventilators.
Incorporation of standardized hospital protocols. The Company believes
there is an increasing trend toward the use of standardized treatment
protocols in order to shorten hospital stays and improve patient outcomes.
The Venturi allows healthcare providers to customize protocols and display
them on the system's guidance screen. Additional protocols can be
implemented in accordance with a patient's response to treatment until
ventilatory support is no longer required.
As a result of these features, the Company believes that the Venturi system
offers significant benefits to patients and healthcare providers, including: (i)
improved patient care, (ii) ease of use, (iii) reduced ventilator days, (iv)
reduced cost of patient care, (v) reduced need for sedatives and narcotics, and
(vi) reduced risk of cross-contamination. The Company plans to price the Venturi
competitively with or at a premium to existing high end ventilators, which the
Company believes generally are priced from $25,000 to $35,000; however, the
Company has not yet determined the exact price range at which the Venturi will
be offered.
PRODUCTS UNDER DEVELOPMENT
The Company is developing new products which are being designed to be fully
compatible with the software and hardware platform utilized in the Venturi
system.
The Venturi MS is being designed as a stand alone system which will add a
wide array of critical care patient monitoring parameters to the Venturi's
primary respiratory platform. The Company expects that this system will
continuously monitor a patient's electrocardiogram (EKG), invasive and
non-invasive arterial blood pressure, blood oxygen saturation, end tidal carbon
dioxide, temperature and respiration. The Venturi MS will provide healthcare
clinicians with a fully-integrated display of these key vital parameters.
Because the Venturi MS will use the same software platform and hardware utilized
in the Venturi, Venturi owners will also be able to incorporate these expanded
monitoring capabilities through modular, easy-to-install hardware and software
upgrades. The Company believes the Venturi MS will significantly reduce users'
capital equipment needs by consolidating commonly used individual monitoring
tools into one fully-integrated portable life-support workstation. The Venturi
MS is in the advanced stages of product design.
The Venturi AS, an advanced anesthesia workstation, is expected to combine
precise anesthetic agent delivery with the Venturi's advanced ventilatory
control. The data management system will be designed to consolidate and simplify
patient monitoring and anesthetic delivery information so that the
anesthesiologist can base clinical decisions on prompt and reliable
patient-specific information depicting the patient's intraoperative and
post-anesthetic status. In addition, the Company expects the product to
incorporate an innovative and precise anesthetic agent delivery system. The
Company believes these features will provide precise control of anesthetic
delivery, increase patient safety and decrease recovery time and costs. The
Venturi AS is still in the research stage.
The Venturi CS, a second generation version of the Venturi system, is being
designed to enhance heart-lung interaction during mechanical ventilation. The
Venturi CS is also expected to incorporate new "smart" software for
cardiac-ventilator synchronization, pulmonary mechanics measurements and
enhanced patient monitoring capabilities. As a result, the Company believes that
the Venturi CS will significantly reduce cardiac work and enhance circulatory
function in cardiac-compromised patients, leading to enhanced patient care and
reduced treatment costs. The Venturi CS is undergoing investigational trials at
Yale-New Haven Hospital under an Investigational Device Exemption (IDE).
The Company will need to obtain clearance or approval from the FDA and
comparable regulatory authorities outside the United States before marketing its
products under development. See "-- Government Regulation."
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SALES, MARKETING AND DISTRIBUTION
The Company, through its relationship with Kontron and its direct sales
force in the United States, intends to focus its initial sales and marketing
efforts on major teaching hospitals and key opinion leaders in the field of
pulmonary medicine and acute ventilatory care, who are in the best positions to
appreciate the therapeutic and financial benefits attributable to the Company's
products. In addition, the Company believes it will be able to develop, as part
of its ongoing clinical marketing studies, published reports which document key
clinical benefits of the Venturi, including the ability of the Venturi to reduce
the average number of ICU days for specific patient populations. The Company
believes studies of this nature would influence purchasing decisions with
respect to intensive care products such as ventilators, which generally are made
by hospital administrators and specialists for buying consortiums. However,
there can be no assurance that such studies will be published on a timely basis,
if at all, or that any studies that are published will support the Company's
claims. See "Risk Factors--Uncertainty of Market Acceptance."
Domestic Sales and Service. The Company currently is establishing a direct
sales force for the United States market. Initially, the Company expects to
establish a sales force of Regional Account Managers in select geographic areas;
the Company expects this sales force to grow in number to the extent product
acceptance and sales volume increase. The sales force will be responsible for
the demonstration and sale of the Company's products as well as developing a
close working relationship with target accounts. Initially, the Company intends
to focus its sales and marketing efforts on major teaching hospitals and other
centers of influence. The sales force will be expected to leverage sales at
these influence centers to achieve subsequent recommendations and endorsements.
A portion of the proceeds of this offering will be used to establish such a
direct sales force. See "Use of Proceeds."
The Company also plans to utilize respiratory specialty distributors to
sell products in markets which will not be initially targeted by the direct
sales force. These distributors will also support the efforts of the direct
sales force in the smaller acute care hospitals and subacute care facilities and
will be responsible for the related sales, service, stocking and account
receivable functions in their assigned geography.
The Company plans to utilize a combination of in-house direct service
representatives and dealer/third party field service representatives. The
Company's direct service representatives will be responsible for the repair of
products, act as liaison between the customer and the Company's product quality
and manufacturing staff, train the dealer/third party service support network
and produce applicable service and support technical material. The dealer/third
party service organizations will be responsible for the field service of
products which have been sold in their assigned geographic territory.
International. The Company plans to penetrate international markets through
its relationship with Kontron. The Company's initial sales are being made to
Kontron for resale in Europe and certain other jurisdictions. See " --
Distribution Agreement with Kontron." The Company is supporting Kontron's
efforts by encouraging clinical marketing studies of the Venturi at several
leading European hospitals. The Company intends to seek additional long-term
strategic relationships or distribution agreements to take advantage of
established sales organizations in the Pacific Rim, South America and other
international markets.
Clinical Support and In-Service Training. The Company plans to support its
domestic and international markets as well as its clinical marketing studies
with a limited staff of clinical specialists, which will increase in size with
product acceptance and increased sales volume. These specialists will be
responsible for installing products and monitoring their operation at study
sites as well as assisting the Company's direct sales organization with
in-service training and technical presentations.
Promotion. The Company plans an intensive awareness campaign to educate the
medical community about its products by sponsoring clinical abstracts and papers
pertaining to Company products at major professional society meetings. The
Company plans to display its products at exhibitions at the annual meetings of
major professional societies, such as the American Association of Respiratory
Care, American Thoracic Society, American College of Chest Physicians, American
Society of Anesthesiologists and the American Society of Critical Care Medicine,
as well as at local respiratory therapy society meetings. The Company also plans
to advertise in professional journals both to enhance recognition of the
Company's name and products and to generate sales leads.
Ancillary Products and Services. Once a sufficient installed base of its
products is in place, the Company may also realize revenue from the sale of
training services, software based treatment guidelines and utilization review
protocols and from the sale of disposable breathing circuits.
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DISTRIBUTION AGREEMENT WITH KONTRON
In March 1995, the Company entered into an exclusive Distribution Agreement
with Kontron Instruments Ltd. for the promotion, sales, servicing and
distribution of Venturi products in Europe and certain other jurisdictions.
Kontron is a subsidiary of Kontron Instruments Holding N.V., a leading European
manufacturer and distributor of medical and scientific instruments with over
$175 million in annual sales and an established critical care sales force which
includes approximately 60 European sales representatives. The Company has
granted Kontron exclusive distribution rights for the Venturi (including the
Venturi CS, Venturi AS and any upgrades of or new developments included therein)
in Europe and certain other jurisdictions. The Company believes a long-term
strategic relationship with Kontron will allow the Company to benefit from
Kontron's established sales organization and distribution network, and
consequently accelerate the Company's penetration of overseas markets. In
addition, the Company hopes to benefit from Kontron's experience with respect to
overseas regulatory approvals. To date, Kontron has funded most of the
expenditures relating to European regulatory approvals, and through direct
investments owns approximately 12% of the Company prior to this offering. See
"Certain Transactions."
Pursuant to the terms of the Distribution Agreement, Kontron has obtained
British Standards Institution certification that the Venturi complies with IEC
601 safety standards. Subject to certain termination rights, the distribution
agreement with Kontron calls for Kontron to purchase specified quantities of the
Venturi ventilator through the end of 1997, after which time the parties have
agreed to negotiate in good faith concerning a new purchase schedule. In
addition, Kontron has agreed to expend a total of at least $1,000,000 for
promotion, advertisement and selling of the Venturi, the timing of which
expenditure is based on the receipt by the Company of certain regulatory
approvals for the Venturi. The Company currently is supplying demonstration
units to Kontron and expects to begin commercial sales efforts through Kontron
in the second half of 1996. A representative of Kontron also is entitled to
attend meetings of the Company's Board of Directors.
The Distribution Agreement extends indefinitely, subject to termination
upon the occurrence of certain events. Ordinary termination of the Distribution
Agreement requires thirty-six months' written notice by either party.
Exceptional termination is allowed: (i) upon twenty-four (24) month's notice by
either party given during any month of January, if Kontron and the Company have
failed to agree by the end of the prior year on a purchase schedule for the
upcoming three years to update the purchase schedule contained in the
Distribution Agreement; (ii) upon six month's notice by either party given
during any month of January beginning in January 1996, if Kontron has failed to
order from the Company in the previous year at least the minimum number of
products set forth in the mutually agreed schedule for the prior year, except
where such failure is due to the Company's inability to deliver products; (iii)
automatically and without notice in case of dissolution or liquidation of the
Company or of Kontron; (iv) immediately upon notice by the Company if Kontron
(other than for reasons of force majeure) shall fail to make any payment due the
Company for a period of sixty (60) days following the date such payment is due
unless such obligation is disputed in good faith; and (v) upon six month's
notice by either party in case a competitor of either party acquires direct or
indirect control of the other party, in which case the right to exceptional
termination can be exercised only by the party not being so acquired.
The Distribution Agreement provides that the Company and Kontron shall
negotiate in good faith with respect to price adjustments for future sales if
the exchange rate of the U.S. dollar with respect to the ECU varies by more than
7.5% from that in effect on the date a price is agreed. Consequently, the
Company's revenues from sales to Kontron may be adversely affected by
fluctuations in currency exchange rates. See "Risk Factors --Reliance on Foreign
Sales; Foreign Currency Fluctuation" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
PRODUCTION
The Company's production operations consist primarily of final assembly,
testing, and quality control of materials, components, subassemblies, and
systems. The Company currently assembles and tests its products at its facility
in Milford, Connecticut. As currently configured, the Company's facilities will
accommodate only limited ventilator production. As a result, the Company
anticipates that it will need to expand its production facilities or establish
alternate facilities as it expands from the development stage to full
production, and intends to spend a portion of the proceeds from this offering
for that purpose. See "Use of Proceeds" and "Risk Factors."
The Company purchases the components for its products from various
independent suppliers. These components are either standard components or are
built to the Company's specifications. As a result of the Company's
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efforts to develop multiple supplier relationships, many of the purchased
components are available from more than one vendor. However, several components
used in the Company's products are currently available from only one source and
others are available from only a limited number of sources. Although the Company
believes it could obtain all of the necessary items from alternate sources if
required, a change in sole source suppliers would disrupt production, create
delays or reductions in product shipments, or increase component costs. See
"Risk Factors -- Reliance Upon Key Suppliers."
PATENTS AND PROPRIETARY INFORMATION
The Company seeks to protect its proprietary rights in its technology and
products through patent applications, trade secrets and non-disclosure and
confidentiality agreements. The Company has filed patent applications relating
to the Venturi's pneumatic system in the United States and internationally
(including a pending application to the PCT) and to the Venturi's control system
and software in the United States. In addition, certain of the Company's
products under development are protected by two United States patents and two
international patents covering ventilation methods and hardware design. The
Company intends to submit additional international patent applications. There
can be no assurance that any of the Company's patent applications will result in
issued patents, that any issued patents will provide any competitive advantage
or that patents will not be challenged, circumvented or invalidated.
The Company also relies on unpatented trade secrets and proprietary
know-how. There can be no assurance that others may not independently develop or
otherwise acquire the same or similar trade secrets and know-how or otherwise
gain access to the Company's proprietary technology or disclose such technology,
or that the Company can meaningfully protect its rights to its unpatented
technology. In the absence of patent protection, the Company's business may be
adversely affected by competitors who independently develop substantially
equivalent technology.
In addition, the Company has filed an "intent-to-use" trademark
registration for the "Venturi" mark, which has been allowed by the United States
Patent and Trademark Office.
COMPETITION
The medical device industry in the United States and abroad is intensely
competitive. The principal manufacturers of ventilator equipment are Nellcor
Puritan-Bennett, Inc., Siemens Life Systems (a division of Siemens AG),
Infrasonics, Inc. (which has entered into an agreement to be acquired by Nellcor
Puritan-Bennett, Inc.), Bird Medical Technologies, Inc. (a division of Thermo
Electron Corp.), Bear Medical Systems, Inc. (a division of Allied Healthcare
Products, Inc.) and Draegerwerk AG. The Company may also compete with other
manufacturers of respiratory products and medical devices. Many of these
companies have substantially greater capital resources, research and development
staffs and facilities, and experience in obtaining regulatory approvals and in
marketing and distribution of products, than does the Company. The Company
believes that the principal competitive factors in this market are product
features and quality, ability to reduce treatment costs, price, customer
service, and improved patient outcomes. The Company believes that it can compete
with respect to each of these factors; however, the Company may find it
necessary to adjust its pricing policies in accordance with market conditions.
See "Risk Factors -- Significant Competition" and "Risk Factors -- Uncertainty
of Market Acceptance."
RESEARCH AND DEVELOPMENT
The Company has devoted substantially all of its efforts since inception to
the design, development, pre-commercial assembly and testing of the Venturi
ventilator. Research and development expenses were $525,000 in the three-month
period ended March 31, 1996 and $301,000 in the three-month period ended March
31, 1995; $1,718,000 in the year ended December 31, 1995, $1,075,000 in the year
ended December 31, 1994 and $542,000 in the year ended December 31, 1993; and
$5,930,000 for the period from inception (March 4, 1988) through March 31, 1996.
The Company's research and development activities are performed by the
Company's internal research and development team. The Company's principal
research and development activities consist of the continued development and
testing of the Venturi and the research, design and development of future
products, including the Venturi MS, the Venturi AS and the Venturi CS. See "--
Products" and "-- Products Under Development." The Company will be required to
seek regulatory clearance or approval for these devices. There can be no
assurance that
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product development will be successfully completed, that regulatory clearances
or approvals will be granted on a timely basis or at all or that any products
that are successfully developed will achieve commercial acceptance. See "Risk
Factors -- Uncertainty of Market Acceptance" and "Risk Factors -- Possible
Adverse Effect of Government Regulation."
GOVERNMENT REGULATION
General. All medical devices are subject to extensive and rigorous
regulation by the federal government, principally the FDA and, in some
instances, by state, local, and foreign government authorities. The Federal
Food, Drug, and Cosmetic Act ("FFDCA") and other federal statutes and
regulations govern the development, testing, manufacture, labeling, packaging,
storage, approval, advertising, promotion, sale and distribution of such
products. Sales of the Company's products outside of the United States are
subject to foreign regulatory requirements that vary from country to country.
The time required to obtain clearance from a foreign country may be longer or
shorter than that required by the FDA, and clearance or approval or other
product requirements may differ.
Regulation of Medical Devices -- United States. Pursuant to the FFDCA,
medical devices intended for human use are classified into three categories,
Classes I, II and III, on the basis of the controls deemed necessary by the FDA
to reasonably assure their safety and effectiveness. Generally, Class I devices
are subject to general controls (e.g., labelling, premarket notification, and
adherence to the Good Manufacturing Practice ("GMP") regulations), and Class II
devices are subject to general controls and special controls (e.g., performance
standards, postmarket surveillance, patient registries and FDA guidelines).
Class III devices are those which must receive premarket approval ("PMA") from
the FDA to ensure their safety and effectiveness (e.g., life-sustaining,
life-supporting, and implantable devices, or new devices that have not been
found substantially equivalent to legally marketed devices). The Venturi
ventilator is classified as a Class II device.
Before a manufacturer can introduce a new device into the market, the
manufacturer must generally obtain marketing clearance through either a
premarket notification ("510(k)") procedure or a PMA procedure. FDA will grant
510(k) clearance for a new device if the medical device manufacturer can
establish that the new device is "substantially equivalent" in terms of safety
and effectiveness to a legally marketed Class I or Class II medical device or to
a Class III medical device for which the FDA has not called for a PMA. The FDA
has recently been requiring a more rigorous demonstration of substantial
equivalence than in the past. It generally takes from four to twelve months from
submission of a 510(k) to obtain 510(k) clearance from FDA, but it may take
longer.
The FDA may determine that the new device is not substantially equivalent
to a legally marketed device, in which case a PMA may be required. The FDA may
also determine that additional information is needed before a substantial
equivalence determination can be made in which case data from safety and
effectiveness tests, including clinical tests, may be required. A "not
substantially equivalent" determination or a request for additional information
could delay the market introduction of new products that fall into this category
and could have a material adverse effect on the Company's business, financial
condition and results of operation.
The Company's Venturi ventilator has been cleared for marketing by the FDA
through the 510(k) clearance process; as a result, the Company may begin
commercial sales of the Venturi in the United States without further regulatory
approval so long as no changes are made which require the filing of an
additional 510(k) Submission. The Company currently anticipates that the Venturi
MS and the Venturi AS will qualify for 510(k) clearance and that the Venturi CS
will require premarket approval. However, there can be no assurance that the
Company will receive FDA clearance of a 510(k) notification for the Venturi MS
or the Venturi AS, or any device that the Company may develop in the future, on
a timely basis or at all.
The FFDCA requires the filing of a new 510(k) Submission when, among other
things, the manufacturer makes a major change or modification in the intended
use of a previously cleared device or a change or modification, including
product enhancements, to a previously cleared device that could significantly
affect its safety or effectiveness. A device manufacturer is responsible for
making the initial determination as to whether a proposed change to a cleared
device or to its intended use necessitates the filing of a new 510(k)
Submission. If the Company determines that any modifications that it may make to
its previously cleared products do not require the filing of a new 510(k)
Submission, there can be no assurance that the FDA would agree with the
Company's determinations and would not require the Company to submit a new
510(k) for any modifications made to the devices. If the FDA requires the
Company to submit a new 510(k) for any modification to the device the Company
may be prohibited from marketing the device as modified until the 510(k) is
cleared by the FDA. There can be no assurance that the Company will obtain
510(k) clearance on a timely basis, if at all, for any device modification for
which it files a future 510(k) Submission.
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A manufacturer must file a PMA application if a new device is not
substantially equivalent to a legally marketed Class I or Class II device, or if
it is a Class III device for which FDA has called for PMA's. A PMA application
must be supported by extensive data, usually including both preclinical and
clinical trial data, to demonstrate the safety and effectiveness of the device.
If clinical trials of a device are required and the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) must obtain FDA approval of an investigational device
exemption ("IDE") application prior to commencing the clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing. Sponsors of clinical trials are permitted to sell those
devices distributed in the course of the study provided such compensation does
not exceed recovery of the costs of manufacture, research, development and
handling. An IDE supplement must be submitted to and approved by the FDA before
a sponsor or an investigator may make a change to the investigational plan that
may affect its scientific soundness or the rights, safety or welfare of human
subjects. There can be no assurance that the Company will be permitted to
undertake such clinical trials or that, if conducted, such clinical trials will
demonstrate the safety and effectiveness of the device.
The PMA application must contain the results of the clinical trials, the
results of all relevant bench tests, laboratory and animal studies, a complete
description of the device and its components, and a detailed description of the
methods, facilities and controls used to manufacture the device. In addition,
the submission must include the proposed labeling, advertising literature and
training methods (if required). The FDA generally takes approximately one to two
years from the date of filing to complete its review of a PMA, but may take
significantly longer. The review time is often significantly extended by the FDA
requesting additional information or clarification of information already
provided in the submission. During the review period, an advisory committee
likely will be convened to review and evaluate the application and provide
recommendations to the FDA as to whether the device should be approved for
marketing. The FDA is not bound by the recommendations of the advisory panel. In
addition, the FDA will inspect the manufacturing facility to ensure compliance
with the GMP regulations for medical devices prior to approval of the PMA
application. If the FDA's evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will either issue an approval
letter or an approvable letter, which usually contains a number of conditions
which must be met in order to secure final approval of the PMA. When and if
those conditions have been fulfilled to the satisfaction of the FDA, the agency
will issue a PMA approval letter, authorizing commercial marketing of the device
for certain indications. If the FDA's evaluations of the PMA application or
manufacturing facilities are not favorable, the FDA will deny approval of the
PMA application or issue a "not approvable" letter. The FDA can also determine
that additional clinical trials are necessary, in which case PMA approval may be
delayed for several years while additional clinical trials are conducted and
submitted in an amendment to the PMA. There can be no assurance that the Company
will obtain PMA approval by the FDA to commercially market a device in the
United States on a timely basis, if at all. If granted, the premarket approval
may include significant limitations on the uses for which the product may be
marketed, and the agency may require postmarketing studies of the device.
Modifications to a device that is the subject of an approved PMA, its
labeling, or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
The Venturi did not require a PMA application; however, the Company may be
required to submit a PMA application for future upgrades of the Venturi or for
some or all of its future products, and expects that its Venturi CS product may
require a PMA application.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. Device manufacturers are required to register their establishments and
list their devices with the FDA, and are subject to periodic inspections by the
FDA, or by a state entity under an FDA contract, for compliance with the GMP
regulations for medical devices. These regulations require a company to
manufacture its products and maintain documents in a prescribed manner with
respect to manufacturing, testing and control activities. The GMP regulations
may be revised by the FDA to include design controls as well. This and other
proposed changes to the GMP regulations, if finalized, could likely increase the
cost of complying with GMP requirements. The Company also may be subject to the
registration and inspection requirements of state regulatory agencies. There can
be no assurance that the Company will be able to attain or maintain compliance
with GMP regulations.
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In addition, the Medical Device Reporting ("MDR") regulation obligates the
Company to inform FDA whenever there is reasonable evidence to suggest that one
of its devices may have caused or contributed to death or serious injury, or
where one of its devices malfunctions and, if the malfunction were to recur, the
device would be likely to cause or contribute to death or serious injury. The
Company may also be required to comply with device tracking regulations, which
require manufacturers to establish a method of tracking individual devices
through the distribution channel to the physician and patient using the device.
Labeling and promotion activities are also subject to scrutiny by the FDA
and, in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.
If, as a result of FDA inspections, MDR reports or information derived from
any other source, the FDA believes the Company is not in compliance with the
law, the FDA can refuse to clear or approve new products for marketing; withdraw
previous product clearances or approvals; require notification to users
regarding newly found unreasonable risks; request repair, refund or replacement
of faulty devices; request corrective advertisements, formal recalls or
temporary marketing suspension; impose civil penalties; or institute legal
proceedings to detain or seize products, enjoin future violations, or seek
criminal penalties against the Company, its officers or employees. Civil
penalties for FFDCA violations may be assessed by the FDA in lieu of or in
addition to instituting legal actions. Any such action by the FDA could result
in disruption of the Company's operations for an indeterminate time.
Regulations of Medical Devices Outside the United States. Products marketed
outside the United States that are manufactured in the United States are subject
to certain FDA regulations, as well as regulation by the country in which the
products are to be sold. The Company also might be subject to foreign regulatory
requirements governing clinical trials and medical device sales if such products
are marketed abroad. Approval of a product by the comparable regulatory
authorities of foreign countries usually must be obtained prior to commencement
of marketing of the product in those countries whether or not FDA approval has
been obtained, although the receipt or denial of FDA clearance for a product may
affect the receipt or denial of regulatory clearance for that product in certain
countries. The approval process varies from country to country and time required
may be longer or shorter than that required for FDA approval.
The Venturi has passed IEC 601 medical electrical equipment safety tests
administered by the British Standards Institution. IEC 601 is the base product
safety standard accepted by all member countries of the European Union and a
number of non-European Union jurisdictions. Although additional approvals will
be required in France andGermany, this certification allows the Venturi to be
marketed in most of the other countries of Europe. Both France and Germany have
specific regulatory requirements that go beyond IEC 601 and involve the
submission of technical and clinical data. The Company has also applied for
approval from the Groupement pour l'evaluation des dispositifs medicaux (G-Med)
for sales in France and from the Technischer Uberwachungsverein (TUV) for sales
in Germany. Although the Company believes that its existing clearance from the
FDA and test results from the British Standards Institution may increase the
likelihood of clearance in other jurisdictions, there can be no assurances that
any such clearances will be received in a timely manner or at all.
Other Regulations. The Company is subject to numerous federal, state and
local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. There can be no assurance that
the Company will not be required to incur significant costs to comply with such
laws and regulations in the future or that such laws or regulations will not
have a material adverse effect upon the Company's ability to do business.
PROPERTIES
The Company's administrative offices, research and development and
production facilities occupy approximately 6,942 square feet of leased space in
Milford, Connecticut. The lease expires on August 1, 1997. The Company plans to
expand its production facilities or establish alternate facilities as it expands
from the development stage to full production. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
EMPLOYEES
As of March 31, 1996, the Company employed 22 full-time individuals. In
addition, the Company utilizes free-lance consultants from time to time. The
Company believes its future success will depend upon, among other things,
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its ability to attract and retain qualified managerial and scientific personnel.
Competition among companies in the medical devices area is intense, and there
can be no assurance that the Company will be able to attract and retain such
personnel on acceptable terms. The Company believes it maintains satisfactory
relations with its employees.
LEGAL PROCEEDINGS AND PRODUCT LIABILITY
The Company is not a party to any material litigation or legal proceeding
relating to its products, and none of the Company's products has ever been the
subject of a safety or quality recall.
Because most of the Company's products are intended to be used on patients
who are physiologically unstable and may be severely ill, the Company may be
exposed to serious potential product liability claims. From time to time,
patients on whom the Company's products are being used are likely to sustain
injury or death related to their medical treatment or condition, which could
lead to product liability claims against the Company. The Company maintains
product liability insurance coverage in an amount which it believes adequate for
its present purposes. There can be no assurance that the Company will be able to
maintain such coverage or obtain additional coverage on acceptable terms, or
that such insurance will provide adequate coverage against all potential claims.
The Company is currently in arbitration with Stephen Jack Herman, a former
officer of the Company, regarding a claim against the Company for $69,090 plus
accrued interest from July 1, 1992 in severance compensation, originally filed
by Mr. Herman in July 1994 in the Superior Court of Massachusetts. The Company
is disputing such claim.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company are:
NAME AGE POSITION
---- --- --------
James W. Biondi, M.D. ... 40 Chairman, Chief Executive Officer and Director
N. Nicoll Snow .......... 51 Vice President, Chief Financial Officer and
Secretary
Robert Glinski .......... 49 Vice President, Sales
Douglas M. Johnston ..... 41 Vice President, Research and Development
Gerhardt P. Schroeder ... 54 Vice President, Engineering
Thomas J. Abbenante ..... 56 Director
John R. Cullinane, Jr. .. 44 Director
Alan Kessman ............ 49 Director
W. Gordon Kruberg, M.D. . 35 Director
James W. Biondi, M.D. has served as Chairman and Director since inception
(March 1988) and as Chief Executive Officer since June 1992. Dr. Biondi also has
been an Adjunct Associate Professor of Pulmonary Medicine and Anesthesiology at
Yale University School of Medicine since 1992. He is widely published in the
area of ventilation and cardiac interaction. Dr. Biondi completed residencies in
Internal Medicine, Pulmonary and Critical Care Medicine, and Anesthesiology at
Yale University School of Medicine. He holds B.S. degrees in mechanical
engineering and biology from Rensselaer Polytechnic Institute and an M.D. degree
from Albany Medical College.
N. Nicoll Snow joined the Company in January 1996 as Vice President, Chief
Financial Officer and Secretary. From May 1992 until joining the Company, he
served as Chief Financial Officer and Secretary of Simmons Outdoor Corporation,
an importer and distributor of sports optical products. Prior to joining
Simmons, Mr. Snow served as a consultant to Noel Group, Inc. from November 1991
through March 1992 and as Chief Financial Officer of U.S. Auction, Inc., a real
estate auction company, from September 1990 through October 1991. Mr. Snow
served as an audit partner for Arthur Andersen & Co. for the ten years through
August 1990. Mr. Snow holds a B.A. in Economics from the University of
Pennsylvania and an M.B.A. from the Wharton Graduate School.
Robert Glinski joined the Company in March 1996 as Vice President of Sales.
Prior to joining the Company, Mr. Glinski spent 20 years, primarily in sales and
marketing positions, with Puritan Bennett Corporation, which was acquired by
Nellcor Incorporated in August 1995. At Nellcor Puritan Bennett, Mr. Glinski was
Corporate Accounts Manager from December 1995 to March 1996. At Puritan Bennett,
Mr. Glinski was Director of National Accounts from 1992 to 1995. Prior to that,
he served as U.S. Field Operations Manager from 1990 to 1992 and as National
Sales Manager for the Puritan Bennett's Boston Division from 1981 to 1990. Mr.
Glinski received a B.S. in Marketing from Fairleigh Dickinson University.
Douglas M. Johnston joined the Company in January 1990 as Vice President of
Research and Development and also served as Secretary of the Company from 1993
to January 1996. From 1988 to 1990, he was a founding partner of Square One
Technology, a medical instrument development company. From 1984 to 1988, he was
the Director of Instrument Development for Cardiovascular Devices, Inc., a
developer of blood gas monitoring systems, now a division of Minnesota Mining
and Mfg. Co. From 1980 to 1984, he held technical leadership positions with
Puritan Bennett Corporation in its ventilator and anesthesia divisions. From
1976 to 1980, he was a design engineer with the Patient Monitoring Division of
Hewlett Packard Co. Mr. Johnston holds a B.S. in Electrical Engineering from the
Massachusetts Institute of Technology.
Gerhardt P. Schroeder joined the Company in May 1991 as Director of
Ventilator Development and was appointed Vice President, Engineering in November
1995. From 1977 to 1991 he held various technical leadership positions at Ohmeda
Inc., a healthcare products and services company, including Director of Research
and Development for the Infant Care Division and Product Development Manager for
the Anesthesia Systems Division. Mr. Schroeder holds a B.S. in Mechanical
Engineering and an MBA from the University of Wisconsin.
Thomas J. Abbenante was a founder of the Company and served as a director
from 1988 to 1991 and since April 1995. Since 1984, he has served as President
of Ivy Biomedical Systems, Inc., a manufacturer of patient monitoring
32
<PAGE>
equipment. He is also a founder of Novametrix Medical Systems, Inc., a
manufacturer of transcutaneous gas monitors and ventilator monitors.
John R. Cullinane, Jr. became a Director of the Company in July 1993. Since
1987 he has been a partner of Marsh Point Partners, the general partner of
Cullinane & Donnelly Venture Partners, L.P., and since 1993 he has been a
partner of Marsh Point Partners, II, the general partner of The Connecticut
Future Fund, L.P. Cullinane & Donnelly Venture Partners, L.P. and The
Connecticut Future Fund, L.P. are venture capital funds. Prior to forming
Cullinane & Donnelly, he was a principal in Quantum Venture Partners and Vice
President at Blyth Eastman Paine Webber. Mr. Cullinane is a graduate of
Princeton University and the Yale University School of Organization and
Management.
Alan Kessman became a director of the Company in June 1995. Since 1988, he
has been Chairman, President and Chief Executive Officer of Executone
Information Systems, Inc., a supplier of voice data and specialized hospital
communications equipment. He is also a director of Castelle Corp., a developer
of local area networks, fax and print servers.
W. Gordon Kruberg, M.D. became a Director of the Company in 1990. He has
been a General Partner of Horn Venture Partners and related entities since 1992.
He was previously Senior Associate of Horn Venture Partners from 1989 to 1992.
Dr. Kruberg received his M.D. from Northwestern University and holds degrees in
Industrial Engineering and Human Biology from Stanford University.
All directors hold office until the next meeting of the stockholders of the
Company and until their successors are elected and qualified. Officers serve at
the discretion of the Board of Directors. There are no family relationships
among directors or executive officers of the Company.
The Company's Audit Committee currently consists of Messrs. Cullinane and
Kessman. The Company's Compensation Committee currently consists of Dr. Kruberg
and Messrs. Abbenante and Kessman. The Company's Regulatory Oversight Committee
currently consists of Dr. Kruberg and Mr. Abbenante. The Audit Committee, among
other things, oversees actions taken by the Company's independent accountants.
The Compensation Committee, among other things, reviews the compensation levels
of the Company's executive officers and makes recommendations to the Board of
Directors regarding compensation. The Compensation Committee also administers
the Company's 1994 Stock Option Plan and makes grants thereunder. See "--Stock
Options." The Regulatory Oversight Committee oversees the periodic audit by
regulatory counsel of the Company's compliance with the FFDCA, the regulations
implemented thereunder and other regulatory matters.
KEY PERSONNEL
The following persons, although not executive officers of the Company, make
significant contributions to the Company's business:
Donald D. Gilmore, Director of Software Development, joined the Company in
March 1991. From 1982 to 1991, he held technical management positions for
several startup software companies. He was Engineering Manager for the
development of a visual programming language for Cognex Corp. He was a Senior
System Architect for ON Technology Inc., where he was a member of a team
assembled by Mitch Kapor to design information management applications. He led
the design and development of a CAD/CAE complex object database for Aries
Technology, Inc., and was Vice President of Research and Development for Azrex,
Inc. From 1969 to 1982, he held software design engineering positions at Digital
Equipment Corporation and Southern New England Telephone Co., and performed
software consulting. Mr. Gilmore studied engineering and mathematics at the
University of Kansas.
Elliot Blank, Director of Manufacturing, joined the Company in September
1994. From 1982 to 1993 he held manufacturing and project management positions
at Puritan Bennett Corporation. From 1976 to 1982, he worked as a manufacturing
engineer in the aerospace industry and as an electrical engineer for ophthalmic
surgery equipment.Mr. Blank holds a B.S. in Electrical Engineering from the
State University of New York, and an MBA from Pepperdine University.
SCIENTIFIC ADVISORS AND INVESTIGATORS
The Company has organized a Scientific Advisory Board which consists of
recognized experts in the research and clinical practice of respiratory care.
The members of the Scientific Advisory Board rely on their diverse areas of
practice to review and comment upon the Company's ongoing and proposed
scientific products. The Scientific Advisory Board also advises the Company on
potential areas of clinical interest and provides scientific evaluations on
products under development. The Scientific Advisory Board will meet quarterly
and certain members will meet in smaller groups or individually with the Company
as needed. The Company will provide each member of the
33
<PAGE>
Scientific Advisory Board with a nominal stipend in the amount of $1,000 per
meeting and a one time grant of an option for 4,000 shares of the Company's
Common Stock. The Company also reimburses each member for expenses incurred when
attending meetings.
All members of the Scientific Advisory Board are employed elsewhere and may
have commitments to and/or consulting contracts with other organizations,
including potential competitors of the Company, that may limit their
availability to the Company. None of these individuals is expected to devote
more than a small portion of his or her time to the Company.
The following are the members of the Company's Scientific Advisory Board:
Michael W. Cleman, M.D. is a Professor of Medicine and a Director of the
Cardiac Catherization Laboratory and PTCA Services at Yale University School of
Medicine. Dr. Cleman's work is primarily in the areas of the use of mechanical
devices in the treatment of coronary artery disease and restenosis. Dr. Cleman
received his M.A. from Johns Hopkins University and his M.D. Johns Hopkins
Medical School.
Lloyd N. Friedman, M.D., is Director of Intensive Care and Quality
Management at Milford Hospital and is an Associate Clinical Professor of
Medicine in Pulmonary and Critical Care at Yale University School of Medicine.
Dr. Friedman received National Institute of Health sponsored training in
clinical epidemiology, biostatistics and clinical study design, and has directed
and published several studies, authored numerous chapters and edits a text in
pulmonary medicine. Dr. Friedman received his B.A. in Biochemistry at Columbia
University and his M.D. at Yale University School of Medicine.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning all
1995 cash and non cash compensation awarded to, earned by or paid to the
Company's Chief Executive Officer and the Company's only other executive officer
whose total salary and bonus for 1995 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
1995 COMPENSATION AWARDS
-------------------- ------------ ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- --------------------------- ------ ----- ------------ ------------
<S> <C> <C> <C> <C>
James W. Biondi, M.D. ............................ $120,016 12,000(1) -- $5,966(2)
Chief Executive Officer and Director
Douglas M. Johnston .............................. $120,016 15,000(1) 27,200 $2,982(2)
Vice President
</TABLE>
- ----------
(1) Represents bonus awarded in 1995 to be paid in 1996.
(2) Consists of compensation expense incurred upon lapse of restrictions on
restricted stock.
EMPLOYMENT AGREEMENTS
The Company has entered into a three year employment agreement, effective
upon the closing of this offering, with James W. Biondi, M.D., the founder and
the Chief Executive Officer of the Company, pursuant to which Dr.
34
<PAGE>
Biondi will be employed as the Chief Executive Officer of the Company and will
receive a minimum annual base salary of $175,000. The agreement provides for
automatic renewal for successive one year terms unless either party gives
advance notice to the contrary. In addition, the agreement provides that Dr.
Biondi shall not compete with the Company during the term of the employment
agreement and for two years thereafter. If the Company terminates the agreement
without cause (as defined in the agreement) or if Dr. Biondi terminates the
agreement for "good reason" (as defined in the employment agreement), Dr. Biondi
shall be entitled to receive the greater of his salary for the remainder of the
term of the agreement or his annual salary for the then current year of
employment. If the employment agreement is terminated in certain circumstances
following certain changes in control of the Company, Dr. Biondi shall be
entitled to receive two times his then current salary (including an amount equal
to any bonuses paid during the prior twelve-month period).
The Company also has entered into two year employment agreements, effective
upon the closing of this offering, with N. Nicoll Snow, Vice President, Chief
Financial Officer and Secretary of the Company, Robert Glinski, Douglas M.
Johnston and Gerhardt P. Schroeder, each a Vice President of the Company, Donald
D. Gilmore, Director of Software Development, and Elliot Blank, Director of
Manufacturing. Pursuant to these agreements, Messrs. Snow, Glinski, Johnston,
Schroeder, Gilmore and Blank will receive minimum annual base salaries of
$150,000, $90,000, $130,000, $130,000, $110,000 and $95,000, respectively. The
agreement with Mr. Glinski also provides for an annual bonus based upon sales
and performance. The agreements provide for automatic renewal for successive
one year terms unless either party gives advance notice to the contrary. In
addition, the agreements with Messrs. Johnston, Schroeder and Gilmore provide
that they shall not compete with the Company during the term of the agreement
and for two years thereafter, and the agreements with Messrs. Snow, Glinski and
Blank provide that they will not compete with the Company during the term of the
agreement and for one year thereafter. If the Company terminates the agreement
without cause (as defined in the agreements) or if the employee terminates the
agreement for "good reason," each of Messrs. Johnston, Schroeder and Gilmore
shall be entitled to receive one year's salary at his then current rate
(including an amount equal to any bonuses paid during the prior twelve-month
period), and each of Messrs. Snow, Glinski and Blank shall be entitled to
receive six months' salary at his then current rate (including, in the case of
Messrs. Snow and Blank, an amount equal to any bonuses paid during the prior
six-month period). If the employment agreement with Mr. Snow is terminated in
certain circumstances following certain changes in control of the Company, Mr.
Snow shall be entitled to receive two times his then current salary (including
an amount equal to any bonuses paid during the prior twelve-month period).
STOCK OPTIONS
1994 Stock Option Plan
The Company's 1994 Stock Option Plan was adopted by the Board of Directors
on February 15, 1995 and approved by the Company's stockholders on May 13, 1995.
The plan currently provides for the grant of qualified and non-qualified options
to purchase up to 600,000 shares of Common Stock. The 1994 Stock Option Plan
permits the granting of options to present or future key employees, consultants
and non-employee directors of the Company.
The 1994 Stock Option Plan provides for the granting of options intended to
qualify as "incentive stock options" ("ISOs"), as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and non-qualified stock
options ("NQSOs") to key employees of the Company as well as other persons or
entities who perform services for the Company. The 1994 Stock Option Plan is
administered by the Compensation/Option Committee of the Board of Directors (the
"Committee"). The Committee determines, subject to the provisions of the plan,
the persons to whom options should be granted, the number of shares covered by
each option, and the exercise price, vesting schedule and other terms and
conditions of the options to be granted.
The exercise price of all ISOs granted under the 1994 Stock Option Plan may
not be less than 100% of the fair market value of the Common Stock (determined
by reference to public market data or, in the absence of such data, by a
committee of the Company's Board of Directors) at the time the option is granted
and the exercise price of NQSOs may not be less than the par value of the Common
Stock. Options may be exercised for a period of not more than ten years from the
date of grant, and are not generally assignable or otherwise transferable except
by will or the laws of descent and distribution. Shares subject to options
granted under the 1994 Stock Option Plan which have lapsed or terminated may
again be subject to options granted under the 1994 Stock Option Plan.
Furthermore, the Committee may offer to exchange new options for existing
options, with the shares subject to the existing options being again available
for grant under the 1994 Stock Option Plan.
35
<PAGE>
As of June 27, 1996, options to purchase an aggregate of 398,400 shares of
Common Stock had been granted under the 1994 Stock Option Plan at exercise
prices ranging from $0.23 to $4.38 per share (with a weighted average exercise
price of $2.43 per share). As of June 27, 1996, 110,300 of these options were
vested; the remainder are subject to vesting restrictions which lapse at various
times from 1996 to 2000. The fair market value of the Common Stock on the
respective grant dates has been determined to date by the Board of Directors. As
of June 27, 1996, no options had been exercised under the 1994 Stock Option
Plan.
During 1995, the Company granted options under the 1994 Stock Option Plan
to purchase an aggregate of 158,400 shares of Common Stock at exercise prices
from $0.23 to $0.63 per share.
The following table sets forth certain information regarding stock options
held as of December 31, 1995 by the executive officers named in the Summary
Compensation Table:
AGGREGATE YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN THE MONEY
AT YEAR END OPTIONS AT YEAR END (1)
------------------------------ ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James W. Biondi, M.D. ............... -- -- -- --
Douglas M. Johnston ................. 13,600 13,600 $132,872 $132,872
</TABLE>
- ----------
(1) Based on an assumed initial public offering price of $10.00 per share.
Stock Option Plan for Non-Employee Directors
The Company's Stock Option Plan For Non-Employee Directors (the
"Non-Employee Director Plan") was adopted by the Board of Directors on August
31, 1995 and approved by the Company's stockholders on October 24, 1995. The
Non-Employee Director plan was amended by the Board of Directors, and the
amendments were approved by the Company's stockholders, on June 6, 1996.
Pursuant to this formula plan, the Company automatically grants options on an
annual basis to members of its Board of Directors who are not employees of the
Company ("Non-Employee Directors"). Each Non-Employee Director will
automatically be granted an option to purchase 10,000 shares of Common Stock on
the date of his or her initial election or appointment, vesting over a five year
period, and each Non-Employee Director will automatically be granted an option
to purchase an additional 2,000 shares of Common Stock on the fifth anniversary
and each successive anniversary of his or her initial election or appointment,
provided the Non-Employee Director is still a member of the Board on such date.
All options are exercisable at a per share price equal to the fair market value
of the Common Stock on the grant date. Options may be exercised at any time
during the ten years subsequent to the date of grant, subject to earlier
termination as a result of the earlier termination of the director's service. In
general, if an optionee's service terminates, the option will expire six months
thereafter (one year if service terminates by reason of death or disability).
The Company has authorized 100,000 shares of Common Stock for issuance under the
Non-Employee Director Plan. As of June 27, 1996, 40,000 options have been
granted under the Non-Employee Director Plan at an exercise price of $0.63 per
share, all of which were granted during 1995.
RESTRICTED STOCK AWARDS
During 1995, restrictions lapsed with respect to 44,458 shares of Common
Stock held by James W. Biondi, M.D. and 22,229 shares of restricted stock held
by Douglas M. Johnston. These shares were granted by the Company, subject to
restrictions, in July 1993.
COMPENSATION OF DIRECTORS
Directors currently do not receive any fees for services on the Board of
Directors. Directors who are not employees of the Company receive grants under
the Non-Employee Director Plan. See " Stock Options." The Company had four
non-employee directors during 1995.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Company's current Compensation Committee consists of Dr. Kruberg
and Messrs. Abbenante and Kessman.
36
<PAGE>
CERTAIN TRANSACTIONS
In December 1995, the Company issued 8% convertible debt notes to five
principal stockholders, including Kontron, and to a company controlled by an
employee of Kontron. Principal on these notes totaled $1,371,500. In March 1996,
two additional notes in the aggregate principal amount of $40,000 were issued to
employees of Kontron. In April 1996 an additional note in the principal amount
of $80,000 was issued to an officer of the Company. These notes were converted
into 298,300 shares of Common Stock on May 20, 1996.
In connection with the issuance of the 8% convertible debt notes in
December 1995, March 1996 and April 1996, the Company granted warrants to
purchase 274,300, 8,000 and 16,000 shares of Common Stock, respectively, at an
exercise price per share of $5.00. The number of shares issuable upon exercise
of these warrants and the exercise price are to be adjusted for certain dilutive
and anti-dilutive events. The warrants are exercisable for a period of five
years from the issuance date.
In March 1995, the Company entered into a Distribution Agreement with
Kontron Instruments Ltd. pursuant to which the Company granted Kontron exclusive
distribution rights for the Venturi in most of Europe and the Middle East, the
former Soviet Union and Africa. See "Business --Distribution Agreement with
Kontron." Kontron Instruments Holding N.V., the corporate parent of Kontron
Instruments Ltd., made an equity investment of approximately $1.0 million
concurrently with the execution of the Distribution Agreement and Kontron
Instruments Holding N.V. Certain employees of Kontron and a company controlled
by an employee of Kontron subsequently have invested an additional $380,000 in
the Company. As a result, Kontron and its affiliates will control an aggregate
of 8.4% of the Company's Common Stock after completion of this offering (8.0% if
the Underwriter's over-allotment option is exercised in full). A representative
of Kontron also is entitled to attend meetings of the Company's Board of
Directors. In addition, in March 1996, the Company granted an option to purchase
10,000 shares of Common Stock at an exercise price of $3.75 per share to Leslie
Smith, an officer of Kontron Instruments Ltd. The Company believes all
transactions with Kontron have been negotiated on an arms length basis and on
terms no less favorable to the Company than those which could be obtained with
an unaffiliated party.
37
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock, in each case as of June 27, 1996 (giving effect
to the automatic conversion of all shares of the Company's Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible
Preferred Stock into shares of Common Stock upon completion of this offering),
by (i) those persons known to the Company to be the beneficial owner of more
than five percent of the Common Stock, (ii) each of the Company's directors and
executive officers who beneficially owns Common Stock or options to purchase
Common Stock that vest within 60 days of June 27, 1996, and (iii) all directors
and officers of the Company as a group, and after the sale of the 2,000,000
shares of Common Stock pursuant to this offering. All information with respect
to beneficial ownership by the Company's directors, officers and beneficial
owners has been furnished by the respective director, officer or beneficial
owner, as the case may be. Unless otherwise indicated below, the persons named
below have sole voting and investment power with respect to the number of shares
set forth opposite their names.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON
STOCK
BENEFICIALLY OWNED
NUMBER OF ---------------------------
SHARES OF PRIOR TO AFTER
NAME OF BENEFICIAL OWNER COMMON STOCK OFFERING OFFERING
- ------------------------ ------------ -------- --------
<S> <C> <C> <C>
The Connecticut Future Fund Limited Partnership
265 Church Street, Suite 1004
New Haven, Connecticut 06510 ........................... 865,811 (1) 21.9% 14.6%
John R. Cullinane, Jr.
The Connecticut Future Fund Limited Partnership
265 Church Street, Suite 1004
New Haven, Connecticut 06510 ........................... 865,811 (2) 21.9% 14.6%
Cupertino Ventures Partnership II, L.P.
20300 Stevens Creek Boulevard
Cupertino, California 95014 ............................ 838,722 (3) 21.1% 14.0%
W. Gordon Kruberg, M.D.
Cupertino Ventures Partnership II, L.P.
20300 Stevens Creek Boulevard
Cupertino, California 95014 ............................ 838,722 (4) 21.1% 14.0%
Aspen Venture Partners, L.P.
1 Post Office Square
Boston, Massachusetts 02109 ............................ 693,322 (5) 17.7% 11.7%
Kontron Instruments Holding N.V.
Julianaplein 22
Curacao, Netherlands Antilles .......................... 499,826 (6) 12.7% 8.4%
James W. Biondi, M.D. ................................... 371,673 9.6% 6.3%
Connecticut Seed Ventures Limited Partnership
242 Trumbull Street
Hartford, Connecticut 06103 ............................ 219,326 (7) 5.6% 3.7%
Connecticut Innovations, Incorporated
40 Cold Spring Road
Rocky Hills, Connecticut 06067 ......................... 200,000 (8) 5.0% 3.3%
Douglas M. Johnston ..................................... 169,286 (9) 4.3% 2.9%
Thomas J. Abbenante
Ivy Biomedical Systems, Inc.
11 Business Park Drive
Branford, Connecticut 06405 ............................ 135,300 (10) 3.5% 2.3%
Gerhardt P. Schroeder ................................... 81,200 (11) 2.1% 1.4%
N. Nicoll Snow .......................................... 32,000 (12) * *
Directors and officers as a group (9 persons) ........... 2,493,992 (13) 60.7% 40.8%
</TABLE>
- ----------
* Less than 1%.
(1) Includes 60,000 shares issuable upon exercise of warrants. See "Certain
Transactions."
38
<PAGE>
(2) Represents shares held by The Connecticut Future Fund Limited Partnership.
Mr. Cullinane is a general partner of Marsh Point Partners II, the general
partner of The Connecticut Future Fund Limited Partnership. Mr. Cullinane
disclaims beneficial ownership of such shares except to the extent of his
ownership therein.
(3) Includes 79,800 shares issuable upon exercise of warrants. See "Certain
Transactions."
(4) Represents shares held by Cupertino Ventures Partnership II, L.P. Dr.
Kruberg is a general partner of Horn Venture Partners, the general partner
of Cupertino Ventures Partnership II, L.P. Dr. Kruberg disclaims beneficial
ownership of such shares except to the extent of his ownership therein.
(5) Includes 36,500 shares issuable upon exercise of warrants. See "Certain
Transactions."
(6) Includes 60,000 shares issuable to Kontron upon exercise of warrants,
16,000 shares held by employees of Kontron and a company controlled by an
employee of Kontron and 16,000 shares issuable upon exercise of warrants
held by employees of Kontron and a company controlled by an employee of
Kontron. See "Certain Transactions."
(7) Includes 30,000 shares issuable upon exercise of warrants.
(8) Includes 100,000 shares issuable upon exercise of warrants.
(9) Includes 13,600 shares issuable upon exercise of options that are
exercisable within 60 days of June 27, 1996.
(10) Includes 105,300 shares held by Ivy Biomedical Systems, Inc., of which Mr.
Abbenante is President.Mr. Abbenante disclaims beneficial ownership of such
shares except to the extent of his ownership therein.
(11) Includes 47,000 shares issuable upon exercise of options that are
exercisable within 60 days of June 27, 1996.
(12) Includes 16,000 shares issuable upon exercise of warrants. See "Certain
Transactions."
(13) Includes 805,811 shares held by The Connecticut Future Fund Limited
Partnership, 758,922 shares held by Cupertino Ventures Partnership II,
L.P., 105,300 shares held by Ivy Biomedical Systems, Inc., 60,600 shares
issuable upon exercise of options that are exercisable within 60 days of
June 27, 1996 and 155,800 shares issuable upon exercise of warrants.
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering and the filing of the amendment referred
to below to the Company's Certificate of Incorporation, the Company's authorized
capital stock will consist of 10,000,000 shares of Common Stock, $.01 par value,
and 1,000,000 shares of Preferred Stock, $.01 par value (the "Preferred Stock"),
issuable in series with rights and preferences as designated by the Board of
Directors.
As of June 27, 1996, there were: 1,279,759 shares of Common Stock
outstanding which were held by 26 stockholders; 3,030,501 shares of Series A
Convertible Preferred Stock outstanding, which were held of record by five
stockholders; 2,196,183 shares of Series B Convertible Preferred Stock
outstanding, which were held of record by four stockholders; and 1,304,348
shares of Series C Convertible Preferred Stock outstanding, which were held of
record by five stockholders. Based upon the number of shares of Common Stock
outstanding as of that date, and giving effect to the issuance of the 2,000,000
shares of Common Stock offered by the Company hereby and the automatic
conversion of the outstanding convertible preferred stock into shares of Common
Stock, there will be 5,892,166 shares of Common Stock outstanding upon the
closing of this offering. See "--Preferred Stock."
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor. Upon the liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and other
liabilities of the Company and any preferential amounts to be distributed to
holders of Preferred Stock. The outstanding shares of Common Stock are, and the
shares offered by the Company in this offering will be, when issued and paid
for, fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to and may be adversely affected by the
rights of the holders of any series of Preferred Stock which the Company may
designate and issue in the future.
PREFERRED STOCK
The Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock and Series C Convertible Preferred Stock are entitled to various
preferences and rights in the event of a liquidation, dissolution or winding-up
of the Company and upon a declaration by the Board of Directors of the payment
of dividends. Each share of Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock and Series C Convertible Preferred Stock is
convertible into 0.4 shares of Common Stock, and upon the closing of this
offering, all of the outstanding shares of Series A Convertible Preferred Stock,
Series B Convertible Preferred Stock and Series C Convertible Preferred Stock
will be converted automatically into an aggregate of 1,212,199 shares, 878,471
shares and 521,737 shares of Common Stock, respectively. The holders of Common
Stock, Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock and Series C Convertible Preferred Stock have approved an amendment to the
Company's Certificate of Incorporation (the "Amendment"), which will be filed
with the Secretary of State of Delaware immediately following the closing of
this offering. The Amendment will, among other things, eliminate all references
to Series A Convertible Preferred Stock, Series B Convertible Preferred Stock
and Series C Convertible Preferred Stock.
The Amendment also will give the Board of Directors the authority to issue
up to 1,000,000 shares of Preferred Stock. The Board of Directors has the
authority to issue Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions, including dividend, conversion,
voting, redemption (including sinking fund provisions), and other rights,
liquidation preferences, and the number of shares constituting any series and
the designations of such series, without any further vote or action by the
stockholders of the Company. Because the terms of the Preferred Stock may be
fixed by the Board of Directors of the Company without stockholder action, the
Preferred Stock could be issued to defeat a proposed takeover of the Company or
to make the removal of the management of the Company more difficult. Under
certain circumstances, this would have the effect of decreasing the market price
of the Common Stock. The Company has no present plans to issue any Preferred
Stock. See "Risk Factors--Possible Adverse Impact of Issuance of Preferred
Stock; Certain Anti-Takeover Effects."
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No holder of any shares of any class or series of stock or securities
convertible into or exchangeable for shares of any class or series of stock of
the Company has any preemptive right to purchase or subscribe for any unissued
stock of any class or series.
CERTAIN ANTI-TAKEOVER EFFECTS
The provisions of the Amended and Restated Certificate of Incorporation of
the Company (the "Certificate") and the Bylaws of the Company (the "Bylaws")
summarized in the succeeding paragraphs, may be deemed to have certain
anti-takeover effects which may make more difficult, time-consuming or costly,
or otherwise discourage, a tender offer, merger proposal, proxy contest or other
attempt to take control of the Company or its Board of Directors that a
stockholder might consider to be in such stockholder's best interest, including
an attempt that might result in a premium over the then-current market price for
the Common Stock.
Authorized but Unissued Stock. The authorized but unissued shares of Common
Stock and Preferred Stock are available for future issuance without further
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public or private offerings to raise
additional capital, corporate acquisitions and employee benefit plans. The
Company's stockholders or holders of options, warrants or other rights to
purchase shares of any class or series of stock or of other securities of the
Company do not have any preemptive right to purchase or subscribe for any
unissued stock of any class or series.
Such authorized and unissued shares also could be used to create voting or
other impediments or to frustrate a person seeking to obtain control of the
Company by means of a merger, tender offer, proxy contest or other means.
Although the Company does not currently contemplate taking such action, shares
of Common Stock or one or more series of Preferred Stock could be issued for the
purposes and effects described above and the Board of Directors reserves its
rights (if consistent with its fiduciary responsibilities) to issue such stock
for such purposes.
Limitations on Stockholder Actions. The Certificate provides that the
stockholders cannot take action by written consent without a meeting, and the
Bylaws provide that special meetings of stockholders may be called only by the
directors or an officer on the instruction of the directors. Such provisions may
have the effect of delaying consideration of a stockholder proposal until the
next annual meeting. In addition, a stockholder could not force stockholder
consideration of a proposal over the opposition of the Board of Directors by
calling a special meeting of stockholders prior to the time the Board of
Directors believed such consideration to be appropriate.
Advance Notice Requirements for Stockholder Nominations of Directors. The
Bylaws establish advance notice procedures with respect to nominations by
stockholders of candidates for election as directors. Although the notice
provisions do not give the Board of Directors any power to approve or disapprove
of stockholders' nominations, they may have the effect of precluding a contest
for the election of directors without regard to whether consideration of such
nominees or proposal might be harmful or beneficial to the Company and its
stockholders.
Requirement to Remain in Connecticut. Pursuant to the terms of an agreement
between the Company and Connecticut Innovations, Incorporated, the Company would
be required to repurchase Common Stock and common stock purchase warrants from
Connecticut Innovations, Incorporated, for the greater of the fair market value
of such securities or the original issue price of $500,000 plus a 25% compounded
annual rate of return, if the Company ceased to maintain its principal place of
business and a majority of its employees in the State of Connecticut at any time
prior to the date such Common Stock and common stock purchase warrants are
registered under the Act or may be offered and sold pursuant to Rule 144(k).
These restrictions might make the Company less attractive to a potential
acquiror outside the State of Connecticut.
DIRECTORS' LIABILITY
As authorized by the Delaware General Corporation Law (the "GCL"), the
Certificate provides that no director of the Company shall be personally liable
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) in respect of certain unlawful dividend payments or stock
redemptions or repurchases or (iv) for any transaction from which the director
derived an improper personal benefit. The effect of the provision in the
Certificate is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care as
a
41
<PAGE>
director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (i) through (iv) above.
This provision does not limit or eliminate the rights of the Company or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. In addition, the Certificate
provides that if the GCL is amended to authorize the further elimination or
limitation of the liability of a director, then the liability of the directors
shall be eliminated or limited to the fullest extent permitted by the GCL as so
amended. These provisions will not alter any liability of directors under
federal securities laws.
The Company has entered into indemnification agreements with each of its
directors and executive officers providing for the Company, among other things,
to indemnify its directors and executive officers against any judgements,
penalties, fines, amounts paid in settlement and expenses incurred in connection
with any actual or threatened action, suit, arbitration, alternative dispute
resolution mechanism, investigation, administrative hearing or any other actual,
threatened or completed proceeding and to advance the expenses of defending any
of the foregoing.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the GCL. That
section provides, with certain exceptions, that a Delaware corporation may not
engage in any of a broad range of business combinations with a person or
affiliate or associate of such person who is an "interested stockholder" for a
period of three years from the date that such person became an interested
stockholder unless: (i) the transaction resulting in a person's becoming an
interested stockholder, or the business combination, is approved by the board of
directors of the corporation before the person becomes an interested
stockholder, (ii) the interested stockholder acquires 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
it an interested stockholder (excluding certain employee stock ownership plans);
or (iii) on or after the date the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors and by
the holders of at least 66-2/3% of the corporation's outstanding voting stock
at an annual or special meeting, excluding shares owned by the interested
stockholder. An "interested stockholder" is defined as any person that is (i)
the owner of 15% or more of the outstanding voting stock of the corporation or
(ii) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
LIABILITY INSURANCE
The Company intends to procure and maintain a policy of insurance under
which the directors and officers of the Company will be insured, subject to the
limits of the policy, against certain losses arising from claims made against
such directors and officers by reason of any acts or omissions covered under
such policy in their respective capacities as directors or officers, including
liabilities under the Securities Act.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The First National
Bank of Boston.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 5,892,166 shares of
Common Stock outstanding. The 2,000,000 shares sold in this offering (2,300,000
shares if the Underwriters' over-allotment option is exercised in full) will be
freely tradeable without restriction under the Securities Act, except for any
such shares held at any time by an "affiliate" of the Company, as that term is
defined in Rule 144 ("Rule 144") under the Securities Act. The remaining
3,892,166 shares outstanding after completion of this offering will be
"restricted securities" and will be freely tradeable only if registered under
the Securities Act or sold in accordance with an applicable exemption from
registration, including an exemption pursuant to Rule 144.
The Company and its directors and executive officers and certain other
stockholders holding an aggregate of 3,619,166 shares of Common Stock have
agreed that, without the prior written consent of the Representatives, they
42
<PAGE>
will not directly or indirectly offer to sell, sell or otherwise dispose of any
of their shares of Common Stock, or any securities convertible into or
exchangeable for Common Stock, for a period of 180 days from the date of this
Prospectus, subject to certain limited exceptions except that the Company may
grant options and issue shares of Common Stock subject to currently outstanding
options under the Company's Option Plan and Non-Employee Director Plan. Upon
expiration of these lockup agreements, 2,737,488 of such 3,892,166 shares will
be eligible for sale in the public market subject to volume and other
limitations pursuant to Rule 144. In addition, holders of stock options could
exercise their options and sell certain of the shares issued upon exercise as
described below.
In general, under Rule 144, as currently in effect, a person who has
beneficially owned restricted shares for at least two years, including an
"affiliate" as that term is defined in Rule 144, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock (approximately 58,922 shares
immediately following this offering) or the average weekly trading volume of the
Common Stock in the Nasdaq National Market during the four calendar weeks
preceding a sale by such person. Sales under Rule 144 are subject to certain
manner of sale limitations, notice requirements and the availability of current
public information about the Company. Rule 144(k) provides that a person who is
not an "affiliate" of the issuer at any time during the three months preceding a
sale and who has beneficially owned shares for at least three years is entitled
to sell those shares at any time under Rule 144 without having to comply with
the public information, volume limitation, manner of sale and notice provisions
of Rule 144. The Securities and Exchange Commission has proposed an amendment to
Rule 144 which would reduce the holding period required for shares subject to
Rule 144 to become eligible for sale in the public market from two years to one
year, and from three years to two years in the case ofRule 144(k).
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled to
sell such shares after the 90th day following the date of this Prospectus in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-day
period, but without a holding period. If all the requirements of Rule 701 are
met, an aggregate of 159,900 shares subject to outstanding vested stock options
may be sold pursuant to such rule, upon the expiration of the lock-up agreements
described above.
As of June 27, 1996, there were outstanding options to purchase an
aggregate of 438,400 shares of Common Stock. As of June 27, 1996, 110,300 of
these options were vested; the remainder are subject to vesting restrictions
which lapse at various times from 1996 to 2000.
Prior to this offering there has been no public market for the Company's
Common Stock. Sales of substantial amounts of Common Stock in the public market
could adversely affect the market price of Common Stock.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
Approximately 3,087,707 shares of outstanding Common Stock and
approximately 475,300 shares of Common Stock underlying outstanding warrants are
subject to certain rights with respect to the registration of such shares under
the Securities Act. Such rights were granted pursuant to an agreement between
the Company and the holders of such shares and warrants. Under the terms of the
agreement, if the Company proposes to register any of its securities under the
Securities Act, either for its own account or the account of other security
holders exercising registration rights, such holders are entitled to notice of
such registration and subject to certain conditions, generally, are entitled to
include their shares of Common Stock in such registration. Among other
conditions, the underwriters in the applicable offering, including this
offering, generally have the right to limit the number of such shares to be
included in the registration. In addition, subject to the terms and conditions
of the agreement, such holders also have certain "demand" registration rights,
pursuant to which such holders may require the Company to register their shares
of Common Stock and shares of Common Stock underlying outstanding warrants even
if the Company does not otherwise propose to register shares of its Common
Stock.
No securities subject to registration rights will be included in this
offering.
In addition, the Company has granted certain registration rights to the
Company's bank in connection with 4,000 shares of Common Stock issuable upon
exercise of warrants and to the Representatives of the Underwriters in
connection with 100,000 shares of Common Stock issuable upon exercise of the
Representatives' Warrants. See "Underwriting."
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting
Agreement, the Underwriters named below (the "Underwriters"), for whom Advest,
Inc. and Cruttenden Roth Incorporated are acting as Representatives, have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement (the "Underwriting Agreement"), to purchase from the Company, and the
Company has agreed to sell to the Underwriters on a firm commitment basis, the
respective numbers of shares of Common Stock set forth opposite their names
below. The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to certain conditions precedent, and that the Underwriters are committed
to purchase and pay for all shares if any shares are purchased.
UNDERWRITER NUMBER OF SHARES
----------- ----------------
Advest, Inc. ...................................
Cruttenden Roth Incorporated ...................
---------
Total .......................................... 2,000,000
=========
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $. per share. The Underwriters
may allow, and such dealers may reallow, a concession to certain other dealers
(who may include the Underwriters) not in excess of $. per share. After the
commencement of this offering to the public, the public offering price,
concession and reallowance may be changed by the Representatives.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 300,000 additional shares of Common Stock at the initial public offering
price per share, less underwriting discounts and commissions, set forth on the
cover page of this Prospectus. Such option may be exercised only for the purpose
of covering over-allotments, if any, incurred in the sale of Common Stock
offered hereby. To the extent the Underwriters exercise such option, each of the
Underwriters will be committed, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock to
be purchased by such Underwriter, as shown in the above table, bears to the
total shown. If purchased, the Underwriters will offer such additional shares on
the same terms as those on which the 2,000,000 shares are being offered.
In connection with this offering, the Company has agreed to sell to the
Representatives warrants to purchase an aggregate of 100,000 shares of Common
Stock (the "Representatives' Warrants") for nominal consideration. The
Representatives' Warrants will be exercisable in whole or in part from time to
time during the period commencing one year and ending five years after the
effective date of the registration statement of which this Prospectus is a part
at an exercise price of 120% of the public offering price set forth on the cover
page of this Prospectus. The Representatives have certain rights with respect to
registration under the Securities Act of the Common Stock underlying the
Representatives' Warrants. For the life of the Representatives' Warrants, the
Representatives will have the opportunity to profit from a rise in the market
price of the Common Stock. If the Representatives' Warrants are
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<PAGE>
exercised, the interests of the Company's stockholders may be diluted. The
exercise price and the number of shares issuable under the Representatives'
Warrants are subject to adjustment pursuant to anti-dilution provisions in the
Representatives' Warrants. The Representatives' Warrants also contain certain
anti-dilution provisions which may cause the exercise price to decrease and the
number of underlying shares of Common Stock to increase if the Company hereafter
takes certain actions with respect to the Common Stock. These actions include a
distribution of debt, cash, property or other assets to the holders of Common
Stock, a stock dividend, reclassification, subdivision or combination with
respect to the Common Stock, the issuance for cash of Common Stock or rights,
options or warrants exercisable for or securities convertible into Common Stock
at a price less than the lesser of the then market price or the then applicable
warrant exercise price or the entering into of a reorganization, merger or
consolidation transaction. The Representatives' Warrants do not confer upon the
holder any voting rights or other stockholder rights. For a period of year
following the closing of this offering, the Representatives' Warrants are not
transferable except to officers of Advest, Inc. and Cruttenden Roth
Incorporated, to successors of their businesses, or by will or pursuant to the
laws of descent and distribution.
In the Underwriting Agreement, the Company will agree to indemnify the
Underwriters against certain liabilities that may be incurred in connection with
this offering, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make with respect thereof.
The Company and its directors and executive officers and certain other
stockholders have agreed that, without the prior written consent of the
Representatives, they will not directly or indirectly offer to sell, sell or
otherwise dispose of any of their shares of Common Stock, or any securities
convertible into or exchangeable for Common Stock, for a period of 180 days from
the date of this Prospectus, subject to certain limited exceptions except that
the Company may grant options and issue shares of Common Stock subject to
currently outstanding options under the Company's 1994 Stock Option Plan and
Non-Employee Director Stock Option Plan.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price of the
Common Stock will be determined by negotiations between the Company and the
Representatives. Among the factors to be considered in such negotiations are
prevailing market conditions, the operating results of the Company in recent
periods, the market capitalizations and stages of development of other companies
which the Company and the Representatives believe to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and other factors deemed relevant. The Company has
applied to have the Common Stock approved for quotation on the Nasdaq National
Market under the symbol "CPCP."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Fulbright & Jaworski L.L.P., New York, New York. A
partner of Fulbright & Jaworski L.L.P. serves as Assistant Secretary of the
Company. Certain legal matters in connection with the underwriting will be
passed upon for the Underwriters by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The financial statements as of December 31, 1994 and 1995 and for each of
the two years in the period ended December 31, 1995 and for the period from
inception (March 4, 1988) through December 31, 1995 included in this Prospectus
have been so included in reliance on the report (which contains an explanatory
paragraph relating to the Company's plans for funding future operations as
described in Note 2 of the Notes to the Company's Financial Statements) of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting. The report of Price Waterhouse LLP for the
period from inception (March 4, 1988) through December 31, 1995 was based in
part on the report of other independent accountants as referred to in the
following paragraph.
The statements of operations of common stock and other stockholders'
deficit and cash flows for the year ended December 31, 1993 and for the period
from January 1, 1991 through December 31, 1993, included in this Prospectus and
elsewhere in the registration statement have been audited by Deloitte & Touche
LLP, independent public accountants, as indicated in their report with respect
thereto (which report expresses an unqualified opinion with an
45
<PAGE>
explanatory paragraph as to an uncertainty surrounding the Company's ability to
continue as a going concern), and have been so included herein in reliance upon
the report of said firm given upon their authority as experts in accounting and
auditing.
In December 1994, the Company retained Price Waterhouse LLP as its
independent accountants and dismissed the Company's former auditors, Deloitte &
Touche LLP. The change in independent accountants has been ratified by the
Company's Board of Directors. Deloitte & Touche LLP audited the Company's
financial statements for the years ended December 31, 1991, 1992 and 1993 and as
such, their report on the Company's financial statements for the year ended
December 31, 1993 covers financial statements of the Company included in this
Prospectus. Such report did not contain an adverse opinion or disclaimer of
opinion, but was modified as to uncertainty surrounding the Company's ability to
continue as a going concern. There were no disagreements with the former
auditors on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure related to the financial
statements which Deloitte & Touche LLP reported on as of the date of their
report and through the date of their dismissal or with respect to the Company's
financial statements which Deloitte & Touche LLP reported on for fiscal years
1991, 1992 and 1993, which, if not resolved to the former auditors'
satisfaction, would have caused them to make reference to the subject matter of
the disagreement in connection with their report. Prior to retaining Price
Waterhouse LLP, the company had not consulted with Price Waterhouse LLP
regarding accounting principles. The Company has authorized Deloitte & Touche
LLP to respond fully to the inquiries of Price Waterhouse LLP respecting the
former's dismissal.
The statements respecting the laws and regulations administered by the
United States Food and Drug Administration included in this Prospectus under the
captions "Risk Factors--Possible Adverse Effect of Government Regulation" and
"Business--Government Regulation" have been reviewed and approved by King &
Spalding, Washington, D.C., regulatory counsel for the Company, as experts on
such matters, and are included herein in reliance upon that review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act, with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and financial statement
schedules thereto. For further information with respect to the Company and the
shares of Common Stock offered hereby, reference is made to the Registration
Statement and the exhibits and schedules thereto. Statements made in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each case reference is made to the copies of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices located at Seven World Trade
Center, 13th Floor, New York, New York 10048, and at 500 West Madison Street,
Northwestern Atrium Center, Suite 1400, Chicago, Illinois 60661-2511. Copies of
materials can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a World Wide Web site on the Internet at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent accountants and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
46
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CARDIOPULMONARY CORP.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF PRICE WATERHOUSE LLP .......................................... F-2
REPORT OF DELOITTE & TOUCHE LLP ......................................... F-3
FINANCIAL STATEMENTS:
Balance sheet at December 31, 1994 and 1995 and March 31, 1996
(unaudited) and pro forma at March 31, 1996 ........................... F-4
Statement of operations for the years ended December 31, 1993, 1994
and 1995, for the period from inception (March 4, 1988) through
December 31, 1995, for the three months ended March 31, 1995
(unaudited) and 1996 (unaudited), and for the period from inception
(March 4, 1988) through March 31, 1996 (unaudited) .................... F-5
Statement of changes in common stock and other stockholders' deficit
for the period from inception (March 4, 1988) through December 31,
1995 and for the three months ended March 31, 1996 (unaudited) ........ F-6
Statement of cash flows for the years ended December 31, 1993, 1994
and 1995, for the period from inception (March 4, 1988) through
December 31, 1995, for the three months ended March 31, 1995
(unaudited) and 1996 (unaudited), and for the period from inception
(March 4, 1988) through March 31, 1996 (unaudited) .................... F-8
NOTES TO FINANCIAL STATEMENTS ........................................... F-10
- --------
Note: All supplementary schedules are omitted since they are not applicable or
the required information can be obtained from the financial statements.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cardiopulmonary Corp.
In our opinion, based on our report and the report of other independent
accountants, the accompanying balance sheet and the related statements of
operations, of common stock and other stockholders'deficit and of cash flows
present fairly, in all material respects, the financial position of
Cardiopulmonary Corp. (a development stage enterprise) at December 31, 1994 and
1995, and the results of its operations and its cash flows for the years then
ended and, for the period from inception (March 4, 1988) through December 31,
1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Cardiopulmonary Corp.
for the period from January 1, 1991 to December 31, 1993, which statements
reflect 38% of the cumulative net loss and 35%, 28%, and 43% of the cumulative
net cash flows from operating, investing, and financing activities,
respectively, from January 1, 1991 to December 31, 1993. These statements were
audited by other auditors whose report thereon has been furnished to us, and our
opinion, insofar as it relates to the amounts for the period from January 1,
1991 to December 31, 1993 is based solely on the report of the other auditors.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other independent accountants provide a reasonable
basis for the opinion expressed above.
As discussed in Note 2, the Company anticipates that it will require
additional financing to fund its future operations.
PRICE WATERHOUSE LLP
BOSTON, MASSACHUSETTS
May 21 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Cardiopulmonary Corp.
Milford, Connecticut
We have audited the accompanying statements of operations, of common stock and
other stockholders' deficit and cash flows of Cardiopulmonary Corp. (a
development stage enterprise) for the year ended December 31, 1993 and for the
period from January 1, 1991 through December 31, 1993. The statements of
operations and cash flows for the period from January 1, 1991 through December
31, 1993 are not included separately herein. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of
Cardiopulmonary Corp. (a development stage enterprise) for the year ended
December 31, 1993 and for the period from January 1, 1991 through December 31,
1993 in conformity with generally accepted accounting principles.
The accompanying financial statements referred to above have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
14 to the financial statements, the Company incurred substantial net losses from
inception through December 31, 1993. This matter raises substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to this matter are described in Note 14 to the financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Deloitte & Touche LLP
Hartford, Connecticut
March 19, 1994 (May 17, 1996 as to Note 10 with respect to the 2 for 5 reverse
stock split)
F-3
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
BALANCE SHEET
<TABLE>
<CAPTION>
PRO FORMA AT
DECEMBER 31, MARCH 31,
------------------- MARCH 31, 1996
1994 1995 1996 (NOTE 9)
---- ---- ---- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 428,104 $1,256,991 $ 525,139 $ 525,139
Accounts receivable from related parties (Note 12) ............. -- 66,658 86,560 86,560
Inventories .................................................... -- 184,232 103,946 103,946
Prepaid expenses and other current assets ...................... 37,877 4,394 19,435 19,435
---------- ---------- ---------- ----------
Total current assets ......................................... 465,981 1,512,275 735,080 735,080
Fixed assets, net ............................................... 33,822 157,526 201,875 201,875
Patents, net .................................................... 110,147 127,368 138,994 138,994
Other assets .................................................... 3,706 4,677 4,677 4,677
---------- ---------- ---------- ----------
$ 613,656 $1,801,846 $1,080,626 $1,080,626
========== ========== ========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON STOCK
AND OTHER STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to related parties................................ $ -- $1,114,891 $1,230,611 $1,230,611
Deferred revenue ............................................... -- 182,908 265,468 265,468
Accounts payable ............................................... 59,432 341,366 189,697 189,697
Accrued expenses ............................................... 94,837 236,926 357,561 357,561
Current portion of capital lease obligation .................... -- 6,354 6,171 6,171
---------- ---------- ---------- ----------
Total current liabilities .................................... 154,269 1,882,445 2,049,508 2,049,508
---------- ---------- ---------- ----------
Long-term portion of capital lease obligation ................... -- 7,573 6,204 6,204
---------- ---------- ---------- ----------
Redeemable convertible preferred stock, $.01 par value:
Series A--3,200,000 shares authorized; 3,030,501 shares
issued and outstanding at issuance cost plus accumulated
accretion of $27,503 at December 31, 1994 and 1995 and
March 31, 1996 (unaudited), none outstanding pro forma ........ 3,339,419 3,339,419 3,339,419 --
Series B--2,200,000 shares authorized; 2,196,183 shares
issued and outstanding at issuance cost plus accumulated
accretion and dividends of $243,458, $415,337 and $458,307
(unaudited) at December 31, 1994 and 1995 and March 31,
1996, respectively, none outstanding pro forma ................ 2,187,864 2,359,743 2,402,713 --
Series C--1,350,000 shares authorized; 1,304,348 shares
issued and outstanding at issuance cost plus accumulated
accretion and dividends of $105,279 and $138,526
(unaudited) at December 31, 1995 and March 31, 1996,
respectively, none outstanding pro forma ...................... -- 1,562,538 1,595,785 --
---------- ---------- ---------- ----------
Total redeemable preferred stock ............................. 5,527,283 7,261,700 7,337,917 --
---------- ---------- ---------- ----------
Common Stock and Other Stockholders' Deficit:
Common stock, $.01 par value; 10,000,000 shares authorized;
804,459 shares issued and outstanding at December 31, 1994
and 1995 and March 31, 1996 (unaudited) and 3,416,867
shares issued and outstanding pro forma ....................... 8,045 8,045 8,045 34,169
Additional paid-in capital ..................................... 235,050 549,175 558,335 7,870,128
Deficit accumulated during the development stage ............... (5,297,393) (7,904,069) (8,879,383) (8,879,383)
Deferred compensation .......................................... (13,598) (3,023) -- --
---------- ---------- ---------- ----------
Total common stock and other stockholders' deficit ........... (5,067,896) (7,349,872) (8,313,003) (975,086)
---------- ---------- ---------- ----------
Commitments (Note 13) ...........................................
---------- ---------- ---------- ----------
$ 613,656 $1,801,846 $1,080,626 $1,080,626
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(MARCH 4, (March 4,
1988) THREE MONTHS ENDED 1988)
DECEMBER 31, THROUGH MARCH 31, THROUGH
------------------------------ DECEMBER 31, ------------------------ March 31,
1993 1994 1995 1995 1995 1996 1996
---- ---- ---- ------------ ---- ---- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Costs and expenses:
Research and development ........ $542,302 $1,075,173 $1,717,515 $5,405,832 $301,504 $524,516 $5,930,348
General and administrative ...... 72,067 183,916 580,141 1,832,241 127,085 272,084 2,104,325
-------- ---------- ---------- ---------- -------- -------- ----------
Loss from operations ........... 614,369 1,259,089 2,297,656 7,238,073 428,589 796,600 8,034,673
Interest (income) ................ (14,832) (37,690) (34,440) (262,316) (4,119) (10,928) (273,244)
Interest expense ................. 93,284 -- 66,302 380,193 -- 113,425 493,618
-------- ---------- ---------- ---------- -------- -------- ----------
Net loss ........................ $692,821 $1,221,399 $2,329,518 $7,355,950 $424,470 $899,097 $8,255,047
======== ========== ========== ========== ======== ======== ==========
Unaudited pro forma net loss
per share assuming conversion
of convertible preferred stock
(Note 9) ........................ $0.55 $0.10 $0.19
===== ===== =====
Shares used in computing net
loss per share .................. 4,108,592 4,108,592 4,108,592
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
STATEMENT OF CHANGES IN COMMON STOCK
AND OTHER STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (MARCH 4, 1988) THROUGH DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT TOTAL
COMMON STOCK ACCUMULATED COMMON STOCK
----------------- ADDITIONAL DURING THE RECEIVABLE AND OTHER
NUMBER OF PAR PAID-IN DEVELOPMENT FROM DEFERRED STOCKHOLDERS'
SHARES VALUE CAPITAL STAGE STOCKHOLDER COMPENSATION DEFICIT
------ ----- ------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sale of common stock ................... 240,000 $2,400 $3,600 $ 6,000
Net loss for the period from inception
(March 4, 1988) through February 28, 1989 $(185,185) (185,185)
------- ------ ------ --------- ----------
Balance at February 28, 1989 ........... 240,000 2,400 3,600 (185,185) (179,185)
Accretion of redeemable convertible
preferred stock to redemption value ... (5,500) (5,500)
Issuance of common stock to employees .. 60,000 600 900 $(1,500)
Amortization of unearned compensation .. 733 733
Net loss ............................... (243,564) (243,564)
------- ------ ------ --------- ------- ----------
Balance at February 28, 1990 ........... 300,000 3,000 4,500 (434,249) (767) (427,516)
Accretion of redeemable convertible
preferred stock to redemption value ... (5,500) (5,500)
Issuance of common stock to employees .. 96,000 960 1,440 (2,400)
Amortization of unearned compensation .. 1,412 1,412
Net loss ............................... (573,529) (573,529)
------- ------ ------ --------- ------- ----------
Balance at December 31, 1990 ........... 396,000 3,960 5,940 (1,013,278) (1,755) (1,005,133)
Accretion of redeemable convertible
preferred stock to redemption value ... (5,500) (5,500)
Amortization of unearned compensation .. 1,300 1,300
Net loss ............................... (1,092,015) (1,092,015)
------- ------ ------ --------- ------- ----------
Balance at December 31, 1991 ........... 396,000 3,960 5,940 (2,110,793) (455) (2,101,348)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
STATEMENT OF CHANGES IN COMMON STOCK
AND OTHER STOCKHOLDERS' DEFICIT -- (CONTINUED)
FOR THE PERIOD FROM INCEPTION (MARCH 4, 1988) THROUGH DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT TOTAL
COMMON STOCK ACCUMULATED COMMON STOCK
----------------- ADDITIONAL DURING THE RECEIVABLE AND OTHER
NUMBER OF PAR PAID-IN DEVELOPMENT FROM DEFERRED STOCKHOLDERS'
SHARES VALUE CAPITAL STAGE STOCKHOLDER COMPENSATION DEFICIT
------ ----- ------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Accretion of redeemable convertible
preferred stock to redemption value .... (5,500) (5,500)
Issuance of common stock ................ 96,000 960 1,440 (2,400)
Exercise of stock options ............... 4,500 45 68 (113)
Amortization of unearned compensation ... 2,100 2,100
Net loss ................................ (1,017,919) (1,017,919)
------- ------ -------- ----------- ------- ----- -----------
Balance at December 31, 1992 ............ 496,500 4,965 7,448 (3,134,212) (113) (755) (3,122,667)
Issuance of common stock for services ... 28,000 280 174,928 175,208
Exercise of stock options ............... 43,500 435 652 (1,087)
Amortization of unearned compensation ... 755 755
Accretion of redeemable convertible
preferred stock to redemption value .... (10,099) (10,099)
Net loss ................................ (692,821) (692,821)
------- ------ -------- ----------- ------- ----- -----------
Balance at December 31, 1993 ............ 568,000 5,680 183,028 (3,837,132) (1,200) -- (3,649,624)
Accrual of cumulative dividends on
redeemable convertible preferred stock and
accretion to redemption value .......... (238,862) (238,862)
Issuance of common stock to employees ... 236,459 2,365 52,022 (54,387)
Amortization of unearned compensation ... 40,789 40,789
Repayment of receivable from stockholder 1,200 1,200
Net loss ................................ (1,221,399) (1,221,399)
------- ------ -------- ----------- ------- ----- -----------
Balance at December 31, 1994 ............ 804,459 8,045 235,050 (5,297,393) -- (13,598) (5,067,896)
Accrual of cumulative dividends on
redeemable convertible preferred stock and
accretion to redemption value .......... (277,158) (277,158)
Issuance of common stock warrants ....... 314,125 314,125
Amortization of unearned compensation ... 10,575 10,575
Net loss ................................ (2,329,518) (2,329,518)
------- ------ -------- ----------- ------- ----- -----------
Balance at December 31, 1995 ............ 804,459 8,045 549,175 (7,904,069) -- (3,023) (7,349,872)
Accrual of cumulative dividends
on redeemable convertible preferred stock
and accretion to redemption value (unaudited) (76,217) (76,217)
Amortization of unearned compensation
(unaudited) ............................ 3,023 3,023
Issuance of common stock warrants
(unaudited) ............................ 9,160 9,160
Net loss (unaudited) .................... (899,097) (899,097)
------- ------ -------- ----------- ------- ----- -----------
Balance at March 31, 1996 (unaudited) ... 804,459 $8,045 $558,335 $(8,879,383) $ -- $ -- $(8,313,003)
======= ====== ======== =========== ======= ===== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(MARCH 4, (March 4,
1988) THREE MONTHS ENDED 1988)
YEAR ENDED DECEMBER 31, THROUGH MARCH 31, THROUGH
------------------------------ DECEMBER 31, ------------------- March 31,
1993 1994 1995 1995 1995 1996 1996
---- ---- ---- ------------ ---- ---- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................ $(692,821) $(1,221,399) $(2,329,518) $(7,355,950) $(424,470) $(899,097) $(8,255,047)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization ..... 40,154 31,943 118,840 283,894 10,381 107,101 390,995
Loss on sale and abandonment of
property and equipment ........... -- -- -- 26,649 -- -- 26,649
Conversion of interest on debt to
equity ........................... 308,914 -- -- 308,914 -- -- 308,914
Compensation expense for stock
issued ........................... 175,963 40,789 10,575 232,872 2,643 3,023 235,895
Changes in operating assets and
liabilities:
Increase in accounts receivable
from related parties ............ -- -- (66,658) (66,658) -- (19,902) (86,560)
(Increase) decrease in inventories -- -- (184,232) (184,232) (7,585) 80,286 (103,946)
(Increase) decrease in prepaid
expenses and other current assets (20,061) (17,116) 33,483 (4,394) 4,200 (15,041) (19,435)
Increase in other assets ......... (2,315) (1,391) (971) (4,677) -- -- (4,677)
Increase in deferred revenue ..... -- -- 182,908 182,908 -- 82,560 265,468
Decrease in accrued interest
payable ......................... (219,352) -- -- -- -- -- --
(Decrease) increase in accounts
payable ......................... (2,005) (49,941) 281,934 341,366 77,891 (151,669) 189,697
(Decrease) increase in accrued
expenses ........................ (19,279) (15,434) 142,089 236,926 87,039 120,635 357,561
-------- ---------- ---------- ---------- -------- -------- ----------
Net cash used by operating
activities ...................... (430,802) (1,232,549) (1,811,550) (6,002,382) (249,901) (692,104) (6,694,486)
Cash flows used in investing activities:
Purchases of fixed assets ........... (24,090) (11,437) (160,150) (370,844) (54,189) (64,949) (435,793)
Additions to patents ................ (4,746) (17,448) (22,741) (150,232) -- (13,247) (163,479)
-------- ---------- ---------- ---------- -------- -------- ----------
Net cash used in investing
activities ...................... (28,836) (28,885) (182,891) (521,076) (54,189) (78,196) (599,272)
-------- ---------- ---------- ---------- -------- -------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
STATEMENT OF CASH FLOWS--(CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(MARCH 4, (MARCH 4,
1988) THREE MONTHS ENDED 1988)
YEAR ENDED DECEMBER 31, THROUGH MARCH 31, THROUGH
------------------------------ DECEMBER 31, ------------------- MARCH 31,
1993 1994 1995 1995 1995 1996 1996
---- ---- ---- ------------ ---- ---- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Payment of capital lease
obligations ........................ -- -- (5,431) (5,431) -- (1,552) (6,983)
Proceeds from issuance of
common stock ....................... -- -- -- 8,513 -- -- 8,513
Proceeds from issuance of common
stock warrants ..................... -- -- 314,125 314,125 -- 9,160 323,285
Proceeds from convertible debt ...... 161,000 -- 1,057,375 2,437,880 -- 30,840 2,468,720
Proceeds from issuance of Series A
redeemable convertible preferred
stock, net of issuance costs ....... -- -- -- 1,472,497 -- -- 1,472,497
Proceeds from issuance of Series B
redeemable convertible preferred
stock, net of issuance costs ....... 1,944,406 -- -- 1,944,406 -- -- 1,944,406
Proceeds from issuance of Series C
redeemable convertible preferred
stock, net of issuance costs ....... -- -- 1,457,259 1,457,259 1,457,259 -- 1,457,259
Loans from stockholders ............. -- -- -- 150,000 -- -- 150,000
Repayment of receivable from
stockholder ........................ -- 1,200 -- 1,200 -- -- 1,200
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities ...................... 2,105,406 1,200 2,823,328 7,780,449 1,457,259 38,448 7,818,897
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents .................... 1,645,768 (1,260,234) 828,887 1,256,991 1,153,169 (731,852) 525,139
Cash and cash equivalents, beginning
of period ........................... 42,570 1,688,338 428,104 -- 428,104 1,256,991 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Cash and cash equivalents,
end of period .......................$ 1,688,338 $ 428,104 $ 1,256,991 $ 1,256,991 $ 1,581,273 $ 525,139 $ 525,139
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the year ended December 31, 1995 and the three months ended March 31,
1996, the Company paid cash for interest of approximately $1,197 and $256
(unaudited), respectively.
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
During fiscal year 1990, the Company issued 150,000 shares of Series A
redeemable convertible preferred stock to two stockholders in exchange for
forgiveness of $150,000 of loans due to those stockholders.
On July 30, 1993, the Company issued 1,380,501 shares of Series A redeemable
convertible preferred stock to three stockholders in exchange for convertible
debt and unpaid accrued interest which aggregated $1,689,419. Also on July
30, 1993, the Company issued 28,000 shares of common stock valued at $175,208
to three stockholders in exchange for services.
During the year ended December 31, 1995, the Company entered into a capital
lease of $19,358 for certain operating system software.
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardiopulmonary Corp. (the "Company") was incorporated in the State of
Delaware on March 4, 1988. The Company was formed to research, develop and
commercialize cardiopulmonary support systems and disposables to provide life
support for intensive care and anesthesia patients in hospitals and sub-acute
facilities.
The Company's primary activities since incorporation have been locating and
outfitting a product development laboratory, business and financial planning,
raising capital and research and product development.
Significant accounting policies followed in the preparation of the
financial statements are as follows:
CASH AND CASH EQUIVALENTS
The Company invests its excess cash in a money market fund backed by U.S.
Government Securities. The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
As of January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" (FAS 115). Under this statement, the Company is required to
classify its marketable securities into one or more of the following categories:
held-to-maturity, trading or available-for-sale. FAS 115 requires that, except
for debt securities classified as held-to-maturity, investments in debt and
equity securities should be reported at fair value. Upon the sale of securities
(the cost of which are determined based on the specific identification method),
realized gains and losses are recorded in the statement of operations. The
adoption of FAS 115 had no impact on the Company's financial position or on the
results of its operations. At December 31, 1994 and 1995 and March 31, 1996
(unaudited), all of the Company's marketable securities are classified as
available-for-sale.
CONCENTRATION OF CREDIT RISK
Substantially all of the Company's cash and cash equivalents are held in
one bank. The Company does not believe that it is subject to any unusual credit
risk beyond the normal credit risk attendant to operating its business.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
FIXED ASSETS
Fixed assets are recorded at cost and depreciated over their estimated
useful lives of two to five years using the straight-line method. Assets held
under capital leases are amortized over the shorter of the lease life or the
estimated useful life of the assets. Repairs and maintenance costs are expensed
as incurred.
PATENTS
Costs associated with patents are capitalized as incurred and amortized on
a straight-line basis over the legal lives or the estimated economic lives of
the patents, whichever is shorter.
SOFTWARE DEVELOPMENT COSTS
The Company incurs software development costs for the planning, design and
improvement of systems incorporated in the Company's products. Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," requires capitalization of
such software development costs incurred subsequent to the establishment of
technological feasibility of the software and the completion of all other
research and development activities associated with the product. Costs incurred
by the Company between completion of such activities and the point at which the
products incorporating the Company's software are ready for delivery to
customers have been insignificant.
F-10
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes,
as set forth in Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (FAS 109). FAS 109 prescribes an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Deferred tax assets are
recognized, net of any valuation allowance, for deductible temporary differences
and operating loss and credit carryforwards. Deferred tax expense represents the
change in the deferred tax asset or liability balances.
REVENUE RECOGNITION
Revenue from product sales is recognized when the product has been shipped,
all significant contractual obligations have been satisfied and collection of
the related receivable is probable. To the extent that right of return
provisions exist, revenue is not recognized until the expiration of such rights.
UNAUDITED PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is determined by dividing the net loss
attributable to common stockholders by the weighted average number of common
stock and common stock equivalents outstanding during the period, assuming the
conversion of all convertible preferred stock which will occur upon the closing
of a qualified public offering of the Company's common stock as described in
Note 9.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
83, common stock equivalents, although anti-dilutive, issued at prices below the
offering price per share during the twelve months preceding the anticipated
public offering of the Company's common stock have been included in the
calculation of unauditedpro forma net loss per share using the treasury stock
method as if outstanding since the beginning of eachperiod presented.
Historical net loss per share has not been presented as the mandatorily
redeemable Series A, B and C convertible preferred stock would have been omitted
from the weighted average shares outstanding as they are anti-dilutive and were
issued more than twelve months prior to the anticipated public offering.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company records impairment losses on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. No such significant impairments have occurred to date.
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 liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
INTERIM FINANCIAL DATA
The interim financial data as of March 31, 1996 and for the three months
ended March 31, 1995 and 1996 are unaudited; however, in the opinion of the
Company, the interim data include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of the
interim periods.
2. BASIS OF FINANCIAL STATEMENTS
The accompanying financial statements have been prepared on a basis which
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The Company incurred net
F-11
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--Continued
losses of $692,821, $1,221,399 and $2,329,518 for the years ended December 31,
1993, 1994 and 1995, respectively, and at December 31, 1995 had an accumulated
deficit of $7,904,069. During the three month period ended March 31, 1996, the
Company incurred a net loss of $899,097 (unaudited), and at March 31, 1996 had
an accumulated deficit of $8,879,383 (unaudited).
The future viability of the Company is dependent on its ability to obtain
necessary additional financing and to generate cash from operations. If the net
proceeds from the offering described in this Prospectus are not received, and
other financing is not available, management believes the Company could continue
its operations at least through December 31, 1996 by delaying, scaling back or
eliminating certain of its planned expenditures, including but not limited to
research and development, clinical, marketing and manufacturing programs.
3. CASH EQUIVALENTS AND MARKETABLE SECURITIES
As of December 31, 1994 and 1995 and March 31, 1996, the Company's
investments in available-for-sale securities consist of money market fund
investments of $388,783, $1,237,211 and $525,139 (unaudited), respectively. The
contractual maturities of these money market investments are less than three
months. These investments are carried at cost, which approximates fair market
value due to the short maturity term of the money market funds. Gross unrealized
gains and losses as of December 31, 1994 and 1995 and March 31, 1996
(unaudited), and realized gains and losses for the periods then ended, are not
significant.
4. INVENTORIES
Inventories consist of the following:
DECEMBER 31, March 31,
1995 1996
-------- --------
(UNAUDITED)
Materials ........................ $106,872 $103,946
Finished goods .................. 77,360 --
-------- --------
$184,232 $103,946
======== ========
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
---- ---- ---------
(UNAUDITED)
Prepaid insurance ............... $30,923 $ -- $11,634
Other current assets ............ 6,954 4,394 7,801
------- ------ -------
$37,877 $4,394 $19,435
======= ====== =======
6. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIVES ------------------ MARCH 31,
IN YEARS 1994 1995 1996
-------- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Laboratory equipment .................................. 2-5 $145,006 $152,325 $152,325
Manufacturing equipment ............................... 5 -- 80,375 99,498
Computer and office equipment ......................... 5 20,301 92,757 138,583
Assets under capital lease ............................ lease term -- 19,358 19,358
-------- -------- --------
165,307 344,815 409,764
Less--accumulated depreciation and amortization ....... (131,485) (187,289) (207,889)
-------- -------- --------
$ 33,822 $157,526 $201,875
======== ======== ========
</TABLE>
F-12
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Depreciation and amortization expense on fixed assets was $35,007 in 1993,
$26,795 in 1994, $49,829 in 1995 and $9,000 (unaudited) and $20,600 (unaudited)
for the three months ended March 31, 1995 and 1996, respectively, of which
$5,975 in 1995 and $1,613 (unaudited) in the three months ended March 31, 1996
related to amortization of assets held under capital lease. Accumulated
amortization on assets under capital lease was $5,975 at December 31, 1995 and
$7,588 (unaudited) at March 31, 1996.
7. PATENTS
Patents consist of the following:
DECEMBER 31,
----------------- MARCH 31,
1994 1995 1996
---- ---- ---------
(UNAUDITED)
Patents, approved and pending ......... $127,491 $150,232 $163,479
Less accumulated amortization ......... (17,344) (22,864) (24,485)
-------- -------- --------
$110,147 $127,368 $138,994
======== ======== ========
Patents are currently amortized over a period of 17 years. Amortization
expense on patents was $5,147 in 1993, $5,148 in 1994, $5,520 in 1995 and $1,320
(unaudited) and $1,621 (unaudited) for the three months ended March 31, 1995 and
1996, respectively.
8. CONVERTIBLE DEBT HELD BY STOCKHOLDERS AND RELATED PARTIES
The Company entered into various unsecured convertible debt note agreements
during 1991, 1992 and 1993 with three principal stockholders. Principal and
interest of 12% were payable to the stockholders beginning March 20, 1992 and
continuing through December 28, 1994. No interest payments were made. On July
30, 1993, all of the notes outstanding aggregating $1,380,505 and unpaid accrued
interest aggregating $308,914 were converted into 1,380,501 shares of Series A
redeemable convertible preferred stock.
On December 5, 1995, the Company issued convertible debt notes to five
principal stockholders, one of which is also a related distributor (see Note
12), and to a company which is controlled by an employee of the related
distributor. Principal on these notes totaled $1,371,500. In March 1996, two
additional notes in the aggregate principal amount of $40,000 (unaudited) were
issued to employees of the related distributor. In April 1996 an additional note
in the principal amount of $80,000 (unaudited) was issued to an officer of the
Company. The notes bear interest at 8% per annum, and are payable on the earlier
of one year from issuance or the closing of an initial public offering of the
Company's common stock. These notes were converted into 298,300 shares of the
Company's common stock on May 20, 1996.
WARRANTS
In connection with the issuance of convertible debt notes in December 1995,
March 1996 and April 1996, the Company granted warrants to purchase 274,300,
8,000 (unaudited) and 16,000 (unaudited) shares of common stock, respectively,
at an exercise price per share of $5.00. The number of warrants and exercise
price are to be adjusted for certain dilutive and anti-dilutive events. The
warrants are exercisable for a period of five years from the issuance date.
Warrant holders are entitled, upon exercise, to receive any cash or property
dividends declared on common stock subsequent to the warrant issuance date. No
such dividends have been declared to date.
Amounts of $314,125, $9,160 (unaudited) and $18,320 (unaudited) were
ascribed to the warrants issued in December 1995, March 1996 and April 1996,
respectively, which amounts were recorded as discounts from the face value of
the related notes. Amortization of this discount totaled $57,516 during 1995 and
$84,880 (unaudited) during the three months ended March 31, 1996, which amounts
are included in interest expense. The Company has reserved 300,000 shares of its
common stock for the exercise of these warrants.
F-13
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
ISSUANCES
During the period ended February 28, 1990, the Company issued 1,650,000
shares of Series A redeemable convertible preferred stock for cash proceeds of
$1,472,497 and the conversion of loans due to certain stockholders totaling
$150,000, net of issuance costs of $27,503. During the year ended December 31,
1993, convertible debt principal aggregating $1,380,505 plus accrued interest of
$308,914 was converted into 1,380,501 additional shares of Series A preferred
stock (see Note 8). Also, during the year ended December 31, 1993, the Company
issued 2,196,183 shares of Series B redeemable convertible preferred stock for
$1,944,406, net of issuance costs of $55,593. The Company issued 1,304,348
shares of Series C redeemable convertible preferred stock for $1,457,259, net of
issuance costs of $42,741, during the year ended December 31, 1995.
CONVERSION
Each preferred share is convertible into common stock at the option of the
preferred stockholder or automatically upon the closing of a public offering of
the Company's common stock in which proceeds equal or exceed $10,000,000. The
number of shares of common stock to which a holder of Series A, B and C
preferred stock shall be entitled upon conversion shall be based upon the
conversion rates as defined by the related stockholder agreements. As of
December 31, 1995 and March 31, 1996 (unaudited), Series A, B and C preferred
stock are convertible into a total of 2,612,407 common shares. The conversion
rates are to be adjusted for certain dilutive and antidilutive events.
REDEMPTION
On July 1 of each year commencing on July 1, 1998, at the request of any
preferred stockholder, the Company is required, unless waived in writing by
two-thirds of the holders of the preferred stock, to redeem 33 1/3 percent of
the Series A, B and C preferred stock at a redemption price equal to $1.00,
$0.91 and $1.15, respectively, per share plus accrued and unpaid dividends
through the redemption date. The Company has recorded the following charges to
accumulated deficit to reflect the accretion of Series A, B and C preferred
stock to redemption value:
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------ MARCH 31,
1993 1994 1995 1996
---- ---- ---- ------------
(UNAUDITED)
Series A ............. $ 5,503 $ -- $ -- $ --
Series B ............. 4,596 11,118 11,118 2,780
Series C ............. -- -- 10,279 3,247
------- ------- ------- ------
$10,099 $11,118 $21,397 $6,027
======= ======= ======= ======
Required redemption amounts for each of the five years following December
31, 1995 for Series A, B and C preferred stock, excluding any cumulative and
unpaid dividends, are as follows:
REDEMPTION
YEAR AMOUNT
---- ------
1996 ...................................... $ --
1997 ...................................... --
1998 ...................................... 2,176,343
1999 ...................................... 2,176,343
2000 ...................................... 2,176,343
F-14
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
LIQUIDATION, DISSOLUTION OR WINDING UP OF THE COMPANY
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Series A, B and C preferred stock are entitled to receive, on
a pro rata basis, $1.00, $0.91 and $1.15 per share, plus all accrued and unpaid
dividends, respectively. Any assets remaining after the initial distribution to
the preferred stockholders shall be available for distribution ratably among the
common and preferred stockholders.
VOTING, REGISTRATION AND OTHER RIGHTS
The holders of the preferred stock are entitled to vote, together with the
holders of common stock, as a single class on all matters. Each preferred
stockholder is entitled to the number of votes equal to the number of whole
shares of common stock into which such stockholder's shares could be converted.
DIVIDENDS
The holders of the Series A preferred stock are entitled to receive
noncumulative dividends at an annual rate of at least $0.10 per share. The
holders of Series B and Series C preferred stock are entitled to receive
cumulative dividends at an annual rate of 8% of the initial conversion prices of
$0.91 and $1.15, respectively. For Series A stockholders, dividends become
payable when and if declared by the Board of Directors and have preference over
common stock dividends. Series B and Series C stockholders are entitled to
receive dividends annually, whether or not declared by the Board of Directors,
which are payable upon liquidation, dissolution, winding-up or upon redemption
of the respective preferred stock. No dividends have been declared by the Board
of Directors on Series A, B and C preferred stock through December 31, 1995.
Cumulative and unpaid dividends on Series B preferred stock were $227,744 and
$388,505 at December 31, 1994 and 1995, respectively, and $428,695 (unaudited)
at March 31, 1996. Cumulative and unpaid dividends on Series C preferred stock
were $95,000 at December 31, 1995 and $125,000 (unaudited) at March 31, 1996.
UNAUDITED PRO FORMA BALANCE SHEET
Upon the closing of the Company's initial public offering, all of the
outstanding shares of Series A, B and C preferred stock (including accrued
dividends) will automatically convert into 2,612,407 shares of common stock,
exclusive of fractional shares. Such conversion has been reflected in the
unaudited pro forma balance sheet as of March 31, 1996.
10. COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
AMENDED CERTIFICATE OF INCORPORATION
On March 15, 1995, the Board of Directors and stockholders unanimously
approved an amendment to the Company's certificate of incorporation to authorize
4,800,000 shares of common stock, $.01 par value, 3,200,000 shares of Series A
redeemable convertible preferred stock, 2,200,000 of Series B redeemable
convertible preferred stock and 1,350,000 shares of Series C redeemable
convertible preferred stock. On May 17, 1996, the Company amended its
certificate of incorporation to increase authorized shares of common stock to
10,000,000.
Under the March 15, 1995 amended certificate of incorporation, the Company
has reserved approximately 2,700,000 shares of common stock for issuance upon
conversion of the Series A, B and C redeemable convertible preferred stock.
STOCK GRANTS
During the fiscal year ended February 28, 1990, the ten-month period ended
December 30, 1990 and the year ended December 31, 1992, the Company issued
52,000, 96,000 and 96,000 shares of common stock, respectively, to certain
employees. In connection with these grants, the Company recorded compensation
expense in the statement of operations for related amounts earned by the
employees. Additionally, the Company recorded deferred compensation expense as a
reduction in stockholders' equity for unvested shares.
F-15
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
STOCK RESTRICTIONS
The Company's 804,459 outstanding common shares at December 31, 1995 are
subject to stock restriction agreements. The agreements provide the Company with
a right of first refusal to repurchase shares offered for sale. The agreements
will terminate upon an initial public offering of the Company's common stock
that results in an aggregate of at least $10,000,000 in proceeds to the Company.
RESTRICTED STOCK
On July 30, 1993, the Company issued 236,459 shares of restricted common
stock to employees. The stock is restricted as to transferability, voting rights
and dividends. On July 30, 1994 and 1995, 78,820 shares each became unrestricted
under this plan, and on March 22, 1996, the remaining 78,819 (unaudited) shares
became unrestricted.
COMMON STOCK AND WARRANT ISSUANCES
In May 1996, the Company issued 177,000 (unaudited) shares of common stock
to certain new investors with warrants to purchase 177,000 (unaudited)
additional shares of common stock at an exercise price per share of $5.00.
Proceeds from this offering net of issuance costs were $867,000 (unaudited), of
which $152,023 (unaudited) has been ascribed to the common stock warrants. An
agreement between the Company and one of the new investors requires the Company
to repurchase common stock and common stock warrants from the new investor, for
the greater of the fair market value of such securities or the original issue
price of $500,000 plus a 25% compounded annual rate of return, if the Company
ceases to maintain its principal place of business and a majority of its
employees in the State of Connecticut at any time prior to the date such common
stock and common stock warrants are registered under the Securities Act of 1933
or may be offered and sold pursuant to Rule 144(k) under that act.
REVERSE STOCK SPLIT
A 2-for-5 reverse stock split of the Company's common stock became
effective on May 17, 1996. All shares of common stock, options, warrants and per
share amounts included in the accompanying financial statements have been
adjusted to give retroactive effect to the reverse stock split for all periods
presented.
NEWLY AUTHORIZED PREFERRED STOCK
On April 24, 1996, the Company's Board of Directors authorized 1,000,000
shares of $.01 par value preferred stock, which will become effective
immediately following the consummation of this offering. Preferred stock may be
issued at the discretion of the Board of Directors of the Company (without
stockholder approval) with such designations, rights and preferences as the
Board of Directors may determine from time to time. The preferred stock may have
dividend, liquidation, redemption, conversion, voting or other rights which may
be more expansive than the rights of the holders of common stock.
STOCK OPTION PLANS
On April 18, 1991, the Company adopted the Cardiopulmonary Corp. 1991 Stock
Option Plan (the "1991 Plan") which provided for the granting of both incentive
stock options and nonqualified stock options to employees, officers and
directors of the Company. The 1991 Plan allowed for a maximum of 48,000 options
to purchase shares of common stock to be issued prior to April 18, 2001. Options
granted to directors of the Company could not exceed 12,000 in the aggregate and
options granted to officers who were not members of the Board of Directors could
not exceed 36,000 in the aggregate. All options allowed under this plan were
granted and exercised prior to December 31, 1993.
On February 15, 1995, the Company adopted the 1994 Stock Option Plan (the
"1994 Plan") which provides for the granting of both incentive stock options and
nonqualified stock options to employees, directors and consultants of the
Company. The 1994 Plan originally allowed for a maximum of 260,000 options to
purchase shares of common
F-16
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
stock to be issued prior to December 20, 2004. Options granted to any employee
originally could not exceed 40,000 shares in any calendar year. In March 1996,
the 1994 Plan was amended to increase the maximum number of options which may be
granted under the plan to 400,000 (unaudited), and to increase the number of
options which may be granted to any employee in any calendar year to 60,000
(unaudited). In April 1996, the 1994 Plan was further amended to increase the
maximum number of options which may be granted to 600,000 (unaudited).
The exercise price of any incentive stock option granted under the 1991
Plan or 1994 Plan shall not be less than the fair value of the stock on the date
of grant or less than 110% of the fair value in the case of optionees holding
more than 10% of the total combined voting power of all classes of stock of the
Company. Options under both Plans are exercisable for ten years from the date of
grant, except for incentive stock options granted to optionees holding more than
10% of the total combined voting power of all classes of stock, which must be
exercised within five years.
On August 31, 1995, the Company adopted the Cardiopulmonary Corp. Stock
Option Plan for Non-Employee Directors (the "Non-Employee Director Plan") which
provides for the granting of non-qualified stock options to non-employee members
of the Company's Board of Directors. The Non-Employee Director Plan originally
allowed for a maximum of 50,000 options to purchase shares of common stock to be
issued prior to August 31, 2005. In June 1996 this Plan was amended to increase
the maximum number of options which may be granted to 100,000 (unaudited). The
exercise price of options granted under the Non-Employee Director Plan shall not
be less than the fair value of the stock on the date of grant, and the options
are exercisable for ten years from the date of grant.
Activity under the 1991 Plan, 1994 Plan and Non-Employee Director Plan
since adoption is as follows:
NUMBER EXERCISE
OF SHARES PRICE
--------- ---------
Granted .................................... 18,000 $0.025
-------
Balance at December 31, 1991 ................ 18,000 $0.025
Granted .................................... 30,000 $0.025
Exercised .................................. (4,500) $0.025
-------
Balance at December 31, 1992 ................ 43,500 $0.025
Exercised .................................. (43,500) $0.025
-------
Balance at December 31, 1993 and 1994 ....... --
Granted .................................... 198,400 $0.23 to $.625
-------
Balance at December 31, 1995 ................ 198,400 $0.23 to $.625
Granted (unaudited) ........................ 112,000 $2.50 to $3.75
-------
Balance at March 31, 1996 (unaudited) ....... 310,400 $0.23 to $3.75
=======
Of the total options outstanding, 54,300 were exercisable at December 31,
1995 and March 31, 1996 (unaudited). If not exercised, these options will expire
at various dates through 2006. Options to purchase 101,600 and 129,600
(unaudited) shares of common stock were available for future grant under the
1994 Plan at December 31, 1995 and March 31, 1996, respectively. Under the
Non-Employee Directors Plan, options to purchase 10,000 shares of common stock
were available for future grant at December 31, 1995 and March 31, 1996
(unaudited), respectively. On May 20, 1996, the Company granted options under
the 1994 Plan to purchase an additional 128,000 (unaudited) shares of Common
Stock at an exercise price of $4.375 (unaudited) per share.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (FAS 123). The Company has elected to adopt FAS 123 in 1996
through disclosure only.
F-17
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. INCOME TAXES
The components of deferred income tax benefit follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Income tax benefit:
Federal ....................................... $ 234,000 $ 430,000 $ 724,000
State ......................................... 41,000 138,000 243,000
----------- ---------- ----------
275,000 568,000 967,000
Deferred tax asset valuation allowance ......... (275,000) (568,000) (967,000)
----------- ---------- ----------
$ -- $ -- $ --
=========== ========== ==========
</TABLE>
No federal or state income taxes were payable in any years as a result of
losses incurred.
The components of deferred tax assets and valuation allowance follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Capitalized research and development
costs, net .................................................. $1,063,000 $1,254,000
Nondeductible accrued expenses ............................... 28,000 143,000
Research and development credit
carryforwards ............................................... 206,000 238,000
Net operating loss carryforwards ............................. 685,000 1,312,000
Depreciation ................................................. 19,000 21,000
---------- ----------
Gross deferred tax assets .................................... 2,001,000 2,968,000
Deferred tax asset valuation allowance ....................... (2,001,000) (2,968,000)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
A reconciliation between the amount of reported income tax benefit and the
amount determined by applying the U.S. federal statutory rate of 34% to the
pre-tax loss follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Loss at statutory rate .......................... $ (236,000) $ (415,000) $ (792,000)
Federal research and development credit ......... (25,000) (69,000) (31,000)
Other, net ...................................... 26,000 7,000 16,000
State tax benefit, net of federal tax liability . (40,000) (91,000) (160,000)
----------- ----------- -----------
(275,000) (568,000) (967,000)
Benefit of loss not recognized, increase in
valuation allowance ........................... 275,000 568,000 967,000
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
The Company has provided a full valuation allowance for net deferred tax
assets, since the realization of these future benefits is not sufficiently
assured as of the end of each fiscal year due to the history of recurring losses
and the uncertainty surrounding future profitability. If the Company achieves
profitability, these deferred tax assets would be available to offset future
income tax liabilities and expense.
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $3,274,000 and $2,674,000 for federal and state income tax
reporting purposes, respectively. In addition, at December 31, 1995, the Company
had federal research and development credit carryforwards of approximately
$238,000. These carryforwards will expire in the years 2000 through 2010 if not
utilized.
F-18
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In accordance with certain provisions of the Tax Reform Act of 1986, a
change in ownership of greater than 50% of a Company within a three-year period
will place an annual limitation on the Company's ability to utilize its existing
federal net operating loss and research and development tax credit
carryforwards. Such a change in ownership occurred in connection with the
Company's new equity financing during 1989. In connection with such transaction,
the annual limitation on the utilization of the Company's federal net operating
loss and tax credit carryforwards may be substantial and the Company may not
obtain material benefit from pre-change net operating losses beforethey expire.
12. OTHER RELATED PARTY TRANSACTIONS
In March 1995, the Company entered into an agreement which granted Kontron
Instruments Ltd. (the "Distributor") exclusive rights to distribute the
Company's Venturi Product in Europe and certain other countries. Inconnection
with the Company's Series C preferred stock offering (see Note 9), the
Distributor purchased 869,565 shares of the Company's Series C preferred stock.
The Company also issued $300,000 of the $1,371,500 private placement offering of
convertible debt notes to the Distributor, with a warrant to purchase 60,000
shares of the Company's Common Stock (see Note 8). Interest incurred on this
note during 1995 was $14,314 which includes amortization of debt discount
attributable to the detachable warrants of $12,581.
Also in conjunction with the private placement debt offering, the Company
issued a convertible debt note of $40,000 and a warrant to purchase 8,000 shares
of the Company's Common Stock to an entity under the control of an employee of
the Distributor. Interest expense on this note during 1995 was not significant.
In March 1996, the Company issued additional convertible debt notes in the
aggregate principal amount of $40,000 (unaudited) to two employees of the
Distributor and warrants to purchase a total of 8,000 shares of the Company's
Common Stock.
During the year ended December 31, 1995 and the three month period ended
March 31, 1996, the Company shipped testing and demonstration products to the
Distributor totaling $182,908 and $82,560 (unaudited), respectively. Because the
Distributor has the right to return these products at a stipulated depreciated
value in the event that the distribution agreement is terminated, the related
revenue has been deferred. Products shipped to the Distributor were charged to
research and development expense since it was determined that these products
have insignficant net realizable value. Accounts receivable totaling $66,658
and $86,560 (unaudited) were due from the Distributor as of December 31, 1995
and March 31, 1996, respectively.
13. COMMITMENTS
The Company leases its facilities under an operating lease agreement. The
Company leases certain equipment and software under noncancelable capital and
operating lease agreements. Total rent expense under noncancelable operating
leases was approximately $36,000, $63,000 and $85,000 for the years ended
December 31, 1993, 1994 and 1995, respectively, and $16,000 (unaudited) and
$21,000 (unaudited) for the three months ended March 31, 1995 and 1996,
respectively. The approximate future minimum lease commitments under all
noncancelable leases at December 31, 1995 are as follows:
OPERATING CAPITAL
LEASES LEASES
------ ------
1996 ........................................ $ 75,377 $ 7,230
1997 ........................................ 48,377 7,230
1998 ........................................ 308 606
-------- -------
Total future payments ....................... $124,062 15,066
========
Less--Amount representing interest .......... 1,139
-------
Present value of minimum lease payments ..... $13,927
=======
F-19
<PAGE>
CARDIOPULMONARY CORP.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
14. GOING CONCERN BASIS--FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,
1993 AND FOR THE PERIOD FROM JANUARY 1, 1991 THROUGH DECEMBER 31, 1993
The accompanying statements of operations, of common stock and other
stockholders' deficit and cash flows for the year ended December 31, 1993 and
for the period from January 1, 1991 through December 31, 1993 have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. At the time of the
issuance of the independent auditors' report dated March 19, 1994 on these
financial statements, the Company had incurred substantial net losses during the
years ended December 31, 1993 and for the period from January 1, 1991 through
December 31, 1993, and the Company's continued existence was dependent upon its
ability to obtain regulatory approval, generate revenue, and pay its debts as
they become due. Accordingly, the independent auditors' report included a
reference to the uncertainty of the Company continuing as a going concern for a
reasonable period of time. Subsequent to December 31, 1993, the Company obtained
additional financing and obtained regulatory approval.
F-20
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. UNDER NO CIRCUMSTANCES SHALL THE DELIVERY OF THIS PROSPECTUS OR
ANY SALE PURSUANT TO THIS PROSPECTUS CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF
THIS PROSPECTUS.
----------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ........................... 3
Risk Factors ................................. 6
Use of Proceeds .............................. 13
Dividend Policy .............................. 13
Dilution ..................................... 14
Capitalization ............................... 15
Selected Financial Data ...................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ............................... 17
Business ..................................... 20
Management ................................... 32
Certain Transactions ......................... 37
Principal Stockholders ....................... 38
Description of Capital Stock ................. 40
Shares Eligible for Future Sale .............. 42
Underwriting ................................. 44
Legal Matters ................................ 45
Experts ...................................... 45
Additional Information ....................... 46
Index to Financial Statements ................ F-1
----------
UNTIL _________ __, 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
2,000,000 SHARES
CARDIOPULMONARY
CORP.
COMMON STOCK
----------
PROSPECTUS
----------
ADVEST, INC.
CRUTTENDEN ROTH
INCORPORATED
----------
, 1996
================================================================================
<PAGE>
PART II
ITEM 13. Other Expenses of Issuance and Distribution.
The following table sets forth the Company's estimates (other than the SEC
registration fee and the NASD filing fee) of the expenses in connection with the
issuance and distribution of the shares of Common Stock being registered, other
than underwriting discounts and commissions:
Securities and Exchange Commission registration fees ......... $ 8,724
NASD filing fee .............................................. 3,030
Nasdaq listing fee ........................................... 32,230
Printing and engraving expenses .............................. 85,000
Legal fees and expenses ...................................... 225,000
Accounting fees and expenses ................................. 140,000
Blue sky fees and expenses ................................... 15,000
Transfer agent and registrar fees ............................ 3,000
Directors and officers insurance fees ........................ 100,000
Miscellaneous expenses ....................................... 88,016
--------
Total ...................................................... $700,000
========
ITEM 14. Indemnification of Directors and Officers.
The Company's Amended and Restated Certificate of Incorporation provides
that the Company shall indemnify certain persons, including officers, directors,
employees and agents, to the fullest extent permitted by Section 145 of the
General Corporation Law of the State of Delaware. The Company has also entered
into indemnification agreements with its current directors and executive
officers. Reference is made to the Certificate of Incorporation and Form of
Indemnification Agreement filed as Exhibits 3.1 and 10.15, respectively. The
Company's directors and officers are insured against losses arising from any
claim against them as such for wrongful acts or omissions, subject to certain
limitations.
Section 145(a) of the General Corporation Law of the State of Delaware
provides that a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation), by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no cause to believe his conduct was unlawful.
Section 145(b) provides that a Delaware corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted under similar standards, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the court in which such action or suit was brought shall
determine that despite the adjudication of liability, such person is fairly and
reasonably entitled to be indemnified for such expenses which the court
shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) and (b) or in the defense of any claim, issue or
matter therein, he shall be indemnified against expenses actually and reasonably
incurred by him in connection therewith; that indemnification provided for by
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and that the corporation may purchase and
maintain insurance on behalf of a director or officer of the corporation against
any liability asserted against him or incurred by him in any such capacity
or arising out of his status as such whether or not the corporation would have
the power to indemnify him against such liabilities under such Section 145.
II-1
<PAGE>
The Underwriting Agreement provides for reciprocal indemnification between
the Company and its officers and directors on the one hand and the Underwriters
and their respective controlling persons on the other hand against certain
liabilities in connection with this offering, including liabilities under the
Securities Act of 1933, as amended.
ITEM 15. Recent Sales of Unregistered Securities.
On July 30, 1993, the Company issued and sold 2,196,183 shares of Series B
Preferred Stock to certain institutional investors for a purchase price of $0.91
per share. These shares will be converted automatically into 878,471 shares of
Common Stock upon the consummation of this offering for an effective price of
$2.28 per share of Common Stock.
On July 30, 1993, the Company issued an aggregate of 43,500 shares of
Common Stock to certain of its employees upon the exercise of options granted
under the 1991 Stock Option Plan at an exercise price of $0.03 per share.
Since February 1995, the Company has granted options to purchase an
aggregate of 438,400 shares of Common Stock under the Company's 1994 Stock
Option Plan at exercise prices ranging from $0.23 to $4.38 per share. To date,
no options have been exercised under the 1994 Stock Option Plan.
On March 17, 1995, the Company issued and sold 1,304,348 shares of Series C
Convertible Preferred Stock to certain institutional investors for a purchase
price of $1.15 per share. These shares will be converted automatically into
521,739 shares of Common Stock upon the consummation of this offering for an
effective price of $2.88 per share of Common Stock.
In December 1995, the Company issued 8% convertible debt notes to five
principal stockholders, including Kontron, and to a company controlled by an
employee of Kontron. Principal on these notes totaled $1,371,500. In March 1996,
two additional notes in the aggregate principal amount of $40,000 were issued to
employees of Kontron. In April 1996, an additional note in the principal amount
of $80,000 was issued to an officer of the Company. These notes were converted
into 298,300 shares of the Common Stock on May 20, 1996.
In connection with the issuance of the 8% convertible debt notes in
December 1995, March 1996 and April 1996, the Company granted warrants to
purchase 274,300, 8,000 and 16,000 shares of Common Stock, respectively, at an
exercise price per share of $5.00. The number of shares issuable upon exercise
of these warrants and the exercise price are to be adjusted for certain dilutive
and anti-dilutive events. The warrants are exercisable for a period of five
years from the issuance date.
On May 20, 1996, the Company issued and sold 177,000 shares of Common Stock
and common stock purchase warrants to purchase 177,000 shares of Common Stock at
an exercise price of $5.00 per share for aggregate consideration of $5.00 for
each unit of one share and a warrant to purchase one share.
On June 5, 1996, in connection with the establishment of a bank revolving
bridge line of credit, the Company granted warrants to purchase 4,000 shares of
Common Stock at an exercise price per share equal to the low end of the range of
the initial public offering price in the Prospectus included in this
Registration Statement, subject to adjustment.
The Securities issued by the Company in the foregoing transactions were not
registered under the Securities Act of 1933 in reliance upon exemptions
contained in Section 4(2) thereof.
ITEM 16. Exhibits.
1 Form of Underwriting Agreement.*
3.1 Form of and Restated Certificate of Incorporation.*
3.2 By-laws.*
4 Specimen Common Stock Certificate.
5 Opinion of Fulbright & Jaworski L.L.P.
10.1 1994 Stock Option Plan.*
10.2 Stock Option Plan for Non-Employee Directors.
10.3 Agreement of Lease, dated October 5, 1994, between SC Properties, LLC
and Cardiopulmonary Corp.*
10.4 Employment Agreement, dated May 20, 1996, between James W. Biondi and
Cardiopulmonary Corp.*
10.5 Employment Agreement, dated May 20, 1996, between N. Nicoll Snow and
Cardiopulmonary Corp.*
10.6 Employment Agreement, dated May 20, 1996, between Douglas M. Johnston
and Cardiopulmonary Corp.*
10.7 Employment Agreement, dated May 20, 1996, between Gerhardt P.
Schroeder and Cardiopulmonary Corp.*
II-2
<PAGE>
10.8 Employment Agreement, dated May 20, 1996, between Robert Glinski and
Cardiopulmonary Corp.*
10.9 Employment Agreement, dated May 20, 1996, between Donald D. Gilmore
and Cardiopulmonary Corp.*
10.10 Employment Agreement, dated May 20, 1996, between Elliot Blank and
Cardiopulmonary Corp.*
10.11 Distribution Agreement, dated as of March 17, 1995, between Kontron
Instruments, Ltd. and Cardiopulmonary Corp.+
10.12 Stock and Warrant Put Agreement, dated as of May 20, 1996, between
Cardiopulmonary Corp. and Connecticut Innovations, Incorporated.*
10.13 Form of Common Stock Purchase Warrants.*
10.14 Registration Rights Agreement, dated as of May 20, 1996.*
10.15 Form of Directors Indemnification Agreement.*
10.16 Form of Representatives' Warrant.*
10.17 Revolving Bridge Loan Agreement, dated June 5, 1996, between
Cardiopulmonary Corp. and Silicon Valley Bank.
10.18 Warrant to Purchase Common Stock, dated June 5, 1996, together with
Antidilution Agreement and Registration Rights Agreement, each dated
June 5, 1996, between Cardiopulmonary Corp. and Silicon Valley Bank.
11 Statement re computation of per share earnings.
16 Letter from Deloitte & Touche LLP respecting change in certifying
accountant.*
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of King & Spalding.*
23.4 Consent of Fulbright & Jaworski L.L.P. (contained in Exhibit 5).
24 Power of Attorney*
27 Financial Data Schedule.*
- ----------
+ Confidential treatment requested for certain portions of this agreement.
* Previously filed.
ITEM 17. Undertakings.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF MILFORD AND STATE OF
CONNECTICUT ON THE 28TH DAY OF JUNE, 1996.
CARDIOPULMONARY CORP.
By: /s/ JAMES W. BIONDI
-------------------------------------
JAMES W. BIONDI, M.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
/s/ JAMES W. BIONDI Chairman, Chief Executive June 28, 1996
- -------------------------- Officer and Director (Principal
JAMES W. BIONDI, M.D. Executive Officer)
/s/ N. NICOLL SNOW Vice President, Chief Financial June 28, 1996
- -------------------------- Officer and Secretary (Principal
N. NICOLL SNOW Financial and Accounting Officer)
/s/ THOMAS J. ABBENANTE* Director June 28, 1996
- --------------------------
THOMAS J. ABBENANTE
/s/JOHN R. CULLINANE, JR.* Director June 28, 1996
- --------------------------
JOHN R. CULLINANE, JR.
/s/ ALAN KESSMAN* Director June 28, 1996
- --------------------------
ALAN KESSMAN
/s/ W. GORDON KRUBERG* Director June 28, 1996
- --------------------------
W. GORDON KRUBERG, M.D.
*By /s/ N. NICOLL SNOW
------------------------
N. Nicoll Snow
Attorney-in-fact
II-4
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
1 Form of Underwriting Agreement.*
3.1 Form of Restated Certificate of Incorporation.*
3.2 By-laws.*
4.1 Specimen Common Stock Certificate.
5 Opinion of Fulbright & Jaworski L.L.P.
10.1 1994 Stock Option Plan.*
10.2 Stock Option Plan for Non-Employee Directors.
10.3 Agreement of Lease, dated October 5, 1994, between SC Properties, LLC
and Cardiopulmonary Corp.*
10.4 Employment Agreement, dated May 20, 1996, between James W. Biondi and
Cardiopulmonary Corp.*
10.5 Employment Agreement, dated May 20, 1996, between N. Nicoll Snow and
Cardiopulmonary Corp.*
10.6 Employment Agreement, dated May 20, 1996, between Douglas M. Johnston
and Cardiopulmonary Corp.*
10.7 Employment Agreement, dated May 20, 1996, between Gerhardt P.
Schroeder and Cardiopulmonary Corp.*
10.8 Employment Agreement, dated May 20, 1996, between Robert Glinski and
Cardiopulmonary Corp.*
10.9 Employment Agreement, dated May 20, 1996, between Donald D. Gilmore
and Cardiopulmonary Corp.*
10.10 Employment Agreement, dated May 20, 1996, between Elliot Blank and
Cardiopulmonary Corp.*
10.11 Distribution Agreement, dated as of March 17, 1995, between Kontron
Instruments, Ltd. and Cardiopulmonary Corp.+
10.12 Stock and Warrant Put Agreement, dated as of May 20, 1996, between
Cardiopulmonary Corp. and Connecticut Innovations, Incorporated.*
10.13 Form of Common Stock Purchase Warrants.*
10.14 Registration Rights Agreement, dated as of May 20, 1996.*
10.15 Form of Directors Indemnification Agreement.*
10.16 Form of Representatives' Warrant.*
10.17 Revolving Bridge Loan Agreement, dated June 5, 1996, between
Cardiopulmonary Corp. and Silicon Valley Bank.
10.18 Warrant to Purchase Common Stock, dated June 5, 1996, together with
Antidilution Agreement and Registration Rights Agreement, each dated
June 5, 1996, betweenm Cardiopulmonary Corp. and Silicon Valley Bank.
11 Statement re computation of per share earnings.
16 Letter from Deloitte & Touche LLP respecting change in certifying
accountant.*
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of King & Spalding.*
23.4 Consent of Fulbright & Jaworski L.L.P. (contained in Exhibit 5).
24 Power of Attorney.*
27 Financial Data Schedule.*
- ----------
+ Confidential treatment requested for certain portions of this agreement.
* Previously filed.
Number CC CARDIOPULMONARY CORP. ______ Shares
COMMON STOCK
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 141908 10 3
THIS IS TO CERTIFY THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
$.01 PAR VALUE PER SHARE, OF
CARDIOPULMONARY CORP. transferable on the books of the Corporation by the
registered holder hereof in person or by duly authorized attorney, upon
surrender of this certificate properly endorsed. This certificate and the shares
represented hereby are issued and shall be held subject to all of the provisions
of the Certificate of Incorporation, as amended, and By-Laws, as amended, of the
Corporation (copies of which are on file with the Transfer Agent) to all of
which the holder of this certificate, by acceptance hereof, assents. This
certificate is not valid until countersigned and registered by the Transfer
Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ N. NICOLL SNOW /s/ JAMES W. BIONDI, M.D.
----------------------------- ------------------------------------
Vice President and Secretary Chairman and Chief Executive Officer
Countersigned and Registered:
THE FIRST NATIONAL BANK
OF BOSTON
Transfer Agent and Registrar
By:
Authorized Officer
[CARDIOPULMONARY CORP. CORPORATE SEAL]
<PAGE>
CARDIOPULMONARY CORP.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS A COPY OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES
THEREOF, WHICH THE CORPORATION IS AUTHORIZED TO ISSUE, AND THE QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. ANY SUCH REQUEST
MAY BE MADE TO THE CORPORATION OR THE TRANSFER AGENT.
-------------
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR DESTROYED
THE COMPANY WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM--as tenants in common
TEN ENT--as tenants by the entireties
JT TEN --as joint tenants with right of survivorship and not as tenants
in common
UNIF GIFT MIN ACT--____________ Custodian __________
(Cust) (Minor)
Under Uniform Gifts to Minors
Act _________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
__________________________________________________________________________shares
of the capital stock represented by the within Certificate,
and do hereby irrevocably constitute and appoint
________________________________________________________________________Attorney
to trasfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated -------------------------
NOTICE
THE SIGNATURE TO THIS X
ASSIGNMENT MUST CORRESPOND -------------------------------------
WITH THE NAME AS WRITTEN (SIGNATURE)
UPON THE FACE OF THE
CERTIFICATE IN EVERY X
PARTICULAR, WITHOUT -------------------------------------
ALTERATION OR ENLARGEMENT (SIGNATURE)
OR ANY CHANGE WHATEVER.
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in an approved signature guarantee medallion program) pursuant to
S.E.C. Rule 17Ad-15.
- --------------------------------------------------------------------------------
SIGNATURE(S) GUARANTEED:
- --------------------------------------------------------------------------------
[FULBRIGHT & JAWORSKI LETTERHEAD]
June 28, 1996
Cardiopulmonary Corp.
200 Cascade Boulevard
Milford, Connecticut 06460
Ladies and Gentlemen:
We refer to the Registration Statement and Amendment No. 1 thereto on
Form S-1, No. 333-04315 (the "Registration Statement"), filed by Cardiopulmonary
Corp. (the "Company") with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, relating to 2,000,000 shares of the
Company's Common Stock, $.01 par value (the "Common Stock"), to be sold by the
Company and up to an additional 300,000 shares of Common Stock to cover
over-allotments.
As counsel for the Company, we have examined such corporate records,
documents and such questions of law as we have considered necessary or
appropriate for the purposes of this opinion and, upon the basis of such
examination, advise you that in our opinion the shares of Common Stock to be
sold by the Company have been duly and validly authorized, and, when sold in
the manner contemplated by the underwriting agreement (the "Underwriting
Agreement") filed as an exhibit to the Registration Statement, and upon receipt
by the Company of payment therefor as provided in the Underwriting Agreement,
such shares will be legally issued, fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and the reference to this firm under the caption "Legal Matters" in
the prospectus contained therein. This consent is not to be construed as an
admission that we are a party whose consent is required to be filed with the
Registration Statement under the provisions of the Securities Act of 1933, as
amended.
Very truly yours,
FULBRIGHT & JAWORSKI L.L.P.
CARDIOPULMONARY CORP.
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
1. PURPOSE.
The purpose of this Stock Option Plan for Non-Employee Directors (the
"PLAN") of Cardiopulmonary Corp. (the "CORPORATION") is to strengthen the
Corporation's ability to attract and retain the services of knowledgeable and
experienced persons who, through their efforts and expertise, can make a
significant contribution to the success of the Corporation's business by serving
as members of the Corporation's Board of Directors and to provide additional
incentive for such directors to continue to work for the best interests of the
Corporation and its stockholders through ownership of its Common Stock, $.01 par
value (the "COMMON STOCK"). Accordingly, the Corporation will grant to each
non-employee director options to purchase shares of the Corporation's Common
Stock on the terms and conditions hereafter established.
2. STOCK SUBJECT TO PLAN.
The Company may issue and sell a total of 100,000 shares of its Common
Stock pursuant to the Plan. Such shares may be either authorized and unissued or
held by the Company in its treasury. New options may be granted under the Plan
with respect to shares of Common Stock which are covered by the unexercised
portion of an option which has terminated or expired by its terms, by
cancellation or otherwise.
3. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Board of Directors of the
Corporation (the "BOARD"). The interpretation and construction by the Board of
any provisions of the Plan or of any other matters related to the Plan shall be
final. The Board may from time to time adopt such rules and regulations for
carrying out the Plan as it may deem advisable. No member of the Board shall be
liable for any action or determination made in good faith with respect to the
Plan.
The Board of Directors may at any time amend, alter, suspend or
terminate the Plan; provided, however, that any such action would not impair any
option to purchase Common Stock theretofore granted under the Plan; and provided
further that without the approval of the Corporation's stockholders, no
amendments or alterations would be made which would (i) increase the number of
shares of Common Stock that may be purchased by each non-employee director under
the Plan (except as permitted by Paragraph 10), (ii) increase the aggregate
number
<PAGE>
of shares of Common Stock as to which options may be granted under the Plan
(except as permitted by Paragraph 10), (iii) decrease the option exercise price
(except as permitted by Paragraph 10), or (iv) extend the period during which
outstanding options granted under the Plan may be exercised; and provided
further that Paragraph 5 of the Plan shall not be amended more than once every
six months other than to comply with changes in the Internal Revenue Code of
1986, as amended, or the Employee Retirement Income Security Act of 1974, as
amended, or the rules thereunder.
4. ELIGIBILITY.
All non-employee directors of the Corporation shall be eligible to
receive options under the Plan. Receipt of stock options under any other stock
option plan maintained by the Corporation or any subsidiary shall not, for that
reason, preclude a director from receiving options under the Plan.
5. GRANTS.
(i) Each non-employee director shall be issued an option to purchase
10,000 shares of the Corporation's Common Stock (the "INITIAL OPTION") on the
date of the earlier of his initial election or appointment to the Board of
Directors or the approval of this plan by the shareholders of the Corporation
(the "INITIAL GRANT DATE") at the following price for the following term and
otherwise in accordance with the terms of the Plan:
(a) The option exercise price per share of Common Stock shall be
the Fair Market Value (as defined below) of the Common Stock covered by
such Initial Option on the Initial Grant Date.
(b) Except as provided herein, the term of an Initial Option shall
be for a period of ten (10) years from the Initial Grant Date.
(ii) In addition, each non-employee director shall, on the fifth
anniversary and on each successive anniversary of the Initial Grant Date (each
and "ADDITIONAL GRANT DATE"), if he is still a non-employee director on such
date, be granted an option to purchase 2,000 shares of the Corporation's Common
Stock (an "ADDITIONAL OPTION") at the following price for the following term and
otherwise in accordance with the terms of the Plan:
(a) The option exercise price per share of Common Stock shall be
the Fair Market Value (as defined below) of the Common Stock covered by
such Additional Option on the Additional Grant Date.
-2-
<PAGE>
(b) Except as provided herein, the term of an Additional Option
shall be for a period of ten (10) years from the Additional Grant Date.
(iii) "FAIR MARKET VALUE" shall mean, for each Grant Date, (A) if the
Common Stock is listed or admitted to trading on the New York Stock Exchange
(the "NYSE") or the American Stock Exchange (the "ASE"), the average of the high
and low sale price of the Common Stock on such date or, if no sale takes place
on such date, the average of the highest closing bid and lowest closing asked
prices of the Common Stock on such exchange, in each case as officially reported
on the NYSE or the ASE, or (B) if no shares of Common Stock are then listed or
admitted to trading on the NYSE or the ASE, the average of the high and low sale
prices of the Common Stock on such date on the NASDAQ National Market System or,
if no shares of Common Stock are then quoted on the NASDAQ National Market
System, the average of the closing bid and highest asked prices of the Common
Stock on such date on NASDAQ or, if no shares of Common Stock are then quoted on
NASDAQ, the average of the highest bid and lowest asked prices of the Common
Stock on such date as reported in the over-the-counter system. If no closing bid
and highest asked prices thereof are then so quoted or published in the
over-the-counter market, "Fair Market Value" shall mean the fair value per share
of Common Stock (assuming for the purposes of this calculation the economic
equivalence of all shares of classes of capital stock), as determined on a fully
diluted basis in good faith by the Board, as of a date which is 15 days
preceding such Grant Date.
6. REGULATORY COMPLIANCE AND LISTING.
The issuance or delivery of any Option may be postponed by the
Corporation for such period as may be required to comply with the Federal
securities laws, any applicable listing requirements of any applicable
securities exchange and any other law or regulation applicable to the issuance
or delivery of such Options, and the Corporation shall not be obligated to issue
or deliver any Options if the issuance or delivery of such options would
constitute a violation of any law or any regulation of any governmental
authority or applicable securities exchange.
7. RESTRICTIONS ON EXERCISABILITY AND SALE.
(i) Except as provided in Section 7(ii) below, and subject to
Section 7(iii) below, (a) each Initial Option granted under the Plan may be
exercisable as to 20% of the total number of shares issuable under such Initial
Option on each of the five successive anniversaries of the Grant Date of such
Initial Option, and (b) each Additional Option granted under the Plan may be
exercisable as to 100% of the total number of shares issuable under such
Additional Option on the first anniversary of the Grant Date of such Additional
Option.
(ii) If any event constituting a "Change in Control of the
Corporation" shall occur, all Options granted under the Plan which are
outstanding at the time a Change of
-3-
<PAGE>
Control of the Corporation shall occur shall immediately become exercisable. A
"CHANGE IN CONTROL OF THE CORPORATION" shall be deemed to occur if (i) there
shall be consummated (x) any consolidation or merger of the Corporation in which
the Corporation is not the continuing or surviving corporation or pursuant to
which shares of the Corporation's Common Stock would be converted into cash,
securities or other property, other than a merger of the Corporation in which
the holders of the Corporation's Common Stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, or (y) any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) of all,
or substantially all, of the assets of the Corporation, or (ii) the stockholders
of the Corporation shall approve any plan or proposal for liquidation or
dissolution of the Corporation, or (iii) any person (as such term is used in
Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT")), shall become the beneficial owner (within the meaning of
Rule 13d-3 under the Exchange Act) of 20% or more of the Corporation's
outstanding Common Stock other than pursuant to a plan or arrangement entered
into by such person and the Corporation, or (iv) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the entire Board of Directors shall cease for any reason to constitute a
majority thereof unless the election, or the nomination for election by the
Corporation's stockholders, of each new director was approved by a vote of at
least two-thirds of the directors then still in office who were directors at the
beginning of the period.
(iii) Notwithstanding anything herein to the contrary, no Option
granted hereunder may be exercised unless and until the Corporation has closed
an offering of shares of its Common Stock to the public pursuant to a
registration statement filed with and declared effective by the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
8. CESSATION AS DIRECTOR.
In the event that the holder of an Option granted pursuant to the Plan
shall cease to be a director of the Corporation for any reason such holder may
exercise any portion of the Option that is exercisable by him at the time he
ceases to be a director of the Corporation, but only to the extent such Option
is exercisable as of such date, within six months after the date he ceases to be
a director of the Corporation.
9. DEATH.
In the event that a holder of an Option granted pursuant to the Plan
shall die, his estate, personal representative or beneficiary may exercise any
portion of the Option that was exercisable by the deceased Optionee at the time
of his death, but only to the extent such Option is exercisable as of such date,
within twelve months after the date of his death.
-4-
<PAGE>
10. STOCK SPLITS, MERGERS, ETC.
In the event of any stock split, stock dividend or similar transaction
which increases or decreases the number of outstanding shares of Common Stock,
(i) the number of options available under the Plan, (ii) the number of shares to
be granted pursuant to Section 5 of this Agreement and (iii) the number and
option exercise price per share of Common Stock which may be purchased under any
outstanding Options, each shall be adjusted automatically to the nearest whole
share (disregarding any fractional shares) to reflect such transaction. In the
case of a merger, consolidation or similar transaction which results in a
replacement of the Corporation's Common Stock and stock of another corporation
but does not constitute Change in Control of the Corporation, the Corporation
will make a reasonable effort, but shall not be required, to replace any
outstanding Options granted under the Plan with comparable options to purchase
the stock of such other corporation, or will provide for immediate maturity of
all outstanding Options, with all Options not being exercised within the time
period specified by the Board of Directors being terminated.
11. TRANSFERABILITY.
Options are not assignable or transferable, except upon the
optionholder's death to a beneficiary designated by the optionee in accordance
with procedures established the Board or, if no designated beneficiary shall
survive the optionholder, pursuant to the optionholder's will or by the laws of
descent and distribution, to the extent set forth in Section 9 and during the
optionholder's lifetime, may be exercised only by him.
12. EXERCISE OF OPTIONS.
An optionholder electing to exercise an Option shall give written
notice to the Corporation of such election and of the number of shares of Common
Stock that he has elected to acquire. An optionholder shall have no rights of a
stockholder with respect to shares of Common Stock covered by his Option until
after the date of issuance of a stock certificate to him upon partial or
complete exercise of his option.
13. PAYMENT.
The Option exercise price shall be payable in cash, check or in shares
of Common Stock upon the exercise of the Option. If the shares of Common Stock
are tendered as payment of the Option exercise price, the value of such shares
shall be the Fair Market Value as of the date of exercise. If such tender would
result in the issuance of fractional shares of Common Stock, the Corporation
shall instead return the difference in cash or by check to the employee.
-5-
<PAGE>
14. OBLIGATION TO EXERCISE OPTION.
The granting of an Option shall impose no obligation on the director to
exercise such option.
15. CONTINUANCE AS DIRECTOR.
Nothing in the Plan shall be deemed to create any obligation on the
part of the Board to nominate any director for reelection by the Corporation's
stockholders.
16. TERM OF PLAN.
The Plan shall be effective as of the date on which it is adopted by
the Board, subject to the approval of the stockholders of the Company within one
year from the date of adoption by the Board. The Plan will terminate on the date
ten years after the date of adoption by the Board, unless sooner terminated by
the Board. The rights of optionees under options outstanding at the time of the
termination of the Plan shall not be affected solely by reason of the
termination and shall continue in accordance with the terms of the option (as
then in effect or thereafter amended).
-6-
DISTRIBUTION AGREEMENT
Between:
CARDIOPULMONARY CORP., a Delaware corporation, having its principal
corporate office at 200 Cascade Boulevard, Milford, Connecticut 06460, USA,
hereinafter called "CPC", duly represented by James Biondi, Chief Executive
Officer,
and
KONTRON INSTRUMENTS LTD., a British company having its registered corporate
office at Blackmoor Lane, Croxley Business Park, Watford WD1 8XQ, Hertfordshire,
UK, hereinafter called "KONTRON INSTRUMENTS", duly represented by Leslie Smith,
Chairman.
Witnesseth:
Whereas CPC develops, manufactures and sells, intensive care ventilators,
accessories and consumables;
Whereas Kontron Instruments and its sister companies within Kontron
Instruments Group manufacture, sell and service medical and bioanalytical
instruments and also sell and service medical equipment manufactured by third
parties;
Whereas both CPC and Kontron Instruments agree that Kontron Instruments
shall sell and service products as exclusive distributor to CPC in the Territory
(as hereinafter defined) in the field of intensive care ventilation;
Whereas both parties desire to specify the rights and obligations of each
party in this Agreement;
Now therefore, the parties mutually agree as follows:
1. DEFINITIONS
1.1 As used in this Agreement, the terms below shall have the meaning
as specified in the following:
"PRODUCTS": the intensive care ventilators specified in ANNEX A
hereto, together with associated consumables, disposables and
spare parts.
"TERRITORY": France, Germany, Spain, Italy, United Kingdom,
Switzerland, Republic of Ireland, Denmark, Sweden, Finland,
Netherlands, Belgium, Portugal, Greece, Luxembourg, Austria,
Norway, Turkey, Russia and all the countries of the former
Eastern Bloc countries formerly incorporated within the Soviet
Union, Poland, Czech Republic, Slovakia, Romania, Former
Yugoslavia, Hungary and Bulgaria, Israel, Lebanon, Syria, Jordan,
Saudi Arabia, Gulf States, Kuwait, Yemen and Africa.
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
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<PAGE>
"TRANSFER PRICES": the prices of products charged by CPC to
Kontron Instruments as detailed in ANNEX B hereto, net of the
discount as detailed in ANNEX C hereto.
"ECU": European Currency Unit.
"EXCHANGE RATE": the rate of exchange between in ECU and the
US dollar published daily on the International Herald Tribune in
the Cross-Rates table on its first Business page.
"KONTRON INSTRUMENTS GROUP": the companies listed on ANNEX D
hereto or any of them, as the context requires; provided, however,
that Kontron Instruments shall be responsible to CPC for all
obligations of the Kontron Instruments Group under this
Agreement.
2. APPOINTMENT AND AUTHORITY OF KONTRON INSTRUMENTS
2.1 Subject to the terms and conditions stated herein, including
without limitation the provisions of Paragraph 8.1 hereof, CPC
appoints Kontron Instruments as CPC's exclusive distributor for
the Products in the Territory. Kontron Instruments shall have a
right to purchase products from CPC and to resell them, repair and
generally service them in the Territory; provided, however, that
Kontron Instruments shall not alter Products without prior written
consent from CPC, and then only according to written instructions
from CPC.
2.2 The products shall be marked and sold within the Territory with
both Kontron Instruments' and CPC's brand names in a manner to be
agreed from time to time by the parties to this Agreement.
2.3 CPC and Kontron Instruments may agree in writing to extend this
Agreement, in total or in part, to cover products sold by CPC in
addition to those listed on ANNEX A. It is the present intention
of CPC to consider Kontron Instruments when selecting a
distributor in the Territory for such future CPC products within
Kontron Instruments' fields of expertise.
2.4 Except as otherwise provided in Section 7.3 of this Agreement,
Kontron Instruments does not become an agent of CPC by virtue of
this Agreement, but rather shall purchase and sell in its own name
and for its own account, and is not entitled to act, and shall not
act, in the name of CPC or to obligate CPC in any form towards any
third party.
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
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<PAGE>
2.5 Kontron Instruments shall safeguard the interests of CPC with the
due diligence of a responsible businessman and keep CPC informed
as to its activities.
2.6 Kontron Instruments may appoint local distributors for the sale of
CPC products in the Territory but shall notify CPC promptly of
such appointments and shall terminate any such appointment which
CPC believes in good faith is prejudicial to the interests of CPC.
2.7 Kontron Instruments shall not solicit offers for Products from
customers outside the Territory; provided, however, that Kontron
Instruments may solicit offers for Products with the prior consent
of CPC on a case-by-case basis except in locations in which CPC
has granted exclusive rights to a third party.
2.8 CPC may, by written notice to Kontron Instruments during the month
of January 1997 and each January thereafter, terminate the rights
of Kontron Instruments hereunder in any country within Territory,
except for France, Germany, Spain, Italy, United Kingdom,
Switzerland, Portugal and Turkey, in which CPC reasonably believes
there has been insufficient progress in establishing distribution
channels for the Products.
3. PROMOTION OF PRODUCTS
3.1 Kontron Instruments shall diligently promote CPC's Products in
each country in the Territory. The details of such promotion
activities shall be coordinated with CPC, but the cost of these
activities shall be borne exclusively by Kontron Instruments,
unless specifically agreed otherwise.
3.2 Kontron Instruments shall inform CPC in advance as to its intended
participation in trade and exhibition programmes. CPC personnel
will endeavor to attend major meetings and events at its expense.
3.3 Kontron Instruments shall inform CPC of the market and competitive
situation in the Territory at least once every quarter, and shall
provide such information as may be required of CPC by the United
States Food and Drug Administration for post-market surveillance.
In addition, Kontron Instruments will use reasonable efforts to
provide names and addresses of customers, date of sale, serial
number and a contact person for each unit sold. CPC shall provide
Kontron Instruments such information as may be reasonably required
by regulatory authorities in the Territory.
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
-3-
<PAGE>
3.4 Kontron Instruments shall expend an amount equalling at least US
$1,000,000 for promotion, advertisement and selling of the
Products. Of this amount, Kontron Instruments shall spend at
least US $[ ** ] during 1995, at least US $[ ** ] during the
twelve months following the date regulatory approvals have been
obtained in Britain, Germany and Italy and at least US $[ ** ]
during the twelve months following the date regulatory approvals
have been received in France and the with respect to the [ ** ].
Kontron Instruments may credit toward these minimums the costs of
regulatory approvals; recruitment, salaries and benefits of
incremental personnel; qualification and appointment of local
distributors and independent agents; sales and technical
training; reasonable commissions for independent agents in Italy
and Spain; brochures, exhibitions and point-of-sale promotional
materials; market research and translations; and clinical and
user preference trials.
4. ORDER FORECAST AND DELIVERIES
4.1 Kontron Instruments shall provide CPC with a six-month rolling
forecast of order volume and requested shipping dates, to be
updated every month.
4.2 CPC shall use all reasonable efforts to ship Products within
forty-five (45) days from receipt of purchase orders, subject to
Paragraphs 4.3 and 4.4 below.
4.3 CPC shall inform Kontron Instruments, within three business days
of receiving the monthly orders and shipment forecasts, of its
ability to respect forecast shipment requirements. If delivery
conditions change, CPC shall inform Kontron Instruments as soon as
feasible.
4.4 Any requests by Kontron Instruments for shipment above 120% of the
quantity forecast by Kontron Instruments three months earlier will
be shipped on a best available date basis.
4.5 All Products shipped by CPC shall conform to CPC's specifications
therefor, and CPC shall make all reasonable efforts to conform to
relevant governmental technical, quality and regulatory standards
specified from time to time by Kontron Instruments. CPC shall
notify Kontron Instruments prior to making material changes in
Product specifications.
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
-4-
<PAGE>
5. SALES AND SERVICE SUPPORT
5.1 CPC shall furnish Kontron Instruments with operating and service
manuals for Products in the English language at CPC's cost.
Kontron Instruments may translate, at its own expense, such
materials and literature into appropriate languages for use in the
Territory. Kontron Instruments shall furnish CPC, at no charge,
with reasonable quantities of such translations.
5.2 CPC shall furnish Kontron Instruments, at no charge, with
reasonable quantities of photographic artwork, videos and
technical text in English that CPC has produced in the course of
its business.
5.3 CPC shall make available in the USA sales, application and service
training courses to selected personnel of the Kontron Instruments
Group free of charge. Travel and living expenses for Kontron
Instruments employees or agents attending such courses shall be
borne by Kontron Instruments.
5.4 CPC staff will travel to Europe to support Kontron Instruments'
efforts to obtain important reference sites during the first
eighteen months of this Agreement, according to a programme to be
agreed Kontron Instruments and CPC. All expenses related to such
visits by CPC staff will be borne by CPC.
6. WARRANTY AND SERVICE
6.1 For a period of eighteen months from date of shipment -- the
"WARRANTY PERIOD" -- CPC warrants that the products delivered to
Kontron Instruments:
(a) conform to their specifications in effect at the time of
confirmation of the purchase order,
(b) are free from defects in design, material and workmanship
under normal use and service, and
(c) if used as directed in the Instructions for Use and product
specifications are fit for the specific purposes set forth in
the Instructions for Use and product specifications, but CPC
makes no such warranties for use for any other purpose.
6.2 Kontron Instruments will provide CPC a bi-monthly summary of
service calls in a form mutually acceptable to CPC and Kontron
Instruments. Any claim by Kontron Instruments that a Product
contains defective materials shall be made in writing to CPC
within the Warranty Period.
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
-5-
<PAGE>
6.3 CPC shall supply replacement parts free of charge upon return by
Kontron Instruments under the terms of the Warranty set forth in
Paragraph 6.1. Material transport charges shall be borne by the
shipping party and duties and taxes shall be borne by the
receiving party. Kontron Instruments shall supply labor for
warranty repair (at either the hospital or a Kontron Instruments
site in Europe) free of charge; provided, however, that CPC will
reimburse members of the Kontron Instruments Group promptly for
50% of such labor costs during the twelve months following the
first sale by Kontron Instruments under this Agreement, up to a
maximum of 5% of CPC's revenues under this Agreement during that
period.
6.4 Products or parts thereof supplied within the scope of Paragraph
6.3 are warranted for the remainder of the original Warranty
Period for the replaced Product, or for a period of 90 days from
installment of the replacing Product, whichever is longer.
6.5 THE WARRANTIES SET FORTH ABOVE RELATING TO
PRODUCTS ARE IN LIEU OF ALL OTHER WARRANTIES
EXPRESSED OR IMPLIED.
6.6 Kontron Instruments shall provide maintenance service, including
warranty service for Products in the Territory. Such service shall
be performed in accordance with CPC's service guidelines, as
amended from time to time.
6.7 CPC shall keep the Kontron Instruments Group indemnified and
harmless against any liability or damages caused by any claim of a
third party relating to the manufacture of a Product furnished to
Kontron Instruments by CPC which did not meet the specifications
in effect at the time of confirmation of the purchase order, or
from the negligence or other wrongdoing of CPC or any employee or
agent of CPC (other than the Kontron Instruments Group). The
Kontron Instruments Group shall keep CPC indemnified and harmless
against any liability or damages caused by packaging by the
Kontron Instruments Group, registration, distribution, promotion
of the Products for use outside their specifications or against
their specific warnings, precautions or contraindications, use of
the Products outside specifications or against specific warnings,
precautions or contraindications by the Kontron Instruments Group,
or from the negligence, failure to comply with instructions
regarding use of the Product, or other wrongdoing of the Kontron
Instruments Group or any employee or agent of the Kontron
Instruments Group. In the event that other damages
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
-6-
<PAGE>
which arise out of transactions related to this Agreement are
alleged against either CPC or the Kontron Instruments Group or
both, then CPC and Kontron Instruments shall cooperate to defend
against and defeat such allegations, but if such damages should be
found and allowed against either CPC or the Kontron Instruments
Group or both, then CPC and the Kontron Instruments Group shall
indemnify each other against the same, such that the parties shall
bear the damages and the costs of defence equally.
7. OTHER OBLIGATIONS OF DISTRIBUTOR
7.1 The Kontron Instruments Group shall observe the rules of fair
competition.
7.2 The Kontron Instruments Group shall maintain, at its own expense,
an inventory of CPC's consumables, accessories and spare parts,
purchased directly from CPC, sufficient to provide satisfactory
service to customers.
7.3 Kontron Instruments or other members of the Kontron Instruments
Group shall act as CPC's agent to obtain, with CPC's assistance
but at Kontron Instruments' expense, all manner of registrations,
clearances and approvals required for CPC's Products in each
country in the Territory. Except as mutually agreed, such
registrations, clearances and approvals shall be in the name of
CPC. If engineering or software changes are required to obtain
such approvals in the Territory, CPC shall make all reasonable
efforts to implement them promptly; provided, however, that CPC
shall not be required to expend more than $[ ** ] in total for all
such changes. Import licenses and/or distribution licenses, if
required, shall be obtained by Kontron Instruments at its own
expense and with assistance from CPC if necessary. Kontron
Instruments shall provide CPC a detailed report of all direct
expenses incurred by Kontron Instruments in obtaining such
clearances, approvals and licenses in each jurisdiction.
7.4 The Kontron Instruments Group shall maintain knowledgeable
personnel and develop the use of the Product in the Territory.
Such personnel shall promote the Products in accordance with their
specifications and shall not promote the Product against its
warnings, precautions or contraindications.
7.5 The Kontron Instruments Group shall maintain records to the
training, service and Product that customers have received to the
end that customers may readily be notified of pertinent
information
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
-7-
<PAGE>
or that it may be established that the customers were
appropriately trained in the safe and effective use of the
Product.
7.6 The Kontron Instruments Group shall not manufacture or distribute
competing products in the Territory during the term of this
Agreement. Kontron shall be free to distribute products specified
as non-competing products in ANNEX A.
8. PRICES AND PAYMENT TERMS
8.1 CPC shall charge Kontron Instruments the Transfer Prices listed in
ANNEX B hereto for CPC's current Venturi products. Transfer prices
and purchase schedules for future products listed on ANNEX A,
including Venturi IIcs and Venturi IIas products, and prices after
1997 for the current products, shall be negotiated by the CPC and
Kontron Instruments in good faith. If the parties are unable to
reach agreement on the transfer price of any such products,
Cardiopulmonary Corp. may offer such products to third parties on
terms substantially the same as the best offer which Kontron
Instruments rejected.
8.2 Kontron Instruments shall be responsible for all freight and
insurance for Products from the time of delivery thereof in a
common carrier at the manufacturing site for shipment to Kontron
Instruments.
8.3 Kontron Instruments shall bear all import and excise duties and
Value Added Tax, if any is due, in the Territory.
8.4 Kontron Instruments shall bear all other costs related to selling,
servicing and distributing the Product, unless otherwise specified
in this Agreement or in written modification thereof.
8.5 CPC invoices to Kontron Instruments shall be due within thirty
(30) days from date of shipment during the first eighteen months
of this agreement and within sixty (60) days from date of shipment
thereafter. The payment terms specified in this paragraph 8.5
shall be deemed material terms of this Agreement.
8.6 Title to Products and risk of loss thereof shall pass to Kontron
Instruments at the time of the delivery by CPC to a common carrier
for shipment to Kontron Instruments.
8.7 Kontron Instruments shall align delivery and warranty terms to its
customers with those obtained from CPC.
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
-8-
<PAGE>
8.8 CPC and Kontron Instruments agree to negotiate in good faith with
respect to price adjustments if the exchange rate of the US dollar
to the ECU varies by more than 7.5% from that in effect on the
date a price is agreed.
9. TERMS OF AGREEMENT AND TERMINATION PROCEDURE
9.1 This Distribution Agreement enters into effect upon the execution
by both parties and shall be valid until terminated according to
the procedures outlined below.
9.2 Ordinary termination shall require thirty-six (36) months' written
notice by either party.
9.3 Exceptional termination shall be allowed in the following
circumstances only:
(a) Upon twenty-four (24) month's notice by either party given
during any month of January, if Kontron Instruments and CPC
have failed to agree by the end of the prior year on a
purchase schedule for the upcoming three years to update the
purchase schedule set forth on ANNEX B hereto.
(b) Upon six month's notice by either party given during any month
of January beginning in January 1996, if Kontron Instruments
has failed to order from CPC in the previous year at least the
minimum amount of Products set forth in the mutually agreed
schedule for the prior year, contained in ANNEX B hereto and
its future updates, except where such failure is due to CPC's
inability to deliver Products.
(c) automatically and without notice in case of dissolution or
liquidation of CPC or of Kontron Instruments.
(d) immediately upon notice by CPC if Kontron Instruments, other
than for reasons of force majeure set forth in Paragraph 13.5
hereof, shall fail to make any payment due CPC under this
Agreement for a period of 60 days following the date such
payment is due; provided, however, that the provisions of this
paragraph 9.3(d) shall not apply to obligations Kontron
Instruments has disputed in good faith, and that CPC shall be
required to provide ten (10) business days' notice prior to
termination under this paragraph 9.3(d).
(e) Upon six month's notice by either party in case a competitor
of either party acquires direct or indirect control of the
other party, in which case the right to exceptional
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
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<PAGE>
termination can be exercised only by the party not being so
acquired.
10. MUTUAL OBLIGATIONS AT TERMINATION
10.1 The termination of this Agreement shall not release either party
from any liability or obligation which existed as of the date of
notice of such termination.
10.2 If the Agreement is terminated, Kontron Instruments shall return
to CPC, within thirty (30) days from the date of effective
termination, all written materials, designs, drawings, formulae or
other technical information regarding Products. Kontron
Instruments shall not make or retain copies of such materials or
of any confidential information provided to it by CPC. CPC shall
continue to supply such information as may be required by
regulatory bodies within the Territory.
10.3 Upon termination, CPC shall be obligated to repurchase from the
Kontron Instruments Group and the Kontron Instruments Group shall
be obligated to resell to CPC all demonstration units and spare
parts inventories in Kontron Instruments' stock, within thirty
(30) days from the date of effective termination, to be paid for
within ninety (90) days of CPC's receipt of the same, and at a
price determined as follows:
a) 100% of the Transfer Price paid by the Kontron Instruments
Group to CPC for unused spare parts.
b) the value on the books of the Kontron Instruments Group,
depreciated by twenty percent (20%) per each full year or
portion thereof since purchase by the Kontron Instruments
Group for those systems which have been used in
demonstrations or clinical trials. Such systems must be in
good operating condition, Kontron Instruments' property,
and be delivered to CPC within thirty (30) days of
termination of this agreement.
c) otherwise as mutually agreed by the parties.
10.4 Upon ordinary termination initiated by CPC pursuant to Paragraph
9.2 of this Agreement or extraordinary termination pursuant to
Paragraph 9.3(c), (d) or (e) as a result of events affecting CPC,
CPC shall assume all reasonable supply obligations of the Kontron
Instruments Group to customers in the Territory to whom Products
have been delivered or are to be delivered under orders already
accepted by CPC, including but not limited to
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
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<PAGE>
pricing and servicing commitments. Upon any other extraordinary
termination pursuant to Paragraph 9.3 or upon ordinary termination
initiated by Kontron Instruments, CPC shall be at liberty to
assume or not assume some, none or all of Kontron Instruments'
foregoing obligations, CPC having to decide within sixty (60) days
of termination.
10.5 Upon ordinary termination pursuant to Paragraph 9.2, but only if
such is initiated by CPC, or extraordinary termination pursuant to
Paragraph 9.3(c), (d) or (e) as a result of events affecting CPC,
and for a twelve month period thereafter, CPC shall refrain from
hiring people who are employed directly or indirectly as "agenti
mono-mandatari", at that time, or in the previous twelve months by
the Kontron Instruments Group, unless specifically exempted in
writing from this requirement by Kontron Instruments.
10.6 Upon termination, the Kontron Instruments Group shall transfer to
CPC, and CPC shall reimburse the Kontron Instruments Group within
180 days for the reasonable direct costs that were sustained by
the Kontron Instruments Group in obtaining, the registrations,
clearances or approvals, as well as the import/distribution
licenses obtained as described in Paragraph 7.3, up to a maximum
of $[ ** ].
11. CONFIDENTIALITY AND BUSINESS SECRETS
11.1 Neither CPC nor the Kontron Instruments Group shall disclose to
any third party, even after termination of this Agreement, any
business or company secrets, manufacturing and control procedures,
drawings, specifications, software and any other information that
is confidential or of substantial value to the other party and
which CPC and the Kontron Instruments Group came to know by virtue
of their relationship described in this Agreement.
11.2 The confidentiality obligation described in Paragraph 11.1 shall
not extend to information which:
a) was validly in possession of either party prior to the initial
negotiations for the relationship described in this
Agreement;
b) is or becomes a part of the public domain or of the public
knowledge through no fault of either party;
c) is obtained by either party to this Agreement from any third
party, provided this third party has the right to disclose and
has not imposed any obligation of confidentiality;
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
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<PAGE>
d) is independently developed by either party and where such
independent development can be documented;
e) is, as a common practice or in the course of normal business,
disclosed by either party; or
f) is required to be disclosed under the terms of a valid and
effective subpoena or order issued by a court of competent
jurisdiction or by a governmental body.
11.3 Neither CPC nor the Kontron Instruments Group shall assert any
rights, even after termination of this Agreement, to any
intellectual property of the other party.
11.4 The provisions of this Section 11 shall survive the expiration or
termination of this Agreement.
12. TRADEMARKS AND PATENTS
12.1 The Kontron Instruments Group shall be obligated at all times to
observe the trademark and intellectual property rights of CPC and
not to register for itself or any third party similar or
conflicting trademarks or otherwise assert rights to any
intellectual property of CPC during or after the expiry of this
Agreement.
12.2 The Kontron Instruments Group shall use the trademarks of CPC, and
may also use its own trademarks, for the promotion and sale of
Products during the term of this Agreement. The Kontron
Instruments Group shall discontinue the use of CPC marks promptly
upon the termination of this Agreement.
12.3 The Kontron Instruments Group shall inform CPC as soon as any
suspected infringement of a CPC patent by a third party occurs in
the Territory or a patent lawsuit is brought against the Kontron
Instruments Group for infringement of patents related to the
Products. CPC may prosecute, but shall defend, as the case may be,
these infringements, at its own expense and the Kontron
Instruments Group shall assist CPC in all manner possible in such
proceedings.
13. CHOICE OF LAW, ARBITRATION AND FORCE MAJEURE
13.1 This Agreement, including the arbitration clause, shall be
interpreted and construed in accordance with the internal laws of
England, it being expressly understood that International
conventions on the sale of goods shall not apply.
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
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<PAGE>
13.2 Any difference or disputes arising from this Agreement or from
agreements regarding its performance shall be settled by an
amicable effort on the part of both parties to the Agreement by
their respective Chief Executive Officers or their delegates. An
attempt to arrive at a settlement shall be deemed to have failed
as soon as one of the parties to this agreement notifies the other
party in writing.
13.3 If an attempt to settlement has failed, the disputes shall be
finally settled in English language under the Rules of the London
Court of International Arbitration by three arbitrators appointed
in accordance with the Rules, the place of arbitration being
London.
13.4 The arbitral award shall be substantiated in writing. The arbitral
tribunal shall decide on the matter of costs of the arbitration.
13.5 Neither party shall be liable for failure to perform obligations
under this Agreement if the failure results from force majeure,
such as fire, explosion, acts of warfare, or hostilities of any
nature, accident, refusal of license, or other governmental act
(including regulatory approvals and export/import licenses),
industrial dispute, or anything manifestly beyond the parties'
control.
14. MISCELLANEOUS
14.1 No modification, alternation, addition, or change in the terms of
this Agreement shall be binding on either party hereto unless in
writing and signed by the duly authorized representatives of each
party. This applies also to the waiver of written form.
14.2 Kontron Instruments may assign its rights under this Agreement to
any member of the Kontron Instruments Group which is at least
fifty (50%) percent owned by Kontron Instruments NV or Kontron
Instruments Holding BV; provided, however, that notwithstanding
any such assignment Kontron Instruments shall remain liable to CPC
for its obligations under this Agreement. Kontron Instruments may
not otherwise assign or extend this Agreement without the prior
written consent of CPC, which may be withheld for any reason or
for no reason.
14.3 Any failure of either party to enforce, at any time or for any
period of time, any of the provisions under this Agreement shall
not be construed as a waiver of the right of the party to enforce
such provisions.
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
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<PAGE>
14.4 Any notice to be given by either party to this Agreement shall be
made by registered mail, telefax, or teletext and, if addressed to
CPC at the principal office listed above, to the attention of the
CEO and, if addressed to Kontron Instruments, to its registered
office listed above, to the attention of the Chairman. Either
party may change the designated address or recipient upon proper
notice of the same to the other party.
14.5 In case one or more of the provisions of this Agreement is or
becomes legally invalid or unenforceable in any country within the
Territory, such provision shall be ineffective without
invalidating the remaining provisions hereof, provided that the
parties shall through mutual negotiations attempt to agree upon a
new provision which, by being legal in all segments, shall follow
the intent of the original provisions as closely as possible.
14.6 This Agreement supersedes any discussions preceding this
Agreement, and incorporates the parties' whole understanding and
undertakings.
15. COMPLETION
In witness whereof, the parties hereto, intending to be legally bound, have
executed this Agreement to be effective as of this 17th day of March, 1995.
CARDIOPULMONARY CORP. KONTRON INSTRUMENTS LTD.
by: by:
/s/ JAMES BIONDI /s/ LESLIE SMITH
- -------------------------------- -----------------------------
James Biondi Leslie Smith
Chief Executive Officer Chairman
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
-14-
<PAGE>
ANNEX A
PRODUCTS COVERED BY THE AGREEMENT
1. CPC Venturi
2. CPC Venturi IIcs
3. CPC Venturi IIas
4. Any upgrades of or new developments included in the products listed
above. For purposes of this Agreement, such upgrades and new
developments shall include any Cardiopulmonary Corp. intensive care
ventilation product with flow and pressure delivery characteristics
substantially equivalent to those included in the current CPC Venturi
ventilators.
NON-COMPETING PRODUCTS
The following products currently distributed by Kontron Instruments shall not be
considered competing products for the purposes of paragraph 7.6 of this
Agreement:
Hamilton and Seachrist ventilators with a unit selling price of less than
$20,000, excluding taxes.
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
-15-
<PAGE>
ANNEX B
TRANSFER PRICES AND PURCHASE SCHEDULES FOR CURRENT VENTURI PRODUCTS
1995: [ ** ] Venturi Units ([ ** ] units for resale plus [ ** ]
demonstration units and [ ** ] clinical trial units)
$[ ** ] per unit
1996: [ ** ] Venturi Units
$[ ** ] per unit
1997: [ ** ] Venturi Units
$[ ** ] unit
Schedules for future years shall be negotiated by the parties in good faith. For
1998 and 1999, CPC may not require an increase of more than [ ** ]% per year
from the unit sales numbers set forth above; for 2000 and subsequent years the
sales numbers shall not decrease from those in the prior year.
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
-16-
<PAGE>
ANNEX C
VARIATIONS TO TRANSFER PRICES
Sales demo units: [ ** ]% discount on current transfer price
Clinical trial units: [ ** ]% discount on current transfer price
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
-17-
<PAGE>
ANNEX D
MEMBERS OF THE KONTRON INSTRUMENTS GROUP
Kontron Instruments Ltd.
Kontron Instruments S.A. (incorporated in France)
Kontron Instruments S.A. (incorporated in Spain)
Kontron Instruments SpA
Kontron Instruments AG
Kontron Instruments GmbH
Kontron Instruments F.L.A.
Kontur S.A.
[ ** ] indicates confidential portions omitted and filed separately with the
Commission.
-18-
Silicon Valley Bank 3003 Tasman Drive Santa Clara, CA 95054-1191 408-654-7400
June 5, 1996
N. Nicoll Snow, CFO
Cardiopulmonary Corp.
200 Cascade Blvd.
Milford, CT 06460
Dear Nick:
We are pleased to inform you that Silicon Valley Bank, a California-chartered
bank ("Lendee') with its principal place of business at 3003 Tasman Drive, Santa
Clara, CA 95054 and with a loan production office located at Wellesley Office
Park, 40 William Street, Suite 350, Wellesley, Massachusetts 02181 doing
business under the name "Silicon Valley East," has approved a Revolving Bridge
Line in the amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00)
(the "Bridge Loan" or sometimes referred to as the "Loan") for use by
Cardiopulmonary Corp., (the "Borrowee') subject to the following terms and to
the Lenders periodic review.
The Loan shall not become effective unless and until an executed copy of this
letter together with all necessary accompanying documentation as well as the
facility fee described below has been returned to the Lender, which must take
place within 30 days from the date of this letter.
Borrowings under the Bridge Loan will be permitted through September 15, 1996
(the "Maturity Date"). Borrower shall pay regular monthly payments of all
accrued interest due as of each payment date, beginning July 15, 1996 and all
subsequent interest payments will be due on the same day of each month
thereafter. The final payment, due September 15, 1996, will be for all
outstanding principal plus all accrued interest not yet paid.
Borrowings under the (a) Bridge Loan shall bear interest at a rate of two and
one-half percentage points (2.500%) over Lendees Prime Rate. Prime Rate means
the rate from time to time announced and made effective by Lender as its Prime
Rate. Borrowers interest rate shall change each time the Prime Rate changes.
Interest will be charged monthly in arrears and shall be calculated on a 360-day
year. Lender shall be authorized to debit Borrowees principal account or any
other account maintained by Borrower with Lender for any principal, interest or
fees associated with Borrowees Loans with or without notice to Borrower.
Borrower shall pay to Lender facility fees in the amount of Five Thousand and
00/100 Dollars ($5,000.00) as well as all out-of-pocket expenses incurred by
Lender in connection with the establishment of the Loan, including all
reasonable legal and documentation costs associated with documenting the credit,
which must be paid at the time the documents are returned to Lender.
Borrowings under the Bridge Loan shall be secured by a first security interest
in the Borrowers present and future accounts receivable, inventory, chattel
paper, accounts, contract rights, copyrights, patents,
(Member FDIC)
1
<PAGE>
trademarks, other general intangibles and the proceeds thereof, all other
assets, all monies, and all other property in Lender's possession which Lender
may use to pay Borrowers obligations.
Borrower shall issue to Lender a Warrant to purchase 4,000 shares of Borrowees
Common Stock. Such warrant shall be for a minimum period of five years and shall
be on Lenders standard form warrant agreement. The Exercise Price on the warrant
will be (I) equal to the dollar amount represented as the low range as stated in
the S-1 Registration Statement; provided an initial public offering is completed
prior to August 31, 1996 or (ii) the lesser of (a) $5.00 or (b) the next
financing round if completed by September 30, 1996.
Any advances hereunder or renewal hereof will be made only if in the opinion of
the Lender there exists no default under any loan documentation executed by you
with the Lender. A default is as defined in the accompanying Promissory Note of
even date. Furthermore, prior to closing, Borrower shall provide Lender with a
comfort letter, in a form satisfactory to Lender, from Cupertino Ventures
Partnership.
A. Requirements.
1. Affirmative Covenants. So long as the Loan remains outstanding, Borrower
agrees to maintain the following covenants:
a. Provide Lender with duplicate unaudited monthly financial
statements, together with a Compliance Certificate, prepared in
accordance with generally accepted accounting principals and
duplicate audited annual financial statements certified by public
accountants with an unqualified opinion, to be received 30 and 90
days, respectively after the close of the period.
b. File all tax returns and to pay all taxes due.
c. Reimburse the Lender for any reasonable expenses incurred by the
Lender to enforce the terms of this obligation.
d. Maintain fire and liability insurance satisfactory to the Lender,
a copy of which shall be forwarded to the Lender.
e. Notify Lender in writing of any legal action introduced against
the Borrower which may result in damages over $100,000.00.
2. Negative Covenants. Borrower covenants and agrees with Lender that while
this Agreement is in effect, Borrower shall not, without the prior written
consent of Lender:
a. Participate in any merger or consolidation or to pay any dividends.
b. Dispose of any material assets other than in the ordinary course of
business.
c. Be in default of any other loan agreement with any other bank.
d. File for protection under the Bankruptcy Code.
e. Directly or indirectly pledge, grant, create or permit to exist any
security interest, lien or other encumbrance upon any of Borrowers
assets except in favor of the Lender, without the Lender's prior
written consent, which will not be unreasonably withheld.
2
<PAGE>
f. Invest in any securities other than money market instruments
acceptable to the Lender, without the Lender's prior written consent
which will not be unreasonably withheld.
g. Incur indebtedness for borrowed money, except for either a)
indebtedness to Silicon Valley Bank or b) indebtedness incurred for
the purchase or lease of equipment in an aggregate amount not to
exceed $500,000.00 in indebtedness on any such capital equipment
outstanding at any given point in time; pay cash dividends or
repurchase stock, except as allowed in this Agreement; hypothecate
existing assets; or loan money or guarantee loans to others.
If the Lender waives any rights under this Agreement, it will not affect any
future action the Lender may wish to take. This Agreement shall be binding upon
any of the Borrowees successors in interest. The laws of the Commonwealth of
Massachusetts shall apply to this Agreement. THE BORROWER ACCEPTS FOR ITSELF AND
IN CONNECTION WITH ITS PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE
JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE
COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT, OR PROCEEDING OF ANY KIND,
AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS LETTER AGREEMENT; PROVIDED,
HOWEVER, THAT IF FOR ANY REASON LENDER CANNOT AVAIL ITSELF OF THE COURTS OF THE
COMMONWEALTH OF MASSACHUSETTS, THEN VENUE SHALL LIE IN SANTA CLARA COUNTY,
CALIFORNIA. (INITIAL HERE /s/ NNS) LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO
ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER
LENDER OR BORROWER AGAINST THE OTHER.
It is our understanding that the Borrower will consider the Silicon Valley Bank
to be its primary bank. Among other things, the Borrower agrees to maintain a
reasonable portion of its excess funds in Silicon Valley Bank.
This Agreement shall become effective only when it shall have been executed by
the Borrower and the Lender (provided, however, in no event shall this Agreement
become effective until signed by an officer of the Lender in California).
<PAGE>
We are delighted to expand our relationship with Cardiopulmonary Corp. and look
forward to many successful years of working together.
Sincerely,
SILICON VALLEY BANK, doing
business as SILICON VALLEY EAST
By: /s/ Phillip S. Ernst
----------------------------
Name: Phillip S. Ernst
Title: V.P.
SILICON VALLEY BANK
By: /s/ Julie Haga
----------------------------
Name: Julie Haga
Title: V.P.
(Signed at Santa Clara County, CA)
Agreed and Accepted this 25th day of June, 1996.
CARDIOPULMONARY CORP.
By: /s/ N. Nicoll Snow
----------------------------
Name: N. Nicoll Snow
Title: V.P., C.F.O.
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: Cardiopulmonary Corp., a Delaware Corporation
Number of Shares: 4,000
Class of Stock: Common
Initial Exercise Price: Shall equal the dollar amount represented as the low
range in the S-1 Registration Statement provided an
initial public offering is completed prior
to August 31, 1996 or the lesser of (1) $5.00 or
(II) the next financing round if completed by
September 30,1996.
Issue Date: June 5, 1996
Expiration Date: June 5, 2001
THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for
other good and valuable consideration, SILICON VALLEY BANK ("Holdee') is
entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the corporation (the "Company") at the
initial exercise price per Share (the'Warrant Price") all as set forth above and
as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and
upon the terms and conditions set forth in this Warrant.
ARTICLE 1. EXERCISE.
1.1 Method of Exercise. Holder may exercise this Warrant by delivering a
duly executed Notice of Exercise in substantially the form attached as Appendix
1 to the principal office of the Company. Unless Holder is exercising the
conversion right set forth in Section 1.2, Holder shall also deliver to the
Company a check for the aggregate Warrant Price for the Shares being purchased.
1.2 Conversion Right In lieu of exercising this Warrant as specified in
Section 1. 1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant Section 1.4.
1.3 Intentionally Omitted.
1.4 Fair Market Value. If the Shares are traded in a public market, the
fair market value of the Shares shall be the closing price of the Shares (or the
closing price of the Company's stock into which the Shares are convertible)
reported for the business day immediately before Holder delivers its Notice of
Exercise to the Company. If the Shares are not traded in a public market, the
Board of Directors of the Company shall determine fair market value in its
reasonable good faith judgment. The foregoing notwithstanding, if Holder advises
the Board of Directors in writing that Holder disagrees with such determination,
then the Company and Holder shall promptly agree upon a reputable investment
banking firm to undertake such valuation. If the valuation of such investment
banking firm is 10% or more greater than that determined by the Board of
Directors, then all fees and expenses of such investment banking
<PAGE>
firm shall be paid by the Company. In all other circumstances, such fees and
expense s shall be paid by Holder.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of loss, theft or destruction, on delivery of an indemnity
agreement reasonably satisfactory in form and amount to the Company or, in the
case of mutilation, or surrender and cancellation of this Warrant, the Company
at its expense shall execute and deliver, in lieu of this Warrant, a new warrant
of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the Company.
1.7.1. "Acquisition". For the purpose of this Warrant,"Acquisition"means
any sale, license, or other disposition of all or substantially all of the
assets of the Company, or any reorganization, consolidation, or merger of the
Company where the holders of the Company's securities before the transaction
beneficially own less than 50% of the outstanding voting securities of the
surviving entity after the transaction.
1.7.2. Assumption of Warrant. If upon the closing of any Acquisition the
successor entity assumes the obligations of this Warrant, then this Warrant
shall be exercisable for the same securities, cash, and property as would be
payable for the Shares issuable upon exercise of the unexercised portion of this
Warrant as if such Shares were outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly.
1.7.3. Nonassumption. If upon the closing of any Acquisition the successor
entity does not assume the obligations of this Warrant and Holder has not
otherwise exercised this Warrant in full, then the unexercised portion of this
Warrant shall be deemed to have been automatically converted pursuant to Section
1.2 and thereafter Holder shall participate in the acquisition on the same terms
as other holders of the same class of securities of the Company.
1.7.4. Purchase Right. Notwithstanding the foregoing, at the election of
Holder, the Company shall purchase the unexercised portion of this Warrant for
cash upon the closing of any Acquisition for an amount equal to (a) the fair
market value of any consideration that would have been received by Holder in
consideration of the Shares had Holder exercised the unexercised portion of this
Warrant immediately before the record date for determining the shareholders
entitled to participate in the proceeds of the Acquisition, less (b) the
aggregate Warrant Price of the Shares, but in no event less than zero.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
Shares are securities other than common stock, subdivides the Shares in a
transaction that increases the amount of common stock into which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been entitled had Holder owned the Shares of record
as of the date the dividend or subdivision occurred.
2
<PAGE>
2.2 Reclassification, Exchange or Substitution. Upon any reclassification,
exchange, substitution, or other event that results in a change of the number
and/or class of the securities issuable upon exercise or conversion of this
Warrant, Holder shall be entitled to receive, upon exercise or conversion of
this Warrant, the number and kind of securities and property that Holder would
have received for the Shares if this Warrant had been exercised immediately
before such reclassification, exchange, substitution, or other event. Such an
event shall include any automatic conversion of the outstanding or issuable
securities of the Company of the same class or series as the Shares to common
stock pursuant to the terms of the Company's Articles of Incorporation upon the
closing of a registered public offering of the Company's common stock. The
Company or its successor shall promptly issue to Holder a new Warrant for such
new securities or other property. The new Warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Article 2 including, without limitation, adjustments to the
Warrant Price-and to the number of securities or property issuable upon exercise
of the new Warrant. The provisions of this Section 2.2 shall similarly apply to
successive reclassifications, exchanges, substitutions, or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The Warrant Price and the number of
Shares issuable upon exercise of this Warrant or, if the Shares are Preferred
Stock, the number of shares of common stock issuable upon conversion of the
Shares, shall be subject to adjustment, from time to time in the manner set
forth on Exhibit A in the event of Diluting Issuances (as defined on Exhibit A).
2.5 No Impairment. The Company shall not, by amendment of its Articles of
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out of all the provisions of this Article 2 and
in taking all such action as may be necessary or appropriate to protect Holdees
rights under this Article against impairment. If the Company takes any action
affecting the Shares or its common stock other than as described above that
adversely affects Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of Shares issuable upon exercise of this
Warrant shall be adjusted upward in such a manner that the aggregate Warrant
Price of this Warrant is unchanged.
2.6 Fractional Shares. No fractional Shares shall be issuable upon exercise
or conversion of the Warrant and the number of Shares to be issued shall be
rounded down to the nearest whole Share. If a fractional share interest arises
upon any exercise or conversion of the Warrant, the Company shall eliminate such
fractional share interest by paying Holder amount computed by multiplying the
fractional interest by the fair market value of a full Share.
2.7 Certificate as to Adjustments. Upon each adjustment of the Warrant
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 Representations and Warranties. The Company hereby represents and
warrants to the Holder as follows:
3
<PAGE>
(a) The initial Warrant Price referenced on the first page of this Warrant
is not greater than the fair market value of the Shares as of the date of this
Warrant.
(b) All Shares which may be issued upon the exercise of the purchase right
represented by this Warrant, and all securities, if any, issuable upon
conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the Company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (1) at least 20 days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least 20 days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (e) above, the same notice as is given to the holders
of such registration rights.
3.3 Information Rights. So long as the Holder holds this Warrant and/or any
of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all notices or other written communications to the
shareholders of the Company, (b) within ninety (90) days after the end of each
fiscal year of the Company, the annual audited financial statements of the
Company certified by independent public accountants of recognized standing and
(c) such other financial statements required under and in accordance with any
loan documents between Holder and the Company (or if there are no such
requirements [or if the subject loan(s) no longer are outstanding), then within
forty-five (45) days after the end of each of the first three quarters of each
fiscal year, the Company's quarterly, unaudited financial statements.
3.4 Registration Under Securities Act of 1933, as amended. The Company
agrees that the Shares shall be subject to the registration rights set forth on
Exhibit B, if attached.
ARTICLE 4. MISCELLANEOUS.
4.1 Term: Notice of Expiration. This Warrant is exercisable, in whole or in
part, at any time and from time to time on or before the Expiration Date set
forth above.
<PAGE>
4.2 Legends. This Warrant and the Shares (and the securities s issuable,
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL
THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
Shares issuable upon the exercise of this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as reasonably
requested by the Company).
4.4 Transfer Procedure. Subject to the provisions of Section 4.3, Holder
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) by giving the Company notice of the portion of
the Warrant being transferred setting forth the name, address and taxpayer
identification number of the transferee and surrendering this Warrant to the
Company for reissuance to the transferee(s) (and Holder if applicable). Unless
the Company is filing financial information with the Securities and Exchange
Commission ('SEC") pursuant to the Securities Exchange Act of 1934, the Company
shall have the right to refuse to transfer any portion of this Warrant to any
person whom it reasonably believes is a competitor with the Company.
4.5 Notices. All notices and other communications from the Company to the
Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such holder from time
to time.
4.6 Waiver. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 Attorneys' Fees. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
<PAGE>
4.8 Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts, without giving
effect to its principles regarding conflicts of law. Borrower accepts for itself
and in connection with its properties, unconditionally, the non-exclusive
jurisdiction of any state or federal court of competent jurisdiction in the
Commonwealth of Massachusetts in any action, suit, or proceeding of any kind
against it which arises out of or by reason of this Warrant to Purchase Stock;
provided, however, that if for any reason Lender cannot avail itself of the
courts of the Commonwealth of Massachusetts, then venue shall lie in Santa Clara
County, California.
CARDIOPULMONARY CORP.
By: /s/ James W. Biondi, M.D.
-----------------------------
Name: James W. Biondi, M.D.
---------------------------
Title: CEO
--------------------------
By: /s/ N. Nicoll Snow
----------------------------
Name: N. Nicoll Snow
--------------------------
Title: VP, CFO
-------------------------
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase_____________________ shares of the
Common/Series Preferred [strike one] Stock
of____________________________________________ pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price of such
shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
9-shares/cash [strike one] in the manner specified in the Warrant. This
conversion is exercised with respect to_____________________________________ of
the Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in the
name of the undersigned or in such other name as is specified below:
- -----------------------------------------------
(Name)
- -----------------------------------------------
(Address)
- -----------------------------------------------
3. The undersigned represents it is acquiring the shares solely for its own
account and not as a nominee for any other party and not with a view toward the
resale or distribution thereof except in compliance with applicable securities
laws.
- -----------------------------------------------
(Signature)
- -----------------------------------------------
(Date)
<PAGE>
SILICON VALLEY BANK
ANTIDILUTION AGREEMENT
THIS ANTIDILUTION AGREEMENT is entered into as of June 5,1996, by and
between Silicon Valley Bank ("Purchaser') and the Company whose name appears on
the last page of this ANTIDILUTION Agreement.
RECITALS
A. Concurrently with the execution of this ANTIDILUTION Agreement, the
Purchaser is purchasing from the Company a Warrant to Purchase Stock (the
'Warrant) pursuant to which Purchaser has the right to acquire from the Company
the Shares (as defined herein).
B. By this Antidilution Agreement, the Purchaser and the Company desire to
set forth the adjustment in the number of Shares issuable upon exercise of the
Warrant as a result of a Diluting Issuance (as herein defined).
C. Capitalized terms used herein shall have the same meaning as set forth
in the Warrant.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, the parties hereto mutually agree as follows:
1 . Definitions. As used in this Antidilution Agreement, the following
terms have the following respective meanings:
(a) "Option" means any right, option, or warrant to subscribe
for, purchase, or otherwise acquire common stock or Convertible
Securities.
(b) "Convertible Securities" means any evidences of indebtedness,
shares of stock, or other securities directly or indirectly
convertible into or exchangeable for common stock.
(c) "Issue" means to grant, issue, sell, assume, or fix a record
date for determining persons entitled to receive, any security
(including Options), whichever of the foregoing is the first to occur.
(d) "Additional Common Shares" means all common stock (including
reissued shares) issued (or deemed to be issued pursuant to Section 2)
after the date of the Warrant. Additional Common Shares does not
include, however, any common stock issued in connection with an
Initial Public offering is such offering is completed prior to
September 15, 1996, or common stock issued in a transaction described
in Sections 2.1 and 2.2 of the Warrant; any common stock Issued upon
conversion of preferred stock outstanding on the date of the Warrant;
the Shares; or common stock Issued as incentive or in a nonfinancing
transaction to employees, officers, directors, or consultants to the
Company.
(e) The shares of common stock ultimately Issuable upon exercise
of an Option (including the shares of common stock ultimately Issuable
upon conversion or exercise of a Convertible Security Issuable
pursuant to an Option) are deemed to be Issued when the Option is
Issued. The shares of common stock ultimately Issuable upon conversion
or exercise of a Convertible Security (other than a Convertible
Security issued pursuant to an Option) shall be deemed Issued upon
Issuance of the Convertible Security.
2. Deemed Issuance of Additional Common Shares. The shares of common
stock ultimately Issuable upon exercise of an Option (including the shares
of common stock ultimately issuable upon conversion or exercise of a
Convertible Security Issuable pursuant to an Option) are deemed to be
Issued when the Option is Issued. The shares of common stock ultimately
issuable upon conversion or exercise of
<PAGE>
a Convertible Security (other than a Convertible Security Issued pursuant
to an Option) shall be deemed Issued upon Issuance of the Convertible
Security. The maximum amount of common stock lssuable is determined without
regard to any future adjustments permitted under the instrument creating
the Options or Convertible Securities.
3. Adjustment of Warrant Price for Diluting Issuances.
3.1 If the Company issues Additional Common Shares after the date of
the Warrant and the consideration per Additional Common Share (determined
pursuant to Section 9) is less than the Warrant Price in effect immediately
before such Issue, the Warrant Price shall be reduced, concurrently with
such Issue, to a price (calculated to the nearest hundredth of a cent)
determined by multiplying the Warrant Price by a fraction:
(a) the numerator of which is the amount of such common stock
outstanding immediately before such Issue plus the amount of common
stock that the aggregate consideration received by the Company for the
Additional Common Shares would purchase at the Warrant Price in effect
immediately before such Issue, and
(b) the denominator of which is the amount of common stock
outstanding immediately before such Issue plus the number of such
Additional Common Shares.
3.2 Adjustment of Number of Shares. Upon each adjustment of the
Warrant Price, the number of Shares issuable upon exercise of the Warrant
shall be increased to equal the quotient obtained by dividing (a) the
product resulting from multiplying (i) the number of Shares issuable upon
exercise of the Warrant and (ii) the Warrant Price, in each case as in
effect immediately before such adjustment, by (b) the adjusted Warrant
Price.
3.3 Securities Deemed Outstanding. For the purpose of this Section 3,
all securities issuable upon exercise of any outstanding Convertible
Securities or Options, warrants, or other rights to acquire securities of
the Company shall be deemed to be outstanding.
4. No Adjustment for Issuances Following Deemed Issuances. No
adjustment to the Warrant Price shall be made upon the exercise of Options
or conversion of Convertible Securities.
5. Adjustment Following Changes in Terms of Options or Convertible
Securities. If the consideration payable to, or the amount of common stock
lssuable by, the Company increases or decreases, respectively, pursuant to
the terms of any outstanding Options or Convertible Securities, the Warrant
Price shall be recomputed to reflect such increase or decrease. The
recomputation shall be made as of the time of the Issuance of the Options
or Convertible Securities. Any changes in the Warrant Price that occurred
after such Issuance because other Additional Common Shares were Issued or
deemed Issued shall also be recomputed.
6. Recomputation Upon Expiration of Options or Convertible Securities.
The Warrant Price computed upon the original Issue of any Options or
Convertible Securities, and any subsequent adjustments based thereon, shall
be recomputed when any Options or rights of conversion under Convertible
Securities expire without having been exercised. In the case of Convertible
Securities or Options for common stock, the Warrant Price shall be
recomputed as if the only Additional Common Shares Issued were the shares
of common stock actually Issued upon the exercise of such securities, if
any, and as if the only consideration received therefor was the
consideration actually received upon the Issue, exercise or conversion of
the Options or Convertible Securities. In the case of Options for
Convertible Securities, the Warrant Price shall be recomputed as if the
only Convertible Securities Issued were the Convertible Securities actually
Issued upon the exercise thereof, if any, and as if the only consideration
received therefor was the consideration actually received by the Company
(determined pursuant to Section 9), if any, upon the Issue of the Options
for the Convertible Securities.
2
<PAGE>
7. Limit on Readjustments. No readjustment of the Warrant Price
pursuant to Sections 5 or 6 shall increase the Warrant Price more than the
amount of any decrease made in respect of the Issue of any Options or
Convertible Securities.
8. 30 Day Options. In the case of any Options that expire by their
terms not more than 30 days after the date of Issue thereof, no adjustment
of the Warrant Price shall be made until the expiration or exercise of all
such Options. .
9. Computation of Consideration. The consideration received by the
Company for the Issue of any Additional Common Shares shall be computed as
follows:
(a) Cash shall be valued at the amount of cash received by the
Corporation, excluding amounts paid or payable for accrued interest or
accrued dividends.
(b) Property. Property other than cash ' shall be computed at the
fair market value thereof at the time of the Issue as determined in
good faith by the Board of Directors of the Company.
(c) Mixed Consideration. The consideration for Additional common
Shares Issued together with other property of the Company for
consideration that covers both shall be determined in good faith by
the Board of Directors.
(d) Options and Convertible Securities. The consideration per
Additional Common Share for Options and Convertible Securities shall
be determined by dividing:
(i) the total amount, if any, received or receivable by the
Company for the Issue of the Options or Convertible Securities,
plus the minimum amount of additional consideration (as set forth
in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such
consideration) payable to the Company upon exercise of the
Options or conversion of the Convertible Securities, by
(ii) the maximum amount of common stock (as set forth in the
instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number)
ultimately lssuable upon the exercise of such Options or the
conversion of such Convertible Securities.
10. General
10.1 Governing Law. This Antidilution Agreement shall be governed in
all respects by the laws of the Commonwealth of Massachusetts as such laws
are applied to agreements between Massachusetts residents entered into and
to be performed entirely within Massachusetts. If Company or Purchaser
cannot avail itself in the courts of the Commonwealth of Massachusetts,
then the venue shall lie in Santa Clara County, California.
10.2 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
10.3 Entire Agreement. Except as set forth below, this Antidilution
Agreement and the other documents delivered pursuant hereto constitute the
full and entire understanding and agreement between the parties with regard
to the subjects hereof and thereof.
10.4 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by first class
mail, postage prepaid, certified or registered mail, return receipt
requested, addressed (a) if to Purchaser at Purchasees address as set forth
below, or at such other address as Purchaser shall have furnished to the
Company in writing, or (b) if to the Company, at the
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<PAGE>
Company's address set forth below, or at such other address as the Company
shall have . furnished to the Purchaser in writing.
10.5 Severability. In case any provision of this Antidilution
Agreement shall be invalid, illegal, or unenforceable, the validity,
legality and enforceability of the remaining provisions of this
Antidilution Agreement shall not in any-way be affected or impaired
thereby.
10.6 Titles and Subtitles. The titles of the sections and subsections
of this Agreement are for convenience of reference only and are not to be
considered in construing this Antidilution Agreement.
10.7 Counterparts. This Antidilution Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of
which together shall constitute one instrument.
PURCHASER COMPANY
SILICON VALLEY BANK CARDIOPULMONARY CORP.
By: /s/ Julie Haga By: /s/ James W. Biondi, M.D.
-------------------------- ---------------------------
Name: Julie Haga Name: James W. Biondi, M.D.
------------------------ -------------------------
Title: V.P. Title: CEO
----------------------- ------------------------
By: /s/ N. Nicoll Snow
---------------------------
Name: N. Nicoll Snow
-------------------------
Title: VP, CFO
-----------------------
Address: Address:
3003 Tasman Drive 200 Cascade Blvd.
Santa Clara, CA 95054 Milford, CT 06460
<PAGE>
EXHIBIT "B"
SILICON VALLEY BANK
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is entered into as of June 5,1996, by
and between Silicon Valley Bank ("Purchasee') and the Company whose name
appears on the last page of this Agreement.
RECITALS
A. Concurrently with the execution of this Agreement, the Purchaser is
purchasing from the Company a Warrant to Purchase Stock (the'Warrant') pursuant
to which Purchaser has the right to acquire from the Company the Shares (as
defined in the Warrant).
B. By this Agreement, the Purchaser and the Company desire to set forth the
registration rights of the Shares all as provided herein.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, the parties hereto mutually agree as follows:
1 Registration Rights. The Company covenants and agrees as follows:
1.1 . For purposes of this Section 1:
(a) The term "register," "registered," and "registration" refer
to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of
1933, as amended (the "Securities Act'), and the declaration or
ordering of effectiveness of such registration statement or document;
(b) The term "Registrable Securities" means (i) the Shares (if
Common Stock) or all shares of Common Stock of the Company issuable or
issued upon conversion of the Shares and (ii) any Common Stock of the
Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or
other distribution with respect to, or in exchange for or in
replacement of, any stock referred to in (i).
(c) The terms "Holdee' or "Holders" means the Purchaser or
qualifying transferees under subsection 1.8 hereof who hold
Registrable Securities.
(d) The term "SEC" means the Securities and Exchange Commission.
1.2 Company Registration.
(a) Registration. If at any time or from time to time, following
its Initial Public Offering of its Common Stock, the Company shall
determine to register any of its securities, for its own account or
the account of any of its shareholders, other than a registration on
Form S-1 or S-8 relating solely to employee stock option or purchase
plans, or a registration on Form S-4 relating solely to an SEC Rule
145 transaction, or a registration on any other form (other than Form
S-1, S-2, S-3 or S-1 8, or their successor forms) or any successor to
such forms, which does not include substantially the same information
as would be required to be included in a registration statement
covering the sale of Registrable Securities, the Company will:
(i) promptly give to each Holder written notice thereof
(which shall include a list of the jurisdictions in which the
Company intends to attempt to qualify such securities under the
applicable blue sky or other state securities laws); and
<PAGE>
(ii) include in such registration (and compliance), and in
any underwriting involved therein, all the Registrable Securities
specified in a written request or requests, made within 30 days
after receipt of such written notice from the Company, by any
Holder or Holders, except as set forth in subsection 1.2(b)
below; provided, however, that, notwithstanding the foregoing, if
the offering is underwritten and the underwriter managing the
offering reasonably believes in good faith that the inclusion of
any or, all of the Registrable Securities so requested by the
Holders to be included in such offering would materially and
adversely affect such offering then the Holders and holders of
securities entitled to include them in such registration (other
than the Company) shall participate in the registration pro rata
based upon their total ownership of shares of Common Stock except
that holders of registration rights pursuant to the Registration
Rights Agreement dated as of May 20, 1996 shall have the priority
set forth therein. Notwithstanding any other provision of this
Agreement, the Company shall have the right at any time after its
shall have given notice pursuant to Section 1.@(a)(I) (whether or
not a written request for inclusion of any Registrable Securities
shall have been made) to elect not to file any such proposed
registration statement or to withdraw the same after the filing
but prior to the effective date thereof.
(b) Underwriting. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting,
the Company shall so advise the Holders as a part of the written
notice given pursuant to subsection 1.2(a)(I). In such event the right
of any Holder to registration pursuant to this subsection 1.2 shall be
conditioned upon such Holdees participation in such underwriting and
the inclusion of such Holdees Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together
with the Company and the other shareholders distributing their
securities through such underwriting) enter into an underwriting
agreement in the same terms as that executed by the Company with the
underwriter or underwriters selected for such underwriting by the
Company.
1.3 Expenses of Registration. All expenses incurred in connection with
any registration, qualification or compliance pursuant to this Section 1
including without limitation, all registration, filing and qualification
fees, printing expenses, fees and disbursements of counsel for the Company
and expenses of any special audits incidental to or required by such
registration, shall be borne by the Company except the Company shall not be
required to pay underwriters fees, discounts or commissions relating to
Registrable Securities. All expenses of any registered offering not
otherwise borne by the Company shall be borne pro rata among the Holders
participating in the offering and the Company.
1.4 Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this
Registration Rights Agreement, the Company will keep each Holder
participating therein advised in writing as to the initiation of each
registration, qualification and compliance and as to the completion
thereof. Except as otherwise provided in subsection 1.3, at its expense the
Company will:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use commercially reasonable
efforts to cause such registration statement to become effective, and,
upon the request of the Holders of a majority of the Registrable
Securities registered thereunder, keep such registration statement
effective for up to 120 days.
(b) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they
may reasonably request in order to facilitate the disposition of
Registrable Securities owned by them.
2
<PAGE>
(d) Use commercially reasonable efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be
reasonably requested by the Holders, provided that the Company shall
not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of
process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in same
terms as that executed by the Company, with the managing underwriter
of such offering. Each Holder participating in such underwriting shall
also enter into and perform its obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto
is required to be delivered under the Securities Act or the happening
of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then
existing.
1.5 Indemnification.
(a) The Company will indemnify each Holder of Registrable
Securities and each of its officers, directors and partners, and each
person controlling such Holder, with respect to which such
registration, qualification or compliance has been effected pursuant
to this Rights Agreement, and each underwriter, if any, and each
person who controls any underwriter of the Registrable Securities held
by or issuable to such Holder, against all claims, losses, expenses,
damages and liabilities (or actions in respect thereto) arising out of
or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus, offering circular or other
document (including any related registration statement, notification
or the like) incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to
make the statement therein not misleading, or any violation or alleged
violation by the Company of the Securities Act, the Securities
Exchange Act of 1934, as amended, ("Exchange Act') or any state
securities law applicable to the Company or any rule or regulation
promulgated under the Securities Act, the Exchange Act or any such
state law and relating to action or inaction required of the Company
in connection with any such registration, qualification of compliance,
and will reimburse each such Holder, each of its officers, directors
and partners, and each person controlling such Holder, each such
underwriter and each person who controls any such underwriter, within
a reasonable amount of time after incurred for any reasonable legal
and any other expenses incurred in connection with investigating,
defending or settling any such claim, loss, damage, liability or
action; provided, however, that the indemnity agreement contained in
this subsection 1.5(a) shall not apply to amounts paid in settlement
of any such claim, loss, damage, liability, or action if such
settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld); and provided further,
that the Company will not be liable in any such case to the extent
that any such claim, loss, damage or liability arises out of or is
based on any untrue statement or omission based upon written
information furnished to the Company by an instrument duly executed by
such Holder or underwriter specifically for use therein.
(b) Each Holder will, if Registrable Securities held by or
issuable to such Holder are included in the securities as to which
such registration, qualification or compliance is being effected,
indemnify the Company, each of its directors and officers, each
underwriter, if any, of the Company's securities covered by such a
registration statement, each person who controls the Company within
the meaning of the Securities Act, and each other such Holder, each of
its officers, directors and partners and each person controlling such
Holder, against all claims, losses, expenses, damages and liabilities
(or actions in respect thereof arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained
in any such registration statement, prospectus, offering circular or
other document, or any omission (or alleged omission) to state therein
a material fact required to be stated
3
<PAGE>
therein or necessary to make the statements therein not misleading,
and will reimburse the Company, such Holders, such directors,
officers, partners, persons or underwriters for any reasonable legal
or any other expenses incurred in connection with investigating,
defending or settling any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such
untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering
circulator other document in reliance upon and in conformity with
written information furnished to the Company by an instrument duly
executed by such Holder specifically for use therein; provided,
however, that the indemnity agreement contained in this subsection
1.5(b) shall not apply to amounts paid in settlement of any such
claim, loss, damage, liability or action if such settlement is
effected without the consent of the Holder, (which consent shall not
be unreasonably withheld); and provided further, that the total amount
for which any Holder shall be liable under this subsection 1.5(b)
shall not in any event exceed the aggregate proceeds received by such
Holder from the sale of Registrable Securities held by such Holder in
such registration.
(c) Each party entitled to indemnification under this subsection
1.5 (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after
such Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting
therefrom; provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or litigation, shall be approved by
the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense
at such party's expense; and provided further, that the failure of any
Indemnified Party to give notice as provided herein shall not relieve
the Indemnifying Party of its obligations hereunder, unless such
failure resulted in prejudice to the Indemnifying Party; and provided
further, that an Indemnified Party (together with all other
Indemnified Parties which may be represented without conflict by one
counsel) shall have the right to retain one separate counsel, with the
fees and expenses to be paid by the Indemnifying Party, if
representation of such Indemnified Party by the counsel retained by
the Indemnifying Party would be inappropriate due to actual or
potential differing interests between such Indemnified Party and any
other party represented by such counsel in such proceeding. No
Indemnifying Party, in the defense of any such claim or litigation,
shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect to such claim or litigation.
1.6 Information -by Holder. Any Holder or Holders of Registrable
Securities included in any registration shall promptly furnish to the
Company such information regarding such Holder or Holders and the
distribution proposed by such Holder or Holders as the Company may request
in writing and as shall be required in connection with any registration,
qualification or compliance referred to herein.
1.7 Rule 144 Reporting. With a view to making available to Holders the
benefits of certain rules and regulations of the SEC which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees at all times to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, after 90 days after the
effective date of the first registration filed by the Company for an
offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the
Exchange Act (at any time after it has become subject to such
reporting requirements); and
(c) so long as a Holder owns any Registrable Securities, to
furnish to such Holder forthwith upon request a written statement by
the Company as to its compliance with the reporting requirements of
said Rule 144 (at any time after 90 days after the effective date of
the first registration statement filed by the Company for an offering
of its securities to the general public), and of the Securities
4
<PAGE>
Act and the Exchange Act (at any time after it has become subject to
such reporting requirements), a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents
so filed by the Company as the Holder may reasonably request in
complying with any rule or regulation of the SEC allowing the Holder
to sell any such securities without registration.
1.8 Transfer of Registration Rights. Holders' rights to cause the
Company to register their securities and keep information available,
granted to them by the Company under subsections 1.2 and 1.7 may be
assigned to a transferee or assignee of a Holdees Registrable Securities
not sold to the public, provided, that the Company is given written notice
by such Holder at the time of or within a reasonable time after said
transfer, stating the name and address of said transferee or assignee and
identifying the securities with respect to which such registration rights
are being assigned. The Company may prohibit the transfer of any Holders'
rights under this subsection 1.8 to any proposed transferee or assignee who
the Company reasonably believes is a competitor of the Company.
2. General.
2.1 Waivers and Amendments. With the written consent of the record or
beneficial holders of at least a majority of the Registrable Securities,
the obligations of the Company and the rights of the Holders of the
Registrable Securities under this agreement may be waived (either generally
or in a particular instance, either retroactively or prospectively, and
either for a specified period of time or indefinitely), and with the same
consent the Company, when authorized by resolution of its Board of
Directors, may enter into a supplementary agreement for the purpose of
adding any provisions to or changing in any manner or eliminating any of
the provisions of this Agreement; provided, however, that no such
modification, amendment or waiver shall reduce the aforesaid percentage of
Registrable Securities without the consent of all of the Holders of the
Registrable Securities. Upon the effectuation of each such waiver, consent,
agreement of amendment or modification, the Company shall promptly give
written notice thereof to the record holders of the Registrable Securities
who have not previously consented thereto in writing. This Agreement or any
provision hereof may be changed, waived, discharged or terminated only by a
statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, except to the extent
provided in this subsection 2.l.
2.2 Governing Law. This Agreement shall be governed in all respects by
the laws of the Commonwealth of Massachusetts as such laws are applied to
agreements between Massachusetts residents entered into and to be performed
entirely within Massachusetts. If Company or Purchaser cannot avail itself
in the courts of the Commonwealth of Massachusetts, then the venue shall
lie in Santa Clara County, California.
2.3 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
2.4 Entire Agreement. Except as set forth below, this Agreement and
the other documents delivered pursuant hereto constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
2.5 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by first class
mail, postage prepaid, certified or registered mail, return receipt
requested, addressed (a) if to Holder, at such Holders address as set forth
below, or at such other address as such Holder shall have furnished to the
Company in writing, or (b) if to the Company, at the Company's address set
forth below, or at such other address as the Company shall have furnished
to the Holder in writing.
2.6 In case any provision of this Agreement shall be invalid, illegal,
or unenforceable, the validity, legality and enforceability of the
remaining provisions of this Agreement or any provision of the other
Agreement s shall not in any way be affected or impaired thereby.
5
<PAGE>
2.7 Titles and Subtitles. The titles of the sections and subsections
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
6
<PAGE>
2.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
PURCHASER COMPANY
SILICON VALLEY BANK CARDIOPULMONARY CORP.
By: /s/ Julie Haga By: /s/ James W. Biondi, M.D.
------------------------- --------------------------
Name: Julie Haga Name: James W. Biondi, M.D.
----------------------- ------------------------
Title: V.P. Title: CEO
---------------------- -----------------------
By: /s/ N. Nicoll Snow
--------------------------
Name: N. Nicoll Snow
------------------------
Title: VP, CFO
-----------------------
Address: Address:
3003 Tasman Drive 200 Cascade Blvd.
Santa Clara, CA 95054 Milford, CT 06460
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PRO FORMA NET LOSS PER SHARE
Year-Ended
December 31, Three Months Ended
1995 1995 1996
--------- --------- ---------
Net loss 2,330,000 424,000 899,000
Interest and amortization on
convertible notes (65,000) 0 (113,000)
--------- --------- ---------
Unaudited pro forma net loss
per share assuming conversion
of convertible preferred stock 2,265,000 424,000 786,000
========= ========= =========
Weighted average common shares
outstanding during the period(1) 804,000 804,000 804,000
Shares issuable upon conversion of
preferred stock 2,612,000 2,612,000 2,612,000
Shares issuable pursuant to Staff
Accounting Bulletin No. 83 (SAB 83)
using the treasury stock method 693,000 693,000 693,000
--------- --------- ---------
Shares used in computing net loss
per share 4,109,000 4,109,000 4,109,000
========= ========= =========
Pro forma net loss per share $0.55 $0.10 $0.19
========= ========= =========
- ----------
(1) Common equivalent shares have been excluded from all periods presented as
their inclusion would be anti-dilutive.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated May 21, 1996, relating to
the financial statements of Cardiopulmonary Corp., which appears in such
Prospectus. We also consent to the references to us under the headings "Experts"
and "Selected Financial Data" in such Prospectus. However, it should be noted
that Price Waterhouse LLP has not prepared or certified such "Selected Financial
Data."
PRICE WATERHOUSE LLP
Boston, Massachusetts
June 27, 1996
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cardiopulmonary Corp.
We consent to the incorporation by reference in the registration statement
on Form S-1 of Cardiopulmonary Corp. of our report dated March 19, 1994, (May
17, 1996 as to Note 10 with respect to the 2 for 5 reverse stock split) (which
includes an explanatory paragraph relating to the Company's ability to continue
as a going concern), relating to the financial statements in the Registration
Statement No. 333-04315 on Form S-1 contained on pages F-4 to F-20 for the year
ended December 31, 1993 and for the period from January 1, 1991 through December
31, 1993. The statements of operations and cash flows for the period from
January 1, 1991 through December 31, 1993 are not included in the Registration
Statement.
We also consent to the reference to our firm under the headings "Experts"
in this Registration Statement.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
June 27, 1996
