<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1996
REGISTRATION NO. 333-04879
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CAMBRIDGE HEART, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 3845 13-3679946
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE) IDENTIFICATION
INCORPORATION OR NUMBER)
ORGANIZATION)
---------------
1 OAK PARK DRIVE, BEDFORD, MA 01730
(617) 271-1200
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANTS'S PRINCIPAl EXECUTIVE OFFICES)
---------------
JEFFREY M. ARNOLD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CAMBRIDGE HEART, INC.
1 OAK PARK DRIVE
BEDFORD, MA 01730
(617) 271-1200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
JOHN A. BURGESS, ESQ.
STEVEN D. SINGER, ESQ. DAVID J. BEVERIDGE, ESQ.
HALE AND DORR SHEARMAN & STERLING
60 STATE STREET 599 LEXINGTON AVENUE
BOSTON, MASSACHUSETTS 02109 NEW YORK, NEW YORK 10022
(617) 526-6000 (212) 848-4000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
---------------
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, 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 number of the earlier effective registration statement for the
same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1)(3) PER SHARE(2) PRICE(2) FEE(4)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value per share....... 3,682,900 shares $13.00 $47,877,700 $16,510
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 480,375 shares which the Underwriters have the option to purchase
from the Company to cover over-allotments, if any. See "Underwriting".
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(3) The shares of Common Stock are not being registered for the purpose of
sale outside the United States.
(4) $15,466 was previously paid by the Registrant on May 31, 1996.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CAMBRIDGE HEART, INC.
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-1
<TABLE>
<CAPTION>
REGISTRATION STATEMENT
ITEM AND CAPTION LOCATION IN PROSPECTUS
---------------------- ----------------------
<S> <C>
1.Forepart of 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; Outside
Back Cover Page
3.Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.. Prospectus Summary; Risk Factors;
The Company
4.Use of Proceeds....................... Prospectus Summary; Use of Proceeds
5.Determination of Offering Price....... Underwriting
6.Dilution.............................. Dilution
7.Selling Security Holders.............. Principal and Selling Stockholders
8.Plan of Distribution.................. Outside Front Cover Page;
Underwriting
9.Description of Securities to be
Registered.......................... Description of Capital Stock
10.Interests of Named Experts and
Counsel............................. Legal Matters; Experts
11.Information With Respect to the
Registrant:
(a)Description of Business............. Business
(b)Description of Property............. Business--Facilities
(c)Legal Proceedings................... Not Applicable
(d)Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholder Matters....... Front Cover Page; Dividend Policy;
Description of Capital Stock;
Shares Eligible for Future Sale
(e)Financial Statements................ Financial Statements; Capitalization
(f)Selected Financial Data............. Selected Financial Data
(g)Supplementary Financial
Information....................... Not Applicable
(h)Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... Management's Discussion and Analysis
of Financial Condition
of Operations
(i)Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.............. Not Applicable
(j)Directors, Executive Officers,
Promoters and Control Persons..... Management--Executive Officers and
Directors; Certain Transactions
(k)Executive Compensation.............. Management--Executive Compensation
(l)Security Ownership of Certain
Beneficial Owners and Management.. Principal Stockholders
(m)Certain Relationships and Related
Transactions...................... Certain Transactions
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 STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 10, 1996
3,202,525 SHARES
[LOGO]
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
-----------
Of the 3,202,525 shares of Common Stock offered hereby, 3,000,000 shares are
being sold by the Company and 202,525 shares are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders". The Company will not
receive any of the proceeds from the sale of the shares being sold by the
Selling Stockholders.
Of the 3,202,525 shares of Common Stock offered, 2,602,525 shares are being
offered hereby in the United States and 600,000 shares are being offered in a
concurrent International Offering outside the United States. The initial public
offering price and the aggregate underwriting discount per share will be
identical for both Offerings. See "Underwriting".
Prior to this Offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $11.00 and $13.00. For the factors to be considered in
determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "CAMH".
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIESAND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HASTHE 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.
-----------
<TABLE>
<CAPTION>
PROCEEDS TO
INITIAL PUBLIC UNDERWRITING PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total(3)................... $ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting".
(2) Before deducting estimated expenses of $625,000 payable by the Company.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional 390,375 shares at the initial public offering
price per share, less the underwriting discount, solely to cover over-
allotments. Additionally, the Company has granted an over-allotment option
with respect to an additional 90,000 shares as part of the International
Offering. If such options are exercised in full, the total initial public
offering price, underwriting discount and proceeds to the Company will be
$ , $ and $ , respectively. See "Underwriting".
-----------
The shares offered hereby are offered severally by the U.S. Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York on
or about , 1996, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO. BEAR, STEARNS & CO. INC.
-----------
The date of this Prospectus is , 1996.
<PAGE>
CAMBRIDGE HEART, INC.
began operations in 1993 to commercialize
innovative technologies for non-invasive cardiac
diagnosis.
[PHOTO OF CH 2000 SYSTEM]
Cambridge Heart's CH 2000, a new stress test
system, utilizes proprietary disposable electrodes
and signal processing techniques to enable it to
measure T-wave alternans down to one millionth of
a volt. T-wave alternans is an alternating pattern in
the ECG which has been associated with sudden
cardiac death and life threatening heart rhythm
disturbances.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
<PAGE>
[Graph re: cardiac death data]
Sudden cardiac death accounts for
approximately one-half of all cardiac deaths and
is the largest cause of death between the ages
of 45 and 65.
[Depiction of T-wave alternans]
Most of those who suffer sudden cardiac
death have an underlying electrical disorder which
puts them at risk of ventricular tachycardia
or fibrillation-life threatening heart rhythm
disturbances.
[Graph of study results]
In a study published in The New England
Journal of Medicine, the detection of T-Wave
alternans predicted the occurrence of sudden
cardiac death and life-threatening heart rhythm
disturbances with accuracy comparable to that
of the most accurate invasive test.
(See section entitled "Association of T-wave
Alternans and Ventricular Arrhytmias")
<PAGE>
Patients at risk for sudden cardiac death now have
treatment options including drug therapy and implantable
defibrillators. What has been missing, until now, is an
accurate and non-invasive means to identify those at risk.
[Depiction of Physicians and patient utilizing CH 2000]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the Company's financial statements and related notes
thereto included elsewhere in this Prospectus. Investors should carefully
consider the information set forth under the heading "Risk Factors". Except as
otherwise noted herein, all information contained in this Prospectus (i) gives
effect to a 1-for-2 reverse split of the Common Stock, (ii) reflects the
conversion of all outstanding shares of the Company's Series A and B
Convertible Preferred Stock (the "Preferred Stock") into an aggregate of
4,455,708 shares of Common Stock and (iii) assumes no exercise of the
Underwriters' over-allotment option.
THE COMPANY
Cambridge Heart, Inc. ("Cambridge Heart" or the "Company") is engaged in the
research, development and commercialization of products for the non-invasive
diagnosis of cardiac disease. Using innovative technologies, including
proprietary disposable electrodes, the Company is addressing such key problems
in cardiac diagnosis as (i) the identification of those at risk of sudden
cardiac death, which accounts for approximately 50% of all deaths due to heart
attack, (ii) the early detection of coronary artery disease and (iii) the
prompt and accurate diagnosis of heart attack.
With the emergence of new preventive therapies for sudden cardiac death
(implantable defibrillators and radio frequency ablation), the Company believes
that the accurate diagnosis of patients needing these therapies has become
increasingly important. Existing non-invasive diagnostic tests generally either
identify only a small subset of patients who are at risk of sudden cardiac
death or are insufficiently accurate to warrant further invasive study or
treatment. The Company believes that its technologies provide a solution to
these shortcomings. The Company's lead product, the CH 2000 System, is designed
to perform conventional cardiac stress tests as well as to incorporate the
Company's proprietary technology to non-invasively measure extremely low levels
of T-wave alternans, a beat-to-beat alternation in a portion of the
electrocardiogram ("ECG" or "EKG"). Clinical research published to date has
demonstrated that T-wave alternans is associated with vulnerability to
ventricular arrhythmias, which are responsible for sudden cardiac death, to a
degree comparable to electrophysiology ("EP") testing, the most accurate
invasive test.
The Company is also conducting research and development on its cardiac
electrical imaging ("CEI") technology for the early detection of coronary
artery disease and the diagnosis of acute myocardial infarction. The Company is
evaluating this technology both for incorporation into the CH 2000 System and
for stand-alone use in hospital emergency rooms.
The Company's T-wave alternans and CEI technologies require the use of its
proprietary disposable Hi-Res and Laplacian electrodes, respectively, which the
Company believes will provide a recurring source of revenue. The Company
anticipates that it will be the sole provider of these single-use electrodes
due to their proprietary nature.
The Company owns or is the exclusive licensee of seven patents issued or
allowed and six patents pending in the United States, with 17 corresponding
foreign patents issued or pending with respect to its technology.
The Company's CH 2000 System has received 510(k) clearance from the FDA for
sale in the United States for the purposes of performing standard stress tests
and measuring T-wave alternans. This clearance, however, does not include a
labeling claim covering the applicability or prognostic use of the T-wave
alternans measurement. The Company is currently conducting further clinical
studies and expects to make a subsequent 510(k) submission in the first half of
1997 with respect to the
3
<PAGE>
prognostic value of the Company's T-wave alternans technology. The Company has
chosen to limit sales of the CH 2000 System in the United States to a limited
number of clinical sites until its proprietary Hi-Res electrodes receive FDA
clearance. The Company filed a 510(k) pre-market notification for the Hi-Res
electrodes in May 1996. The CH 2000 System has received the CE mark for sale in
Europe, and application has been made for approval with the Ministry of Health
in Japan.
The Company intends to market the CH 2000 System domestically through a
direct sales force and distributors and internationally through distributors.
The Company has entered into agreements with Kontron Instruments Ltd.
("Kontron"), a leading supplier of patient monitoring and cardiac diagnostic
equipment in Europe, for distribution of the CH 2000 System in Europe and the
Middle East, and Fukuda Denshi Co., Ltd. ("Fukuda Denshi"), the leading
supplier of stress test and ECG equipment in Japan, for distribution of the
system in Japan.
In July 1996, Medtronic, Inc. ("Medtronic") and the Company entered into a
non-binding letter of intent relating to the conduct of joint clinical studies
to demonstrate the utility of the prophylactic use of implantable cardioverter
defibrillators ("ICDs") in patients identified through the use of T-wave
alternans measurement. Medtronic has expressed an intention to purchase $3.5
million of Common Stock in this Offering. The collaboration between the Company
and Medtronic is contingent upon this investment. There can be no assurance
that Medtronic will make such an investment or that Medtronic and the Company
will collaborate on the joint clinical studies described above.
The Company was incorporated in Delaware in 1990. The Company's principal
office is located at 1 Oak Park Drive, Bedford, MA 01730 and its telephone
number is (617) 271-1200.
CH 2000(TM) and Hi-Res(TM) are trademarks of the Company. All other trade
names and trademarks appearing in this prospectus are the property of their
respective holders.
----------------
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company:
U.S. Offering......................... 2,400,000 shares
International Offering................ 600,000 shares
Common Stock offered by the Selling
Stockholders:
U.S. Offering......................... 202,525 shares
Total................................ 3,202,525 shares
Common Stock to be outstanding after
the Offering.......................... 10,778,813 shares(1)
Use of proceeds........................ Research and development, clinical
studies, capital equipment, sales and
marketing, and for working capital and
other general corporate purposes.
Nasdaq National Market symbol.......... CAMH
</TABLE>
- --------
(1) Excludes 1,745,121 shares of Common Stock issuable upon the exercise of
options and warrants outstanding as of June 30, 1996. See "Dilution",
"Capitalization", "Certain Transactions" and "Description of Capital
Stock".
The offering of 2,602,525 shares of Common Stock initially being offered in
the United States (the "U.S. Offering") and the offering of 600,000 shares of
Common Stock initially being offered outside the United States (the
"International Offering") are collectively referred to herein as the
"Offering". The closing of the International Offering is conditioned upon the
closing of the U.S. Offering and vice versa.
RISK FACTORS
The shares offered hereby involve a high degree of risk, and prospective
purchasers should carefully consider the factors described under "Risk
Factors".
4
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Product revenue......... $ -- $ -- $ 68 $ -- $ 55
Revenue from research
and option agreement... -- 25 -- -- --
Cost of goods sold...... -- -- 141 -- 49
Costs and expenses:
Research and develop-
ment................. 589 1,124 1,560 414 353
Selling, general and
administrative....... 321 724 1,110 191 366
---------- ---------- ---------- ---------- ----------
Loss from operations.... $ (910) $ (1,823) $ (2,743) $ (605) $ (713)
Interest income, net.... 27 164 246 44 47
---------- ---------- ---------- ---------- ----------
Net loss................ $ (883) $ (1,659) $ (2,497) $ (561) $ (666)
========== ========== ========== ========== ==========
Pro forma net loss per
share.................. $ (0.32) $ (0.08)
========== ==========
Pro forma weighted
average common and
common equivalent
shares outstanding(1).. 7,727,524 8,102,288
========== ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 3,027 $35,882
Working capital......................................... 3,149 36,004
Total assets............................................ 3,536 36,391
Total liabilities....................................... 182 182
Accumulated deficit..................................... (5,747) (5,747)
Stockholders' equity.................................... 3,353 36,208
</TABLE>
- --------
(1) For the year ended December 31, 1995 and the three months ended March 31,
1996, pro forma weighted average common and common equivalent shares
outstanding consist of 7,233,875 and 7,619,861 shares of Common Stock,
respectively, after giving effect to the reverse stock split and the
conversion of preferred stock upon the completion of the Offering and
493,649 and 482,427 shares, respectively, attributable to options granted
and Common Stock sold at prices below the assumed initial public offering
price in the twelve months preceding the initial filing of the Company's
registration statement and through the effective date of the Offering using
the if-converted method.
(2) Gives effect to the sale of 3,000,000 shares of Common Stock offered by the
Company in the Offering hereby at an assumed initial public offering price
of $12.00 per share and the application of the net proceeds therefrom,
after deducting the estimated underwriting discount and offering expenses
payable by the Company. See "Use of Proceeds".
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information
contained in this Prospectus, should be carefully considered in evaluating the
Company and its business before purchasing the shares of Common Stock offered
hereby. This Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such differences include those discussed below.
DEVELOPMENT STAGE COMPANY; HISTORY OF OPERATING LOSSES
The Company is a development stage company and since inception has engaged
primarily in research, development, testing and obtaining regulatory
clearances for its products. To date, sales of its CH 2000 System have been
limited to participants in clinical trials and the Company's distributor in
Japan. The Company is required to obtain regulatory clearance for significant
aspects of its technology. See "--Risks Relating to Technological Approaches
of the Company" and "--Government Regulation; Future Product Approvals
Uncertain". As of March 31, 1996, the Company had an accumulated deficit of
approximately $5,747,000 and had a net loss of approximately $2,497,000 for
the year ended December 31, 1995. The Company expects to incur substantial and
increasing net losses for the foreseeable future as a result of sales and
marketing, research and product development, manufacturing and other expenses
expected to be incurred as the Company further commercializes the CH 2000
System and expands its product offerings. There can be no assurance that the
Company will ever generate substantial revenues or achieve profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
NO ASSURANCE OF MARKET ACCEPTANCE; SUBSTANTIAL DEPENDENCE ON SINGLE PRODUCT
To date, the Company has developed only one product for commercial sale, the
CH 2000 System, and significant aspects of the Company's technology are
awaiting clearance. The Company believes that its future success substantially
depends upon successful commercialization and market acceptance of the CH 2000
System incorporating the Company's T-wave alternans technology. The analysis
of T-wave alternans to diagnose ventricular arrhythmias is a new diagnostic
approach that is currently investigational. The Company has not yet applied
for clearance from the U.S. Food and Drug Administration (the "FDA") for a
labelling claim covering the applicability or prognostic use of its T-wave
alternans technology. In addition, the Company's proprietary Hi-Res
electrodes, which are required for the effective implementation of the CH 2000
System, have not received regulatory clearance. Market acceptance will depend
upon the Company's ability to obtain regulatory clearance or approval for its
Hi-Res electrodes and for claims covering the applicability or prognostic use
of T-wave alternans measurement, as well as its ability to demonstrate the
diagnostic advantages, cost-effectiveness and performance features of the CH
2000 System. Market acceptance will also be driven in large part by acceptance
of the CH 2000 System by influential physicians. There can be no assurance
that the Company will be able to successfully commercialize or achieve market
acceptance of the CH 2000 System or that the Company's competitors will not
develop competing technologies that are superior to those of the Company.
Failure by the Company to successfully commercialize or achieve market
acceptance of the CH 2000 System would have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS RELATING TO TECHNOLOGICAL APPROACHES OF THE COMPANY
The Company intends to develop and sell products which are based upon T-wave
alternans analysis and cardiac electrical imaging technologies that have not
previously been applied to cardiac diagnostic products. There can be no
assurance that a market will develop or that the ultimate size of such market
will justify the Company's significant investment in commercializing its
products. The Company has sponsored and is continuing to sponsor a number of
clinical studies relating to the
6
<PAGE>
CH 2000 System, its T-wave alternans technology and its Hi-Res electrodes to
establish the prognostic value of its T-wave alternans technology. While these
studies and third-party studies on high risk patients to date have indicated
that T-wave alternans is associated with ventricular arrhythmia to a degree
comparable to EP testing, there can be no assurances that the results of such
studies will continue to do so. Any results of clinical studies or trials
which fail to demonstrate that T-wave alternans is comparable in accuracy to
alternative diagnostic tests, or which otherwise call into question the cost-
effectiveness, efficacy or safety of this, or other Company technologies,
would have a material adverse effect on the Company's business, financial
condition and results of operations. The development of commercial products
based upon these technologies will also be subject to the risks typically
inherent in the development of products based on new technologies. These risks
include the possibility that any diagnostic products based on these
technologies will be found to be ineffective or inaccurate, or otherwise fail
to receive necessary regulatory clearances or approvals; that the proprietary
rights of third parties will preclude the Company or its distributors from
marketing products; or that third parties will market equivalent or superior
products. The Company is currently conducting further clinical studies and
expects to make a subsequent 510(k) submission in the first half of 1997 with
respect to the prognostic value of the Company's T-wave alternans technology.
However, there can be no assurance that the results of such studies will
support such submission or that regulatory clearance will be received. In
addition, there can be no certainty that products incorporating alternative
technologies in which the Company has limited expertise will not be introduced
and adversely affect demand for the Company's products. As a result, there can
be no assurance that the Company's development activities will result in
commercially viable products. Failure to develop commercially viable products
would have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE UPON LICENSES
The Company and the Massachusetts Institute of Technology ("MIT") have
entered into four license agreements (the "MIT License Agreements"), pursuant
to which the Company is the exclusive licensee of certain technologies upon
which the Company's current and future products are based, including certain
patents associated therewith. Two of the MIT License Agreements that cover the
T-wave alternans analysis technology incorporated in the Company's CH 2000
System and that relate to cardiac electrical imaging are of material
importance to the Company. These licenses are exclusive until 2007;
thereafter, each license will convert to a nonexclusive license, and will last
for the life of the applicable patents, unless extension of exclusivity is
agreed to by MIT. In addition, the Company has entered into a license
agreement with Dr. Richard Cohen, a founder, director of, and consultant to,
the Company (the "Cohen License Agreement"), pursuant to which the Company is
the exclusive licensee of certain technology developed by Dr. Cohen which the
Company may include in its future products. These license agreements impose
various commercialization, sublicensing, insurance, royalty, product liability
indemnification and other obligations on the Company. Under the MIT License
Agreement covering the T-wave alternans technology, the Company must achieve
sales of $50,000 in 1998, $100,000 in 1999 and $500,000 in 2000 and each year
thereafter. The MIT License Agreement covering cardiac electrical imaging
technology requires that the Company achieve sales of related products of
$100,000 in 1998, $500,000 in 1999 and $1,000,000 in 2000 and each year
thereafter. Failure by the Company to comply with these requirements could
result in conversion of the licenses from being exclusive to nonexclusive in
nature or, in some cases, termination of the license. The loss of the
Company's exclusive rights to the T-wave alternans and cardiac electrical
imaging technologies, licensed under two of the MIT License Agreements or the
termination of either or both of such agreements would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Patents, Trade Secrets and Proprietary Rights" and
"Certain Transactions".
7
<PAGE>
GOVERNMENT REGULATION; FUTURE PRODUCT APPROVALS UNCERTAIN
The Company's products, product development activities, manufacturing
processes and sales and marketing are subject to extensive and rigorous
regulation by the FDA and comparable agencies in foreign countries. In the
United States, the FDA regulates the introduction of medical devices as well
as manufacturing, labeling and record keeping procedures for such products. In
order for the Company to market its products for clinical use in the United
States, the Company must obtain from the FDA clearance of a 510(k) pre-market
notification, or approval of a more extensive submission known as pre-market
approval ("PMA") application. The process of obtaining marketing clearance or
approval for new medical devices from the FDA can be costly and time
consuming, and there can be no assurance that such clearance or approval will
be granted for the Company's future products on a timely basis, if at all, or
that FDA review will not involve delays that will adversely affect the
Company's ability to commercialize additional products or expand permitted
uses of existing products.
A 510(k) pre-market notification requires the manufacturer of a medical
device to establish that the device is "substantially equivalent" to medical
devices legally marketed in the United States. While the CH 2000 System
currently marketed by the Company, including the Company's T-wave alternans
measuring technology, has received 510(k) clearance from the FDA for sale in
the United States, the 510(k) clearance does not allow the Company to make
claims regarding the effectiveness of this technology in identifying patients
at risk of sudden cardiac death. The Company is currently conducting further
clinical studies and intends to submit a 510(k) application to support such
claims. The Company has also filed a 510(k) pre-market notification for its
Hi-Res electrodes which are required for the effective implementation of the
CH 2000 System. For these and any future products, including any product based
on the Company's CEI technology, there can be no assurance that the FDA will
concur with the Company's 510(k) request for clearance, or that the FDA will
not require the Company to file PMA applications. The process of obtaining a
PMA can be more expensive, uncertain and lengthy than the process of obtaining
510(k) clearance, and frequently requires anywhere from one to several years
from the date of submission, if approval is obtained at all. The failure to
obtain 510(k) clearance for additional labeling claims for the CH 2000 System
or for the Hi-Res electrodes would have a material adverse effect on the
business, financial condition and results of operations of the Company.
Even if regulatory clearance to market a device is obtained from the FDA,
this clearance may limit the indicated uses of the device. Marketing clearance
can also be withdrawn by the FDA due to failure to comply with regulatory
standards or the occurrence of unforeseen problems following initial
clearance. The Company may be required to file new 510(k) applications if the
Company intends to make one or more major changes or modifications in the
intended use of the CH 2000 System, or to make any number of other changes
that could significantly affect the safety or effectiveness of the device. A
manufacturer is expected to make the initial determination as to whether a
proposed change to a cleared device or to its intended use is of a kind that
would necessitate the filing of a new 510(k) notification. The Company has
made certain minor modifications to its cleared device, the CH 2000 System,
and for these changes the Company concluded that a new 510(k) application was
not required because the changes were not major changes or modifications in
intended use and did not significantly affect the safety or effectiveness of
the device. There can be no assurance that the FDA will conclude that these
changes did not necessitate one or more new 510(k) applications, or even PMAs.
If the FDA were to disagree with the Company's determination and conclude that
the changes required one or more new 510(k)s or PMAs, the FDA could take
regulatory actions such as the issuance of a warning letter or requiring that
the Company stop marketing the device or devices until 510(k) or PMA
applications are cleared or approved. The FDA could also limit or prevent the
manufacture or distribution of the Company's products and has the power to
require the recall of such products. Significant delay or cost in obtaining,
or failure to obtain FDA clearance to market products, any FDA limitations on
the use of the Company's products, or any withdrawal of clearance by the FDA
could have a material adverse effect on the business, financial condition and
results of operations of the Company.
8
<PAGE>
The FDA also strictly regulates the development and testing of medical
devices under the agency's investigational device exemption ("IDE")
regulations. Clinical investigations involving human subjects for the purpose
of demonstrating the safety and effectiveness of a device must be approved by
an Institutional Review Board ("IRB"). Clinical investigations involving a
"significant risk" device must also receive prior approval by the FDA. There
can be no assurance that the Company will be able to obtain FDA and/or IRB
approval to undertake clinical trials in the U.S. for investigational devices
such as the Company's T-wave alternans technology, that the Company will be
able to comply with FDA's IDE and other regulations governing clinical
investigations, or that the data from any such trials will support clearance or
approval of the investigational device.
In addition, all products manufactured by the Company must be manufactured in
compliance with the standards established by the FDA's Good Manufacturing
Practices ("GMP") regulations. Ongoing compliance with GMP and other applicable
regulatory requirements is monitored through periodic inspection by state and
federal agencies, including the FDA. The FDA may inspect the Company and its
facilities from time to time to determine whether the Company is in compliance
with regulations relating to medical device manufacturing companies, including
regulations concerning manufacturing, testing, quality control and product
labeling practices.
FDA regulations depend heavily on administrative interpretation, and there
can be no assurance that future interpretations made by the FDA or other
regulatory bodies, with possible retroactive effect, will not adversely affect
the Company. In addition, changes in the existing regulations or adoption of
new governmental regulations or policies could prevent or delay regulatory
approval of the Company's products.
Failure to comply with applicable regulatory requirements could result in,
among other things, warning letters, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
refusal of the government to grant pre-market clearance or pre-market approval
for devices, withdrawal of approvals and criminal prosecution.
A significant portion of the Company's revenue will be dependent upon sales
of its products outside the United States. Foreign regulatory bodies have
established varying regulations governing product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. Specifically, the European Union ("EU") has
promulgated rules which require that medical products receive the right to
affix the CE mark, an international symbol of adherence to quality assurance
standards and compliance with applicable European medical device directives.
There is no assurance that the Company will be able to obtain CE approval for
its future products. Application has been made for approval with the Ministry
of Health in Japan, however, there can be no assurance that such approval will
be granted. The inability or failure of the Company or its international
distributors to comply with varying foreign regulations or the imposition of
new regulations could restrict or, in certain countries, result in the
prohibition of the sale of the Company's products internationally and thereby
adversely affect the Company's business, financial condition and results of
operations. See "Business--Government Regulation".
RAPID TECHNOLOGICAL CHANGE AND INTENSE COMPETITION
The medical device market is characterized by intensive development efforts
and rapidly advancing technology. The future success of the Company will
depend, in large part, upon its ability to anticipate and keep pace with
advancing technology and competitive innovations. However, there can be no
assurance that the Company will be successful in identifying, developing and
marketing new products or enhancing its existing products. In addition, there
can be no assurance that new products or alternative diagnostic techniques will
not be developed that will render the Company's current or planned products
obsolete or inferior. Rapid technological development by competitors may result
in the Company's products becoming obsolete before the Company recovers a
significant portion of the research, development and commercialization expenses
incurred with respect to such products.
9
<PAGE>
Competition from medical devices which help to diagnose cardiac disease is
intense and likely to increase. The Company competes with manufacturers of ECG
stress tests, the conventional method of diagnosing ischemic heart disease,
and may compete with manufacturers of other non-invasive tests, including
ECGs, Holter monitors, ultrasound tests and systems for measuring cardiac late
potentials. Many of the Company's competitors and potential competitors have
substantially greater capital resources, name recognition, research and
development experience and regulatory, manufacturing and marketing
capabilities. Many of these competitors offer well established, broad product
lines and ancillary services not offered by the Company. Some of the Company's
competitors have long-term or preferential supply arrangements with physicians
and hospitals which may act as a barrier to market entry. In addition, other
large health care companies may enter the non-invasive cardiac diagnosis
product market in the future. Competing companies may succeed in developing
products that are more efficacious or less costly than any that may be
developed by the Company, and such companies also may be more successful than
the Company in producing and marketing such products or their existing
products. Competing companies may also introduce competitive pricing pressures
that may adversely affect the Company's sales levels and margins. There can be
no assurance that the Company will be able to compete successfully with
existing or new competitors. See "Business--Competition".
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT
The Company could be adversely affected by changes in reimbursement policies
of governmental or private health care payors, particularly to the extent any
such changes affect reimbursement for procedures in which the Company's
products are used. Failure by physicians, hospitals and other users of the
Company's products to obtain sufficient reimbursement from health-care payors
for procedures in which the Company's products are used or adverse changes in
governmental and private third-party payors' policies toward reimbursement for
such procedures would have a material adverse effect on the Company's
business, financial condition and results of operations.
If the Company obtains the necessary foreign regulatory approvals, market
acceptance of the Company's products in international markets would be
dependent, in part, upon the availability of reimbursement within prevailing
health-care payment systems. Reimbursement and health-care payment systems in
international markets vary significantly by country, and include both
government sponsored health care and private insurance. The Company intends to
seek international reimbursement approvals, although there can be no assurance
that any such approvals will be obtained in a timely manner, if at all, and
failure to receive international reimbursement approvals could have an adverse
effect on market acceptance of the Company's products in the international
markets in which such approvals are sought. See "Business--Reimbursement".
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
The computer algorithms that allow the CH 2000 System to measure T-wave
alternans and certain aspects of the Company's CEI technology, including its
CEI electrodes, are covered by U.S. patents issued to MIT that are licensed
exclusively to the Company. The Company has applied for a U.S. patent covering
the use of exercise or physiological stress in the measurement of T-wave
alternans, which has been allowed, and corresponding foreign patents are
pending. The Company has also applied for U.S. and foreign patents covering
additional proprietary signal processing algorithms and its Hi-Res electrodes
for use in the measurement of T-wave alternans. The failure to obtain such
patents could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company owns or is the
exclusive licensee of seven patents issued or allowed and six patents pending
in the United States, with 17 corresponding foreign patents issued or pending
with respect to its technololgy. The MIT License Agreement and the Cohen
License Agreement impose various commercialization, sublicensing, insurance,
royalty, product liability indemnification and other obligations on the
Company. See "-- Dependence Upon Licenses".
10
<PAGE>
The Company's future success will depend, in part, on its ability to
continue to develop patentable products, enforce its patents and obtain patent
protection for its products both in the United States and in other countries.
However, the patent positions of medical device companies, including the
Company, are generally uncertain and involve complex legal and factual
questions. No assurance can be given that patents will issue from any patent
applications owned by or licensed to the Company or that, if patents do issue,
the claims allowed will be sufficiently broad to protect the Company's
technology. In addition, no assurance can be given that any issued patents
owned by or licensed to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Litigation, which is
likely to result in substantial expense to the Company, may be necessary to
enforce any patents issued or licensed to the Company and/or to determine the
scope and validity of others' proprietary rights. The Company may also have to
participate in interference proceedings declared by the United States Patent
and Trademark Office, which could result in substantial expense to the
Company, to determine the priority of inventions. Furthermore, the Company may
have to participate at substantial cost in International Trade Commission
proceedings to abate importation of products which would compete unfairly with
products of the Company.
The Company relies on unpatented trade secrets to protect its proprietary
technology, and no assurance can be given that others will not independently
develop or otherwise acquire substantially equivalent techniques or otherwise
gain access to the Company's proprietary technology or disclose such
technology or that the Company can ultimately protect its rights to such
unpatented proprietary technology. The Company also relies on confidentiality
agreements with its collaborators, employees, advisors, vendors and
consultants to protect its proprietary technology. There can be no assurance
that these agreements will not be breached, that the Company would have
adequate remedies for any breach or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. Failure
to obtain or maintain patent and trade secret protection, for any reason,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Patents, Trade Secrets and
Proprietary Rights".
LIMITED MANUFACTURING AND MARKETING EXPERIENCE
For the Company to commercialize its products successfully, it must
manufacture or assemble these products, either by itself or through third
parties, in commercial quantities, at high quality levels and at commercially
reasonable costs. Such manufacturing or assembly must be accomplished in
accordance with GMP and, by 1998, ISO 9001 and other applicable regulatory
requirements. There can be no assurance that the Company's reliance on others
for the manufacture of its components, including the Hi-Res electrodes, will
not result in problems with product supply. Interruptions in the availability
of components could delay or prevent the development and commercial marketing
of the CH 2000 System.
The Company intends to market its products in the United States primarily
through its own direct sales force and, to a lesser extent, distributors.
Significant expenditures, management resources and time will be required for
the Company to develop a successful domestic direct sales force. There can be
no assurance that the Company will be able to recruit and retain skilled sales
management, direct salespersons or distributors, or that the Company's sales
efforts will be successful. See "Business--Sales and Marketing". The Company
intends to market its products internationally through independent
distributors. These distributors may also distribute competing products under
certain circumstances. The loss of a significant international distributor
could have a material adverse effect on the Company's business if a new
distributor, sales representative or other suitable sales organization cannot
be found on a timely basis in the relevant geographic market. To the extent
that
11
<PAGE>
the Company relies on sales in certain territories through distributors, any
revenues the Company receives in those territories will depend upon the
efforts of its distributors. Furthermore, there can be no assurance that a
distributor will market the Company's products successfully or that the terms
of its distribution arrangements will be acceptable to the Company. See
"Business--Marketing and Sales".
DEPENDENCE UPON KEY SUPPLIERS
Although the Company believes that there are a number of qualified vendors
for most of the components and subassemblies required for its products,
certain components are currently single sourced. Moreover, substitute
components may not be immediately available in quantities needed by the
Company. Delays associated with any future component shortages, particularly
as the Company scales up its manufacturing activities in support of commercial
sales, could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company is actively seeking
alternative sources but the Company's inability to obtain alternative
suppliers or a sufficient quantity of such components on favorable terms could
materially adversely affect the Company's business, financial condition and
results of operations. See "Business--Manufacturing".
DEPENDENCE UPON KEY MANAGEMENT PERSONNEL AND CONSULTANTS
The Company is highly dependent on its senior management, marketing and
technical personnel, the loss of whose services could have a material adverse
effect on the Company. Recruiting and retaining such personnel in the future
will be critical to the Company's success. There can be no assurance that the
Company will be able to attract and retain qualified personnel on acceptable
terms given the competition for such qualified personnel.
The Company is party to a consulting agreement with Dr. Cohen, pursuant to
which Dr. Cohen has agreed to provide one day a week of consulting services to
the Company through February 1998 regarding development and commercialization
of the Company's core technologies which have been licensed from MIT. During
the term of the consulting agreement, and for a period of up to two additional
years following its termination or expiration, Dr. Cohen is obligated not to
compete with the Company provided the Company makes continuing payments to Dr.
Cohen during such two year period. In the event that Dr. Cohen ceases to
provide consulting services or to maintain a relationship with the Company,
whether by reason of expiration of the consulting agreement, a breach by the
Company of the agreement's terms, or any dispute between the Company and Dr.
Cohen, such cessation would have a material adverse impact upon the Company in
view of Dr. Cohen's reputation with important clinical constituencies, and his
expertise concerning the Company's technologies.
In addition, the Company depends on other third party consultants,
collaborators and contractors in connection with its product development,
testing and manufacturing activities. The discontinuation of the Company's
collaborative relationship with any of its consultants, collaborators or
contractors, or the Company's failure to establish relationships in the future
with highly qualified collaborators, consultants or contractors, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company has entered into employment agreements with Jeffrey M. Arnold,
the Company's President and Chief Executive Officer, and Dr. Paul Albrecht,
Vice President of Engineering. See "Management--Employment Agreements".
LIMITED INTERNATIONAL SALES AND OPERATIONS EXPERIENCE
The Company plans to sell the CH 2000 System and any future products on a
worldwide basis. A number of risks are inherent in international transactions.
International sales and operations may be limited or disrupted by the
imposition of government controls, export license requirements, political
12
<PAGE>
instability, trade restrictions, changes in tariffs or difficulties in
staffing and managing international operations. In addition, laws in foreign
countries may not always provide protection for the Company's proprietary
rights in its technologies. Foreign regulatory agencies often establish
product standards different from those in the United States and any inability
to obtain foreign regulatory approvals on a timely basis could have an adverse
effect on the Company's international business and its financial condition and
results of operations. Additionally, the Company's business, financial
condition and results of operations may be adversely affected by fluctuations
in currency exchange rates as well as increases in duty rates and difficulties
in obtaining export licenses. There can be no assurance that the Company will
be able to successfully commercialize the CH 2000 System or any future product
in any foreign market. See "Business--Marketing and Sales".
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
Although the Company believes that its existing capital resources, together
with the proceeds of this Offering and interest earned thereon, will be
adequate to satisfy its capital requirements for at least the next two years,
the Company's future capital requirements will depend on many factors, some of
which are not within the control of the Company. These factors include sales
of its existing product, the continued progress in, and magnitude of, its
research and product development programs, the timing and costs involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting,
enforcing and defending patent claims, competing technological and market
developments and the costs and success of commercialization activities. There
can be no assurance that the Company may not in the future require additional
funding. If the Company requires additional funding, there can be no assurance
that it will be able to obtain such funding on acceptable terms, if at all.
PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE
The manufacture and sale of medical devices entails significant risk of
product liability claims in the event that the use of such devices is alleged
to have resulted in adverse effects to a patient. To date, the Company has
obtained a limited amount of product liability insurance coverage (with a $3.0
million policy limit). However, there can be no assurance that the Company's
existing insurance coverage limits are adequate to protect the Company from
any liabilities it might incur in connection with the sale of its products. In
addition, the Company may require increased product liability coverage. Such
insurance is expensive and in the future may not be available on acceptable
terms, if at all. A successful product liability claim or series of claims
brought against the Company in excess of its insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations. Additionally, it is possible that adverse product
liability actions could negatively affect the Company's ability to obtain and
maintain regulatory approval for its products.
NO PUBLIC MARKET; POSSIBLE VOLATILITY OF SHARE PRICE
Prior to this Offering, there has been no public market for the Common Stock
of the Company, and there can be no assurance that an active trading market
will develop or be sustained after this Offering. The initial public offering
price will be determined by negotiations among the Company and the
representatives of the Underwriters based upon several factors and may not be
indicative of future market prices. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
market price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly variations in the Company's operating
results, announcements of technological innovations or new commercial products
by the Company or its competitors, governmental regulation, developments in
patent or other proprietary rights and public concern regarding the safety,
effectiveness or other implications of the products being developed by the
Company. In addition, the stock market has experienced extreme price and
volume fluctuations. This volatility has significantly affected the market
prices of securities of many medical device companies for reasons frequently
unrelated to or disproportionate to the operating performance of the specific
companies. These broad market fluctuations may adversely affect the market
price of the Company's Common Stock.
13
<PAGE>
CONTROL BY DIRECTORS, OFFICERS AND PRINCIPAL STOCKHOLDERS
Upon completion of this Offering, the Company's directors, executive
officers and principal stockholders, together with their affiliates, will
beneficially own approximately 50% of the Company's outstanding Common Stock
(approximately 48% if the Underwriters exercise their over-allotment option in
full). As a result, these stockholders, if acting together, will have the
ability to influence the outcome of corporate actions requiring stockholder
approval, including the election of directors and the approval of certain
mergers and other significant corporate transactions, such as a sale of
substantially all of the Company's assets, irrespective of how other
stockholders of the Company may vote. This concentration of ownership may have
the effect of delaying or preventing a change in control of the Company. See
"Management" and "Principal and Selling Stockholders".
POTENTIAL ADVERSE EFFECTS OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
this Offering could have a material adverse effect on the market price of the
Common Stock. Of the 10,778,813 shares to be outstanding after this Offering,
the 3,202,525 shares of Common Stock offered by the Company and the Selling
Stockholders (and any shares sold pursuant to the exercise of the
Underwriters' over-allotment option) will be freely tradable without
restriction. An additional 226,153 shares of Common Stock will be eligible for
sale in the public market upon the date of this Prospectus in reliance on Rule
144(k) under the Securities Act of 1933, as amended (the "Securities Act").
Beginning approximately 90 days after the date of this Prospectus,
approximately 7,153,607 additional shares of Common Stock (including
approximately 866,264 shares of Common Stock issuable upon exercise of
warrants and vested stock options) will become eligible for sale in the public
market pursuant to Rules 144 and 701. The remaining shares will become
eligible for sale in the public market at various dates beginning 180 days
after the effective date of the Registration Statement. However, the Company's
executive officers and directors and certain other stockholders of the Company
(who in the aggregate will hold 6,518,589 shares of Common Stock upon
completion of this Offering) have agreed pursuant to certain lock-up
agreements that they will not, without the prior written consent of the
representatives of the Underwriters, offer, sell or otherwise dispose of the
shares of Common Stock beneficially owned by them for a period of 180 days
from the date of the U.S. Underwriting Agreement. Additionally, stockholders
of the Company owning an aggregate of approximately 5,628,680 shares of Common
Stock, have the right to demand registration under the Securities Act of their
shares of Common Stock and have the right to have their shares of Common Stock
included in future registered public offerings of securities by the Company.
The Company cannot predict the effect, if any, that market sales of shares or
the availability of shares for sale will have on the market price of the
Common Stock prevailing from time to time. Sales of significant amounts of the
Common Stock of the Company in the public market could adversely affect the
market price of the Company's Common Stock and could impair the Company's
ability to raise capital through an offering of its equity securities. See
"Description of Capital Stock--Common Stock", "Shares Eligible for Future
Sale" and "Underwriting".
POTENTIAL ADVERSE EFFECTS OF ANTI-TAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation as in effect upon the
closing of this Offering will require that any action required or permitted to
be taken by stockholders of the Company must be effected at a duly called
annual or special meeting of stockholders and may not be effected by any
consent in writing, and will require reasonable advance notice by a
stockholder of a proposal or director nomination which such stockholder
desires to present at any annual or special meeting of stockholders. Special
meetings of stockholders may be called only by the President of the Company or
by the Board of Directors. The Restated Certificate of Incorporation provides
for a classified Board of Directors, and members of the Board of Directors may
be removed only for cause upon the affirmative vote of holders of at least
two-thirds of the shares of capital stock of the Company entitled to vote. In
addition, the Board of Directors will have the authority, without further
action by the
14
<PAGE>
stockholders, to fix the rights and preferences of, and issue shares of,
Preferred Stock. These provisions and other provisions of the Restated
Certificate of Incorporation, may have the effect of deterring unsolicited
acquisition proposals or hostile takeovers or delaying or preventing changes
in control or management of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over the then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interests. See "Description of Capital Stock--Preferred Stock" and "--Delaware
Law and Certain Charter and By-Law Provisions".
SIGNIFICANT FLEXIBILITY IN APPLYING NET PROCEEDS OF OFFERING
Currently, the Company has no specific plans for the net proceeds of this
Offering, other than to fund research and development activities, clinical
studies, capital equipment for manufacturing scale-up, sales and marketing,
and for working capital and general corporate purposes. In addition to
obtaining equity capital, the purpose of this Offering is to create a public
market for the Common Stock and to facilitate future access to public markets.
A portion of the net proceeds may also be used for the acquisition of products
and technologies that are complementary to those of the Company. Accordingly,
management will have significant flexibility in applying the net proceeds of
this Offering. See "Use of Proceeds".
ABSENCE OF DIVIDENDS
The Company has not paid any dividends on the Common Stock since its
inception and does not anticipate paying any dividends in the future.
Declaration of dividends on the Common Stock will depend upon, among other
things, future earnings, if any, the operating and financial condition of the
Company, its capital requirements and general business conditions. See
"Dividend Policy".
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby by the Company are estimated to be $32.9 million
($38.2 million if the Underwriters exercise their over-allotment option in
full), assuming an initial public offering price of $12.00 per share and after
deducting the underwriting discount and estimated offering expenses payable by
the Company. The Company will not receive any of the net proceeds from the
sale of shares by the Selling Stockholders.
The Company intends to use the net proceeds of this Offering to fund
research and development, clinical studies, the acquisition of capital
equipment for manufacturing scale-up, sales and marketing activities and for
working capital and general corporate purposes. A portion of the net proceeds
may also be used for the acquisition of products and technologies that are
complementary to those of the Company.
The amount and timing of expenditures may vary significantly depending upon
numerous factors, including the success of the Company's currently marketed
product, the continued progress in, and magnitude of the Company's research
and product development programs, market acceptance of the Company's products,
the timing and costs involved in obtaining regulatory clearances and
approvals, the costs involved in filing, prosecuting, enforcing and defending
patent claims, and competing technological and market developments and the
costs and success of its commercialization activities. Based upon its current
operating plan, the Company believes that its existing capital resources,
together with the proceeds of this Offering and interest earned thereon, will
be adequate to satisfy its capital requirements for at least the next two
years.
Pending application of the proceeds of this Offering as described above, the
Company intends to invest the net proceeds of this Offering in short-term,
investment-grade, interest-bearing instruments. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain future earnings, if any, for
use in its business and therefore does not anticipate paying cash dividends in
the foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company's Board of Directors after taking into account
various factors, including the Company's financial condition, operating
results, current and anticipated cash needs and plans for expansion. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
16
<PAGE>
CAPITALIZATION AND CASH POSITION
The following table sets forth as of March 31, 1996 (i) the actual
capitalization and cash position of the Company, after giving effect to a 1-
for-2 reverse split of the Common Stock, (ii) the pro forma capitalization and
cash position of the Company giving effect to the conversion of all
outstanding shares of Preferred Stock into Common Stock at the closing of this
Offering, and (iii) the pro forma capitalization and cash position of the
Company as adjusted to reflect the issuance and sale of 3,000,000 shares of
Common Stock offered hereby by the Company at an assumed initial public
offering price of $12.00 per share and the application of the net proceeds
therefrom, after deducting the underwriting discount and estimated offering
expenses.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents $ 3,027 $ 3,027 $35,882
======= ======= =======
Stockholders' equity:
Series B convertible preferred stock, $0.001
par value; 2,500,000 shares authorized;
2,333,333 issued and outstanding (liquidating
preference of $3,500,000) actual; none issued
and outstanding pro forma and pro forma as
adjusted..................................... $ 2 $ -- $ --
Series A convertible preferred stock, $0.001
par value; 6,900,000 shares authorized;
6,578,083 shares issued and outstanding
(liquidating preference of $6,578,083)
actual; none issued and outstanding pro forma
and pro forma as adjusted.................... 7 -- --
Preferred stock, $0.001 par value; 2,000,000
shares authorized; no shares issued and
outstanding.................................. -- -- --
Common stock, $0.001 par value; 25,000,000
shares authorized; 3,208,163 shares issued
and outstanding actual; 7,663,871 pro forma;
10,663,871 pro forma as adjusted(1).......... 3 8 11
Additional paid-in capital.................... 9,517 9,521 42,373
Deficit accumulated during the development
stage........................................ (5,747) (5,747) (5,747)
Deferred compensation......................... (429) (429) (429)
------- ------- -------
Total stockholders' equity.................. $ 3,353 $ 3,353 $36,208
======= ======= =======
</TABLE>
- --------
(1) The foregoing assumes no exercise of outstanding options or warrants. As
of March 31, 1996, there were outstanding options to purchase 1,319,499
shares of Common Stock under the Company's 1993 Incentive and Non-
Qualified Stock Option Plan (the "1993 Plan") at a weighted average
exercise price of $0.54 per share, and warrants to purchase 438,538 shares
of Common Stock at an exercise price of $2.00 per share. As of the closing
of this Offering, an additional 1,200,000 shares will be reserved for
future issuance under the Company's stock plans. See "Management--Employee
Benefit Plans" and Notes 5 and 6 to the Company's financial statements.
17
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1996
was approximately $3,353,000, or $0.44 per share, after giving effect to the
conversion of all outstanding shares of Preferred Stock into an aggregate of
4,455,708 shares of Common Stock upon completion of this Offering. Pro forma
net tangible book value per share represents the amount of total tangible
assets of the Company reduced by the Company's total liabilities, divided by
the number of shares of Common Stock outstanding. Assuming an offering price
of $12.00 per share and after giving effect to the sale by the Company of
3,000,000 shares of Common Stock in this Offering (after deducting the
estimated underwriting discount and offering expenses), the pro forma net
tangible book value of the Company as of March 31, 1996 would have been
approximately $36,208,000 or $3.40 per share. This represents an immediate
increase in pro forma net tangible book value of $2.96 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$8.60 per share to new investors purchasing Common Stock in this Offering. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $12.00
Pro forma net tangible book value per share as of March 31,
1996....................................................... $0.44
Increase per share attributable to new investors............ 2.96
-----
Pro forma net tangible book value per share after this
Offering..................................................... 3.40
------
Dilution per share to new investors........................... $ 8.60
======
</TABLE>
The following table summarizes, on the pro forma basis described above, as
of March 31, 1996, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company, and the average price
paid per share by the existing stockholders and by investors purchasing shares
of Common Stock offered hereby (at an assumed initial public offering price of
$12.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 7,663,871 71.9% $10,095,898 21.9% $ 1.32
New investors........... 3,000,000 28.1 36,000,000 78.1 12.00
---------- ----- ----------- -----
Total................. 10,663,871 100.0% $46,095,898 100.0%
========== ===== =========== =====
</TABLE>
(1)Sales by the Selling Stockholders in this Offering will reduce the number
of shares held by existing stockholders to 7,507,871, or approximately 70% of
the total number of shares of Common Stock outstanding after this Offering (or
approximately 67% if the Underwriters' over-allotment option is exercised in
full), and will increase the number of shares held by new investors to
3,202,525, or approximately 30% of the total number of shares of Common Stock
outstanding after this Offering (or 3,682,900 shares and approximately 33% if
the Underwriters' over-allotment option is exercised in full).
The above computation assumes no exercise of outstanding options and
warrants since March 31, 1996. As of March 31, 1996, there were options and
warrants outstanding to purchase an aggregate of 1,758,037 shares of Common
Stock at a weighted average exercise price of $0.90 per share. The exercise of
such options and warrants will result in further dilution to new investors. As
of the closing of this Offering, an additional 1,200,000 shares of Common
Stock will be reserved for future issuance under the Company's stock plans.
See "Capitalization", "Management--Compensation of Directors", "--Employee
Benefit Plans", and "Description of Capital Stock".
18
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for the three years ended
December 31, 1995 and for the period from inception (January 16, 1990) through
December 31, 1995, and as of December 31, 1994 and 1995, are derived from the
financial statements of the Company that have been audited by Price Waterhouse
LLP, independent accountants, which are included elsewhere in this Prospectus.
The selected financial data set forth below as of December 31, 1993 are derived
from audited financial statements not included in this Prospectus. The
unaudited statement of operations data for the three months ended March 31,
1995 and 1996 and for the period from inception (January 16, 1990) through
March 31, 1996 and the unaudited balance sheet at March 31, 1996 have been
derived from unaudited financial statements also appearing herein which, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the financial position
and results of operations for the unaudited interim periods. The operating
results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the full fiscal year ending
December 31, 1996 or for any subsequent period. The data set forth below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's financial statements,
related notes thereto and other financial information included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(JANUARY 16, THREE MONTHS (JANUARY 16,
YEAR ENDED DECEMBER 31, 1990) THROUGH ENDED MARCH 31, 1990) THROUGH
---------------------------- DECEMBER 31, ----------------- MARCH 31,
1993(1) 1994 1995 1995 1995 1996 1996
------- ------- ---------- ------------- ----- ---------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Product revenue......... $ -- $ -- $ 68 $ 68 $ -- $ 55 $ 123
Revenue from research
and option agreement... -- 25 -- 25 -- -- 25
------ ------- ---------- ------- ----- ---------- -------
Total revenue......... $ -- $ 25 $ 68 $ 93 $ -- $ 55 $ 148
Cost of goods sold...... -- -- 141 141 -- 49 190
------ ------- ---------- ------- ----- ---------- -------
Gross profit (loss)..... $ -- $ 25 $ (73) $ (48) $ -- $ 6 $ (42)
Costs and expenses:
Research and
development.......... $ 589 $ 1,124 $ 1,560 $ 3,286 $ 414 $ 353 $ 3,639
Selling, general and
administrative....... 321 724 1,110 2,184 191 366 2,550
------ ------- ---------- ------- ----- ---------- -------
Total costs and
expenses........... $ 910 $ 1,848 $ 2,670 $ 5,470 $ 605 $ 719 $ 6,189
------ ------- ---------- ------- ----- ---------- -------
Loss from operations.... $ (910) $(1,823) $ (2,743) $(5,518) $(605) $ (713) $(6,231)
Interest income, net.... 27 164 246 437 44 47 484
------ ------- ---------- ------- ----- ---------- -------
Net loss.............. $ (883) $(1,659) $ (2,497) $(5,081) $(561) $ (666) $(5,747)
====== ======= ========== ======= ===== ========== =======
Pro forma net loss per
share.................. $ (0.32) $ (0.08)
========== ==========
Pro forma weighted
average common and
common equivalent
shares outstanding(2).. 7,727,524 8,102,288
========== ==========
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1993(1) 1994 1995 1996
------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $5,029 $ 3,329 $ 3,948 $ 3,027
Working capital......... 4,865 3,081 3,849 3,149
Total assets............ 5,060 3,421 4,277 3,536
Total liabilities....... 166 266 266 182
Accumulated deficit..... (925) (2,584) (5,081) (5,747)
Stockholders' equity.... 4,813 3,155 4,011 3,353
</TABLE>
- --------
(1) The Company's operations during the period from inception (January 16,
1990) through December 31, 1992 were minimal, consisting primarily of
business establishment and planning. During the period from inception
(January 16, 1990) through December 31, 1991, the Company's only activity
consisted of incorporation and the sale of 50 shares of its Common Stock
for an aggregate of $1. No expenses were recorded during this period.
During the year ended December 31, 1992, the Company's activities were
comprised of initial start up expenses totalling $41,888 (current
liabilities related to these expenses totaled $37,310 at December 31, 1992)
and the issuance of additional Common Stock for cash proceeds of $5,599.
Due to the immaterial nature of these activities, the statement of
operations data for the years ended December 31, 1991 and 1992, and balance
sheet data as of December 31, 1991 and 1992 have been omitted from the
table above. See the Company's financial statements and related notes
thereto included elsewhere in this Prospectus.
(2) For the year ended December 31, 1995 and the three months ended March 31,
1996, pro forma weighted average common and common equivalent shares
outstanding consist of 7,233,875 and 7,619,861 shares of Common Stock,
respectively, after giving effect to the reverse stock split and the
conversion of preferred stock upon the completion of the Offering and
493,649 and 482,427 shares, respectively, attributable to options granted
and Common Stock sold at prices below the offering price in the twelve
months preceding the initial filing of the Company's registration statement
and through the effective date of the Offering using the if-converted
method.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Cambridge Heart is engaged in the research, development and
commercialization of products for the non-invasive diagnosis of cardiac
disease. The Company has generated limited revenues from the shipment of
demonstration units of its first product and has experienced substantial net
losses since its inception, and expects to incur substantial and increasing
net losses for the foreseeable future. The Company believes that its research
and development expenses will increase significantly in the future as it
develops additional products and funds clinical trials of its products. The
Company's research and development expenses may also increase in the future as
it supplements its internal research and development with third party
technology licenses and potential product acquisitions. The Company also
expects that its selling, general and administrative expenses will continue to
increase in connection with the Company's continued expansion of its sales and
marketing activities. Revenues generated from the sale of the Company's
products will depend upon numerous factors, including the timing of regulatory
actions, progress of product development, the extent to which the Company's
products gain market acceptance, varying pricing promotions and volume
discounts to customers, competition and the availability of third party
reimbursement. The Company has incurred cumulative net losses since inception
through March 31, 1996 of approximately $5,747,000. See "Risk Factors--
Development Stage Company; History of Operating Losses".
RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1995 AND 1996
The Company had no product revenue in the quarter ended March 31, 1995 and
product revenue of $55,000 in the quarter ended March 31, 1996. This revenue
resulted from the shipment of demonstration units of the CH 2000 System in the
United States.
Cost of goods sold was $49,000 for the quarter ended March 31, 1996,
representing 89% of product sales. These expenses reflect a number of fixed
costs that were incurred as the Company expanded manufacturing operations in
anticipation of commercializing its products.
The Company's research and development expenses were $414,000 in the quarter
ended March 31, 1995 and $353,000 in the quarter ended March 31, 1996. The
expenses for 1995 included prototype CH 2000 Systems for clinical sites.
The Company's selling, general and administrative expenses increased from
$191,000 in the quarter ended March 31, 1995 to $366,000 in the quarter ended
March 31, 1996. The increase was primarily attributable to the development of
the Company's administrative infrastructure.
Interest income was $44,000 in the quarter ended March 31, 1995, compared to
$47,000 in the quarter ended March 31, 1996.
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
The Company recorded its first product revenue of $68,000 in 1995. This
revenue resulted from the shipment of demonstration units of the CH 2000
System to Fukuda Denshi, the Company's distributor in Japan. In 1994, the
Company recognized revenue of $25,000 in connection with a research and option
agreement with a third party. See "Business--Research and Development".
Cost of goods sold was $141,000 in 1995, representing 208% of product sales
in 1995. These expenses reflect a number of fixed costs that were incurred as
the Company expanded manufacturing operations in anticipation of
commercializing its products.
20
<PAGE>
The Company's research and development expenses were $589,000 in 1993,
$1,124,000 in 1994 and $1,560,000 in 1995. Research and development expenses
have primarily related to product development expenses for the CH 2000 System
which the Company first introduced in the third quarter of 1995. In 1995, the
Company's research and development expenses also included expenses relating to
the development of its proprietary Hi-Res electrodes. The increase in research
and development expenses in 1995 from 1994 was attributable primarily to
increases in personnel and clinical studies support.
The Company's selling, general and administrative expenses increased from
$321,000 in 1993, to $724,000 in 1994 and $1,110,000 in 1995. The increases in
1994 and 1995 were primarily attributable to the development of the Company's
administrative infrastructure.
Interest income was $33,000 in 1993, $164,000 in 1994 and $246,000 in 1995.
The changes in interest income from year to year reflect fluctuations in
interest rates in each of these years as well as an increased cash balance
resulting from the sale of convertible preferred stock in 1993 and 1995. See
"--Liquidity and Capital Resources".
Inflation did not have a significant effect on the Company's results of
operations for any of the three years in the period ended December 31, 1995.
The Company recorded no provision for income taxes for 1993, 1994 and 1995
because it incurred net losses in each of such years. At December 31, 1995,
the Company had net operating loss carryforwards of $4,871,000 as well as
$237,000 of tax credit carryforwards available to offset future taxable income
and income tax liabilities, respectively. These carryforwards generally expire
in the years 2007 through 2010 and may be subject to annual limitations as a
result of changes in the Company's ownership. There can be no assurance that
changes in ownership in future periods or continuing losses will not
significantly limit the Company's use of net operating loss and tax credit
carryforwards.
The Company has generated taxable losses from operations since inception
and, accordingly, has no taxable income available to offset the carryback of
net operating losses. In addition, although management's operating plans
anticipate taxable income in future periods, such plans provide for taxable
losses over the near term and make significant assumptions which cannot be
reasonably assured including approval of the Company's products by the FDA and
market acceptance of these products by customers. Based upon the weight of all
available evidence, the Company has provided a full valuation allowance
($2,200,000 at December 31, 1995) for its deferred tax assets since, in the
opinion of management, realization of these future benefits is not
sufficiently assured (defined as a likelihood of slightly more than 50
percent).
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed operations primarily from the sale
of convertible preferred stock. As of March 31, 1996, the Company had raised
$9,065,000 (net of stock issuance costs) from the sales of equity securities,
with net proceeds of $5,697,000 received in 1993 and $3,353,000 received in
1995.
As of March 31, 1996, the Company had cash and cash equivalents of
$3,027,000. The proceeds of the equity offerings have been used primarily to
fund operating losses of $5,747,000, reflecting expenditures made primarily to
support research and development activities, to form a marketing and sales
organization, to support an administrative infrastructure, and the investment
of approximately $250,000 in property and equipment as of March 31, 1996. In
1995, the Company used $2,615,000 to fund operating activities.
The Company expects its capital expenditures to increase as it continues to
commercialize its products, particularly in connection with the manufacture of
its proprietary Hi-Res electrodes. The Company does not expect capital
expenditures to exceed an aggregate $3,000,000 over the next two years.
21
<PAGE>
Under the terms of various license, consulting and technology agreements,
the Company is required to pay royalties on sales of its products, as further
described in Notes 10 and 11 of the Company's financial statements and related
notes thereto included elsewhere in this Prospectus. Minimum license
maintenance fees under these license agreements, which are creditable against
royalties otherwise payable for each year, range from $20,000 to $45,000 per
year in total through 2008. The Company is committed to pay an aggregate of
$490,000 of such minimum license maintenance fees subsequent to December 31,
1995. As part of these agreements, the Company is also committed to meet
certain development and sales milestones, including a requirement to spend a
minimum of $200,000 in any two-year period for research and development,
clinical trials, marketing, sales and/or manufacturing of products related to
certain technology covered by the consulting and technology agreements.
The Company anticipates that its existing capital resources, together with
the proceeds of this Offering and the interest earned thereon, will be
adequate to satisfy its capital requirements for at least the next two years.
There may be circumstances, however, that would accelerate the Company's use
of proceeds from this Offering. If this occurs, the Company, may, from time to
time, incur additional indebtedness or issue, in public or private
transactions, equity or debt securities. However, there can be no assurance
that suitable debt or equity financing will be available to the Company on
acceptable terms, if at all.
RECENTLY ENACTED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation". The Company has elected to adopt this standard in 1996 through
footnote disclosure only.
22
<PAGE>
BUSINESS
Cambridge Heart is engaged in the research, development and
commercialization of products for the non-invasive diagnosis of cardiac
disease. Using innovative technologies, including proprietary disposable
electrodes, the Company is addressing such key problems in cardiac diagnosis
as (i) the identification of those at risk of sudden cardiac death, accounting
for approximately 50% of all deaths due to heart attack, (ii) the early
detection of coronary artery disease and (iii) the prompt and accurate
diagnosis of heart attack. The Company's lead product, the CH 2000 System, is
designed to perform conventional cardiac stress tests as well as to
incorporate the Company's proprietary technology to non-invasively measure
extremely low levels of T-wave alternans, a beat-to-beat alternation in a
portion of the electrocardiogram. Clinical research published to date has
demonstrated that T-wave alternans is associated with vulnerability to
ventricular arrhythmias responsible for sudden cardiac death to a degree
comparable to EP testing, the most accurate invasive test.
HEART DISEASE
Cardiac disease is the leading cause of death in the United States and many
other developed countries. According to the American Heart Association, in
1993 cardiovascular disease accounted for 42% of all deaths in the United
States. Approximately 1.5 million people suffered heart attacks in the United
States in 1993, resulting in 500,000 deaths. Approximately half of these
deaths were sudden, generally the result of ventricular arrhythmias, which
cause the heart to beat in an abnormal and ineffective manner.
ISCHEMIC HEART DISEASE AND ACUTE MYOCARDIAL INFARCTION
Disease Characteristics. Ischemic heart disease, also referred to as
coronary artery disease, is related to the progressive narrowing of the blood
vessels that supply oxygen and nutrients to the heart. When blood flow becomes
inadequate, the patient may experience chest pain (angina), especially under
conditions of stress or exercise. When the build-up of plaque or the presence
of a blood clot further narrows the coronary arteries, an area of the heart
muscle (myocardium) may die, an event called a myocardial infarction, the most
common type of heart attack.
Disease Incidence. Coronary artery disease is a common form of cardiac
disease, affecting approximately 13.5 million people in the United States. It
is estimated that approximately eight million patients each year present
themselves at emergency rooms in the United States with acute chest pain or
other symptoms typical of acute myocardial infarction. Of these patients, the
Company estimates that approximately 2.7 million are admitted to the hospital
for evaluation, of whom the Company estimates that about 1 million actually
have experienced a myocardial infarction. Despite this high admission rate, it
has been estimated that between 4% and 8% of those patients experiencing
myocardial infarction may be sent home inappropriately, some of whom die soon
thereafter.
Current Therapies. If properly diagnosed, ischemic heart disease is
treatable with coronary artery bypass grafting ("CABG") or coronary
("balloon") angioplasty. These treatments are used to bypass, reopen or widen
blocked or narrowed arteries often in combination with medicines (such as
nitrates, beta blockers and calcium channel blockers), which are used to
improve blood flow or regulate the heart. In 1993, an estimated 485,000 CABG
procedures and 398,000 angioplasty procedures were performed in the United
States.
Current Diagnostic Procedures. The principal non-invasive diagnostic tools
utilized in the diagnosis of ischemic heart disease are the ECG and the
exercise stress test. Normal heartbeats make a specific pattern of electrical
signals that can be measured by an ECG through electrodes applied to the
patient and recorded graphically on paper or displayed on a video monitor.
Specific types of heart disease usually change the pattern of signals in ways
recognizable to a physician.
23
<PAGE>
Most patients with suspected heart disease undergo an exercise stress test,
during which the patient exercises on a motorized treadmill or bicycle
ergometer with ECG electrodes attached to the patient's chest. Although
standard stress tests are widely used as a screening test for heart disease,
stress tests are not considered to be highly sensitive or accurate in
detecting or localizing coronary artery blockages. For example, these tests
generally have a false negative rate on the order of 34%, and, in the absence
of chest pain, as high as 63%. This lack of accuracy may result in unnecessary
follow-on procedures or in the failure to detect significant heart disease.
The accuracy of stress tests and the ability to locate coronary artery
disease may be enhanced by the use of ultrasound imaging technology (an
"echocardiogram"), or through the use of a low level radioactive tracer
isotope (a "nuclear stress test"). Both of these tests are considered to be
more sensitive in detecting and analyzing coronary artery blockages than a
standard treadmill exercise test, but are also substantially more expensive.
There were approximately six million standard exercise ECG stress tests
performed in the United States in 1995 at a cost of $200 to $350 per
procedure. In addition, there were an estimated 1.5 million echocardiogram
stress tests performed at a cost of $800 to $1,000 per procedure and 1.5
million nuclear stress tests performed at a cost of $1,000 to $1,500 per
procedure.
Patients with a positive stress test or with suspected coronary artery
disease will generally undergo invasive coronary angiography. In this
procedure, a catheter is inserted through an artery in the leg or arm and
guided into the patient's coronary arteries, where the physician can use the
catheter to diagnose the nature and extent of the patient's coronary artery
disease. In 1993, approximately 1.5 million coronary angiographies were
performed in the United States at a cost of approximately $3,000 to $4,000 per
procedure.
VENTRICULAR ARRHYTHMIA AND SUDDEN CARDIAC DEATH
Disease Characteristics. Arrhythmias are abnormalities in the regular
beating pattern of the heart caused by an alteration in the normal pattern of
conduction of electrical signals within the heart. Sudden cardiac arrest is
generally caused by ventricular fibrillation, a disorganized quivering of the
ventricles which interferes with the pumping action of the heart, or by
ventricular tachycardia, a rapid beating of the ventricles which can
degenerate into ventricular fibrillation. Ventricular fibrillation and
ventricular tachycardia most often result from the triggering of an underlying
electrical instability of the heart. This electrical instability may be the
result of congenital factors, may be caused by scar tissue from a previous
myocardial infarction, or may result from coronary artery disease or other
diseases.
Disease Incidence. Each year more than 300,000 individuals in the United
States experience a sudden cardiac arrest episode. Of these, the Company
estimates that approximately 250,000 individuals die and 50,000 individuals
survive, primarily through emergency defibrillation. Most of those who die
suddenly have some pre-identified condition which puts them at elevated risk.
For example, without treatment, the approximately 50,000 annual survivors of a
cardiac arrest episode have over a 25% chance of dying suddenly in the one
year following cardiac arrest. Of the approximately 1.0 million annual
survivors of myocardial infarction, 13% of men and 6% of women will die
suddenly in the following six years. Patients with enlarged hearts due to
hypertrophic cardiomyopathy, patients with congestive heart failure
(approximately 4.7 million patients), patients with known coronary artery
disease (approximately 13.5 million patients) and patients who have
experienced fainting spells are also at elevated risk. Such high risk
subgroups account for approximately 75% of sudden cardiac deaths; for the
other 25% there is no prior indication of cardiac disease.
24
<PAGE>
Current Therapies. When properly diagnosed, those patients at risk of sudden
cardiac death are treatable with an ICD, with RF ablation of abnormal tissue
in the ventricles, which can improve electrical conduction in the heart, or
with anti-arrhythmic medication. In the United States, most patients are
treated with an ICD, an electronic device similar to a pacemaker that is
permanently implanted in the patient. The ICD is designed to monitor the
patient's heartbeat and, in the event of ventricular fibrillation or
ventricular tachycardia, to deliver electric pulses or shocks to the heart to
terminate the arrhythmia. It is estimated that 21,000 ICDs were implanted in
1995 in the United States.
Current Diagnostic Procedures. Patients believed to be at risk of
ventricular arrhythmia may undergo an electrophysiology ("EP") study.
Diagnostic EP studies are invasive and involve the deliberate electric
stimulation of the heart utilizing specially-designed catheters. These
catheters are inserted into the heart through a major vein or artery to
provoke heart rhythm disturbances which, if they occur, are then terminated by
pacing or defibrillation shocks. Patients in whom certain types of ventricular
arrhythmia can be induced via this procedure are considered to be at risk of
sudden cardiac death.
Although EP studies are generally effective in diagnosing cardiac
arrhythmias, they are invasive and costly procedures. As a result, their use
is generally limited to patients who have demonstrated previous episodes of
ventricular arrhythmia, or have experienced fainting spells believed to be
caused by these arrhythmias. The Company estimates that approximately 75,000
EP studies were performed for the diagnosis of ventricular arrhythmias in 1995
in the United States at a cost of $3,000 to $4,000 per procedure. This
represents a small fraction of the many millions of persons believed to be at
risk but who are not studied or treated because of the lack of an effective
non-invasive screening test.
The Company believes that, aside from its technology, there is no effective
non-invasive diagnostic test to assess accurately the risk of sudden cardiac
death caused by ventricular arrhythmia. The non-invasive diagnostic tests that
are available generally either identify only a small subset of patients who
are at risk of sudden cardiac death or are not sufficiently accurate to
warrant further invasive study or treatment. For example, (i) the
identification of short episodes of non-sustained ventricular tachycardia on a
24-hour Holter ECG recording, (ii) the presence of late potentials (delayed
electrical activity in the ventricles) on the signal averaged ECG, (iii)
reduced beat-to-beat variability in heart rate, (iv) reduced response in heart
rate to blood pressure changes (baroreceptor sensitivity) and (v) increased
variation in the duration of the QT interval among different electrocardiogram
leads in the same patient, all have been reported to be associated with an
increased risk of sudden cardiac death. However, none of these methods are
generally considered to be sufficiently accurate to warrant further invasive
study or treatment. Finally, ejection fraction, which uses ultrasound or
nuclear imaging to measure the percentage of blood ejected from the heart on
each beat, can indicate a damaged heart which is ineffective in pumping blood.
This is associated with increased rates of sudden cardiac death and with
increased risk of mortality in general; however, because ejection fraction is
not specific in identifying those with high risk of ventricular arrhythmia, it
is not generally considered sufficient to identify those who need to be
invasively studied or treated to prevent sudden death.
NEED FOR IMPROVED DIAGNOSTIC TECHNIQUES
In 1996, developing low-cost, non-invasive technologies to address the
following diagnostic challenges are key problems in cardiac diagnosis:
Sudden Cardiac Death. A study released in April 1996 (the "MADIT Study")
indicates that the prophylactic implantation of ICDs can reduce mortality in
high-risk patients. Although such preventive therapies for sudden cardiac
death have recently become available, non-invasive diagnostic techniques have
not matched these advances. Existing non-invasive diagnostic procedures
generally either identify only a small subset of patients who are at risk of
sudden cardiac death or are not sufficiently accurate to warrant further
invasive study or treatment. EP studies are not an attractive alternative
because they are both invasive and expensive. As a result, despite the fact
that there are
25
<PAGE>
approximately 250,000 sudden deaths per year, and at least several times that
number of patients are at risk, fewer than 30,000 received definitive
treatment in 1995. This attests to the need for an accurate, non-invasive,
diagnostic procedure to identify patients at risk of sudden cardiac death.
Accurate and Cost Effective Detection of Coronary Artery Disease. Despite
the fact that approximately six million standard stress tests are performed
each year in the United States at a cost of approximately $1.8 billion, these
tests are generally not considered to be very accurate in detecting or
localizing coronary artery blockages. Other tests, such as echocardiograms and
nuclear stress tests, are somewhat more accurate but are significantly more
expensive. Coronary angiography, like EP studies, is both invasive and
expensive. The need therefore exists for a more accurate and low cost non-
invasive method to identify patients with ischemic heart disease, particularly
in the asymptomatic population.
Accurate and Timely Diagnosis of Acute Myocardial Infarction. With eight
million patients in the United States arriving at hospital emergency rooms
each year complaining of acute chest pain or other symptoms typical of acute
myocardial infarction, the Company believes that a fast and accurate means of
diagnosing acute myocardial infarction is needed. Existing technologies, such
as the 12 lead ECG, can be inaccurate in the diagnosis of impending myocardial
infarction, and diagnosis based on serial enzyme tests can take too long. With
the recognition that the early use of thrombolytics (blood clot dissolving
drugs) in those with acute myocardial infarction can improve a patient's
outcome, a faster and more accurate method of diagnosis has become
increasingly important.
THE CAMBRIDGE HEART SOLUTION
Cambridge Heart has developed an innovative, proprietary non-invasive
cardiac diagnostic system which the Company believes will address shortcomings
in currently available cardiac diagnostic procedures. The Company's initial
product, the CH 2000 System, is designed to perform a broad range of cardiac
stress tests as well as to incorporate the Company's T-wave alternans
technology. Current clinical research into T-wave alternans has demonstrated
an association between T-wave alternans and vulnerability to ventricular
arrhythmia.
The Company's research on its CH 2000 System, using T-wave alternans
technology and Hi-Res electrodes to diagnose ventricular arrhythmias,
indicates that the Company's system has the following potential advantages:
. ACCURACY
Clinical studies to date indicate that the detection
of T-wave alternans can identify vulnerability to
ventricular arrhythmias more accurately than other
non-invasive tests and with results comparable to
those of EP studies.
. NON-INVASIVE
Unlike EP studies which require the insertion of
electrical catheters into the patient's heart and the
administration of local anesthesia, the CH 2000
System requires only the placement of electrodes on
the patient's chest.
. BROAD APPLICABILITY Six million standard stress tests and three million
imaging stress tests were performed in the United
States in 1995. The CH 2000 System, incorporating the
Company's proprietary T-wave alternans technology, is
designed to simultaneously detect coronary artery
disease and assess the risk of sudden cardiac death
due to ventricular arrhythmias and with only a modest
increase--less than $100--in the total cost of the
procedure.
. NON-HOSPITAL SETTING Unlike EP studies and other tests which require a
hospital setting, the CH 2000 System can be used in a
physician's office.
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. PROCEDURE COST ADVANTAGES
The Company anticipates that a stress test with the
CH 2000 System utilizing T-wave alternans technology
will cost approximately $400 per procedure, compared
with approximately $3,000 to $4,000 for an EP study.
. SYSTEM AFFORDABILITY Starting at under $30,000, the CH 2000 System is only
moderately more expensive than standard stress test
systems and only 10% to 30% the cost of certain other
equipment, such as ultrasound or nuclear imaging
equipment.
The Company is also conducting research into the detection of ischemic heart
disease using its cardiac electrical imaging technology. CEI provides an image
of the electrical activity of the heart that is highly sensitive to changes
resulting from ischemia, the lack of oxygen caused by coronary artery disease
or acute myocardial infarction. The Company intends to pursue application of
this technology (i) to provide for enhanced detection and localization of
coronary artery disease during a standard exercise stress test and (ii) to
provide faster and more accurate diagnosis of acute myocardial infarction in
patients who arrive at hospital emergency rooms with acute chest pain.
BUSINESS STRATEGY
The Company's principal objective is to establish the CH 2000 System as the
preferred method for the diagnosis of ventricular arrhythmia. The Company also
intends to develop additional cardiac diagnostic products based upon its
proprietary technology. The Company intends to seek FDA clearance or approval
for promotion of the CH 2000 System for the diagnosis of ventricular
arrhythmias and to implement the following strategies:
. Establish Acceptance of the CH 2000 System By Opinion Leaders. The
Company has enlisted leading medical centers with recognized cardiac care
expertise in the United States and Europe as the initial users of the CH
2000 System, and believes that the successful adoption of its products by
widely recognized cardiology opinion leaders is a critical element in
fostering the market acceptance of its products. The Company intends to
continue to work with leading medical centers and to invest in clinical
studies to establish the efficacy of its products and their
appropriateness for use in the diagnosis of heart disease.
. Expand Usage to Broad Patient Populations. The Company initially intends
to target its T-wave alternans technology for the use by
electrophysiologists on the highest risk patients. The Company will then
work to expand the adoption of this technology by hospital stress test
laboratories and for use on intermediate risk patients such as survivors
of myocardial infarction. Ultimately, the Company intends to market the
CH 2000 System to office cardiologists for general diagnostic and
screening applications.
. Utilize the CH 2000 System to Support Additional Diagnostic
Functions. The Company is conducting research and development of its
proprietary CEI technology for the diagnosis of coronary artery disease
and the detection of acute myocardial infarction. The Company is
evaluating the incorporation of this technology into the CH 2000 System,
as well as for stand-alone use in hospital emergency rooms.
. Establish Disposable Electrodes Business. The effective implementation of
the Company's T-wave alternans and CEI technologies require the use of
proprietary disposable electrodes which the Company believes will provide
a recurring source of revenue as its installed base of CH 2000 Systems
expands. The Company intends to continue to invest in its proprietary Hi-
Res electrodes and other proprietary disposable technologies.
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<PAGE>
. Establish Strategic Alliances and Distribution Arrangements. In addition
to the Company's existing distribution arrangements with Fukuda Denshi
and Kontron, the Company intends to pursue other strategic relationships,
as appropriate, in order to broaden the acceptance of its products as
quickly as possible and to increase the use of its disposable electrodes.
. Protect and Enhance Proprietary Technology Base. The Company believes
that its intellectual property and technological expertise are important
competitive resources. The Company continues to evaluate markets and
products to exploit its underlying technology. In addition, the Company
maintains a program of intellectual property protection, both to assure
that the proprietary technology developed by the Company is appropriately
protected, and, where necessary, to assure that there is no infringement
of the Company's proprietary technologies by competitive technologies.
PRODUCTS AND APPLICATIONS
The CH 2000 System is designed to perform conventional cardiac stress tests
as well as to incorporate the Company's proprietary T-wave alternans
technology. Current clinical research into T-wave alternans has demonstrated
an association between certain T-wave alternans and vulnerability to
ventricular arrhythmias. The Company's proprietary T-wave alternans technology
permits evaluation, computation and recording of T-wave alternans during
bicycle exercise, atrial pacing or pharmacological stress. Because of the need
to record very small variations in electric signals for precise T-wave
alternans measurement, the CH 2000 System incorporates proprietary Hi-Res
electrodes and proprietary signal processing algorithms to minimize noise
levels resulting from patient movement.
THE CH 2000 SYSTEM
The Company's CH 2000 System is a fully-featured diagnostic system that
includes a cart- mounted computer with proprietary software, integral ECG
system, display, keyboard and output devices which can be configured for both
hospital and office settings. This system is designed to support a broad range
of standard and physician-customized protocols for the conduct and measurement
of cardiac stress tests and is compatible with both standard electrodes and
with the Company's Hi-Res electrodes for T-wave alternans analysis. The CH
2000 System is capable of controlling both treadmill and bicycle ergometers
and is well suited for standard, nuclear or echocardiogram stress tests.
In addition to the incorporation of T-wave alternans technology, the CH 2000
System has been designed to provide a broad range of special features,
including the following:
. A 15-inch high-resolution color monitor for the display of critical data
and parameters, including the display of full 12-lead output, or that of
any specific lead, as required.
. The capacity to generate printed output including 12-lead reports, a
summary of an entire stress test on one page, and alternans levels versus
normal heart rate for an entire study.
. The incorporation of hard disk and optional optical disk storage of data
acquired during the stress test, facilitating both post-test analysis and
post-test annotation of results.
. A modular design using standard computer components for easy maintenance
and upgrade.
Although the Company's strategic focus is on its proprietary T-wave
alternans and CEI technologies, the Company expects that its international
distribution partners, Kontron and Fukuda Denshi, will market the base CH 2000
System as their top-end offering in the stress test market.
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<PAGE>
ASSOCIATION OF T-WAVE ALTERNANS AND VENTRICULAR ARRHYTHMIAS
The association between ventricular arrythmia and extremely low levels of T-
wave alternans (not detectable by visual inspection of the ECG) was unknown
until recently. Research conducted in Dr. Richard Cohen's laboratory at MIT
beginning in the early 1980's indicated that analysis of microvolt (millionth
of a volt) levels of T-wave alternans was predictive of vulnerability to
ventricular arrhythmias responsible for sudden cardiac death. Dr. Cohen and
his associates developed the technology to quantify this electrical conduction
pattern which has been exclusively licensed to the Company and which forms the
basis of the Company's proprietary technology.
In a collaborative study of 83 patients conducted at Massachusetts General
Hospital ("MGH") in collaboration with Dr. Cohen's laboratory at MIT, which
was published in the New England Journal of Medicine in December 1994, the
detection of T-wave alternans at certain levels in patients referred for EP
studies was shown to be as accurate as invasive EP testing in predicting
sudden cardiac death and life-threatening ventricular arrhythmias. In the high
risk population studied for up to 20 months following the procedure, an
actuarial analysis involving 66 patients indicated that 81% of those testing
positive for T-wave alternans died or suffered a life-threatening arrhythmia
within 20 months of the test; only 6% of the patients testing negative for T-
wave alternans did so. These results were comparable to those obtained with
invasive EP testing and were more predictive than those which have been
reported using other non-invasive methods.
[Graph: T-wave alternans compared to EP testing appears here]
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<PAGE>
The Company has sponsored and is continuing to sponsor a number of clinical
studies relating to the CH 2000 System, its T-wave alternans technology and
its Hi-Res electrodes to establish the prognostic value of T-wave alternans
technology. There can be no assurance that the results of such studies will
confirm earlier studies, or that regulatory clearance will be received. The
following table sets forth clinical studies concerning T-wave alternans:
<TABLE>
<CAPTION>
NUMBER OF
STUDY PURPOSE PATIENTS SITE(S) STATUS
----- ------- --------- ------- ------
<S> <C> <C> <C> <C>
Pilot Pacing/EP Assessment of T- 23 Massachusetts Completed(1)
Study* wave alternans General Hospital
during atrial
pacing
Pacing/EP Study* Assessment of T- 83 Massachusetts Completed(2)
wave alternans General Hospital
during atrial
pacing
Pilot Assessment of T- 26 Tufts/New England Completed(3)
Exercise/EP wave alternans Medical Center and
Study during exercise in others
EP patients
Exercise/EP Assessment of T- 100 Tufts/New England Enrolling
Study wave alternans Medical Center and Patients
during exercise in others
EP patients
ICD Pilot Correlation of T- 22 Lahey Clinic, Completed(4)
wave alternans with Massachusetts
activation of ICDs
ICD Study Correlation of T- 100 Massachusetts Enrolling
wave alternans with General Hospital Patients
activation of ICDs
HCM Pilot Identification of 17 St. George's Completed(5)
hypertrophic Medical Center,
cardiomyopathy London
through T-wave
alternans
HCM Study Identification of 100 St. George's Enrolling
hypertrophic Medical Center Patients
cardiomyopathy
through T-wave
alternans
Controls Study Demonstration that 100 SUNY Downstate Enrolling
persons without Medical Center, New Patients
heart disease do York
not have T-wave
alternans
Post-Myocardial Prediction of 300 St. George's Enrolling
Infarction Pilot arrhythmic events Medical Center; Patients
Study in post-myocardial Frankfurt
infarction patients University; Hopital
Nord, Marseille;
University of
Pavia, Italy;
Nippon Medical
School, Tokyo
</TABLE>
* Study not sponsored by the Company.
- --------
(1) Smith JM, et al. Electrical alternans and cardiac electrical instability.
Circulation 1988; 77:110-121.
(2) Rosenbaum DS, et al. Electrical alternans and vulnerability to ventricular
arrhythmia. New England Journal of Medicine 1994; 330:235-241 and
Rosenbaum et al. New approaches for evaluating cardiac electrical
activity: repolarization alternans and body surface Laplacian mapping. In
Cardiac Electrophysiology: From Cell to Bedside, WB Saunders Co.,
Philadelphia, 1994.
(3) Abstract published in PACE 1995, Vol. 18, pg. 796.
(4) In this study of 22 patients with ICD's, TWA was shown to correlate with
previous and subsequent ICD firings. Unpublished.
(5) Abstract published in Momiyama Y, et al. Exercise Induced T-wave Alternans
as a Marker of High-risk Patients with Hypertrophic Cardiomyopathy.
Journal of the American College of Cardiology Feb. 1996 Special Issue.
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CARDIAC ELECTRICAL IMAGING FOR ISCHEMIC HEART DISEASE
The Company is conducting research into systems to detect ischemic heart
disease based upon its CEI technology, which provides an image of the
electrical activity of the heart. Animal studies and an initial human study
indicate that CEI is highly sensitive to changes resulting from ischemia, the
lack of oxygen caused by coronary artery disease or acute myocardial
infarction. The Company intends to pursue application of this technology (i)
to provide for enhanced detection and localization of coronary artery disease
during a standard exercise stress test and (ii) to provide faster and more
accurate diagnosis of acute myocardial infarction in patients who arrive at
hospital emergency rooms with acute chest pain.
Cardiac electrical imaging utilizes the Company's own signal processing
software and a proprietary array of disposable "Laplacian" electrodes. Each
electrode is focused in that it provides signals from a highly localized
region of the heart, in contrast to standard electrodes which record signals
from all regions of the heart. An array of Laplacian electrodes provides a
highly sensitive means of detecting the presence of ischemia and localizing
the regions of ischemia within the heart.
The Company is evaluating the incorporation of CEI technology into the CH
2000 System, and intends to initiate additional clinical studies of this
technology in the second half of 1996. In addition, the Company is evaluating
the commercial feasibility of a portable system incorporating CEI technology
for hospital emergency room use to detect acute myocardial infarction.
MARKETING AND SALES
The Company is targeting the market for cardiac stress systems with its CH
2000 System. In 1995, approximately 3,000 cardiac stress systems were sold in
the United States, and the Company believes that the total installed U.S. base
of cardiac stress systems is approximately 23,000 units.
The Company believes that the key to the adoption of the CH 2000 System and
market acceptance of its proprietary technologies to diagnose heart disease
will be continued clinical development and positive clinical experience with
the CH 2000 System, together with the publication of these results in medical
journals. The commercial success of the CH 2000 System will require marketing,
educational and sales efforts to encourage cardiologists and other medical
professionals to utilize T-wave alternans testing and, eventually, CEI, in
their medical practices. The Company plans to establish centers of excellence
at leading cardiology medical centers, fund studies to further demonstrate the
efficiency of its technologies, support seminars and symposiums and
participate in industry trade shows and academic conferences.
The Company intends to market its products in the United States primarily
through a direct sales force in major urban areas and through independent
distributors elsewhere. The Company has hired a Vice President of Sales and
Business Development to lead its sales and marketing organization and is in
the process of hiring additional sales and support personnel as it introduces
the CH 2000 System in the U.S. market.
The Company intends to market its products internationally through
independent distributors. The Company has entered into distribution agreements
with Kontron for the sale of the CH 2000 System in Europe and the Middle East,
and with Fukuda Denshi for the sale of the CH 2000 System in Japan. The
Company sold a limited number of demonstration units to Fukuda Denshi in 1995.
The Company began commercial shipment of complete CH 2000 Systems, including
Hi-Res electrodes, to Kontron in April 1996, and commercial shipments to
Fukuda Denshi are expected to begin following the approval of the Japanese
Ministry of Health, anticipated in late 1996.
MANUFACTURING
Cambridge Heart performs final assembly, including hardware and software
components, and testing of its products, at its headquarters in Bedford,
Massachusetts. The Company believes its facility will be adequate to meet its
needs through 1997. The Company will be required to meet and adhere
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to all applicable requirements of U.S. and international regulatory agencies,
including GMP standards. The Company's manufacturing facilities are subject to
periodic inspection by both U.S. and international regulatory agencies. See
"--Government Regulation".
The manufacturing process consists primarily of final assembly of purchased
components, testing operations and packaging. Components are purchased
according to the Company's specifications and are inspected and tested by the
Company. The Company relies on outside vendors to manufacture certain major
components used in the CH 2000 System, including its Hi-Res electrodes. A
number of components are currently supplied by sole source vendors. See "Risk
Factors--Dependence Upon Key Suppliers".
RESEARCH AND DEVELOPMENT
The Company has licensed four different product technologies from MIT,
including the technology underlying T-wave alternans and CEI, which were
developed at MIT over a period of approximately ten years at a cost of over
five million dollars. The Company also has rights to any follow-on
technologies developed at MIT which are derived from the four original
technologies. The Company is actively engaged in commercializing the CH 2000
System, and is conducting research and development with respect to its CEI
technology, which is investigational. The Company is evaluating this
technology both for incorporation into the CH 2000 System and for stand-alone
use in hospital emergency rooms.
The Company believes that its technology base will permit it to develop
additional products for use in the diagnosis and treatment of cardiac disease.
Other cardiac diagnostic and treatment areas the Company intends to
investigate include monitoring of blood flow from the heart as a method of
measuring hemodynamic deterioration and the measurement of beat-to-beat
fluctuation in heart rate, blood pressure and respiration rate to measure and
quantify directly the functioning of the body's regulatory mechanisms. These
technologies will require significant additional research and development
expenditures by the Company in the event it should elect to pursue any of
these technologies and the Company has not yet commenced any product
development or clinical testing of these technologies.
The Company's research and development expenses were $589,000 in 1993,
$1,124,000 in 1994 and $1,560,000 in 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations". The Company
expects research and development expenses to increase significantly in the
future as it develops additional products and funds clinical trials on its
products. As of May 1, 1996 the Company had ten employees engaged in research
and development activities.
PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
The computer algorithms that allow the CH 2000 System to measure T-wave
alternans and certain aspects of the Company's CEI technology, including the
CEI electrodes, are covered by U.S. patents issued to MIT that are licensed
exclusively to the Company. The Company has applied for a U.S. patent covering
the use of exercise or physiological stress in the measurement of T-wave
alternans, which has been allowed, and corresponding foreign patents are
pending. The Company has also applied for U.S. and foreign patents covering
additional proprietary signal processing algorithms and its Hi-Res electrodes
for use in the measurement of T-wave alternans. The failure to obtain such
patents could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company owns or is the
exclusive licensee of seven patents issued or allowed and six patents pending
in the United States, with 17 corresponding foreign patents issued or pending
with respect to its technololgy.
The Company believes that its intellectual property and expertise, as
originally licensed from MIT and thereafter developed at the Company,
constitute an important competitive resource, and the Company intends to
continue to aggressively evaluate markets and products which are most
appropriate to exploit the expertise licensed by, and developed at, the
Company. In addition, the
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Company intends to maintain an active program of intellectual property
protection, both to assure that the proprietary technology developed by the
Company is appropriately protected, and, where necessary, to assure that there
is no infringement of the Company's proprietary technology by competitive
technologies.
The Company's future success will depend, in part, on its ability to
continue to develop patentable products, enforce its patents and obtain patent
protection for its products both in the United States and in other countries.
However, the patent positions of medical device companies, including the
Company, are generally uncertain and involve complex legal and factual
questions. No assurance can be given that patents will issue from any patent
applications owned by or licensed to the Company or that, if patents do issue,
the claims allowed will be sufficiently broad to protect the Company's
technology. In addition, no assurance can be given that any issued patents
owned by or licensed to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company.
The commercial success of the Company will also depend in part on its
neither infringing patents issued to others nor breaching the licenses upon
which the Company's products are based. The Company has licensed significant
technology and patents from third parties, including patents and technology
relating to T-wave alternans and CEI licensed from MIT. The Company's licenses
of patents and patent applications impose various commercialization,
sublicensing, insurance, royalty and other obligations on the Company. Failure
of the Company to comply with these requirements could result in conversion of
the licenses from being exclusive to nonexclusive in nature or, in some cases,
termination of the license.
The MIT License Agreements provide that the licenses granted therein (the
"MIT Licenses") are exclusive worldwide for a period ending on the earlier to
occur of either 12 years after the first commercial sale of products employing
licensed technology or the expiration of 15 years after the effective date of
the Agreements. MIT reserves the right to practice under the licensed patent
rights and to use and distribute to third parties for noncommercial research
purposes the underlying technology . The MIT License Agreements provide that
the Company must achieve certain milestones, which include raising equity
capital, filing applications with the FDA and generating specified revenues
beginning in 1998. If such milestones are not achieved, MIT has the right to
terminate the MIT Licenses, although such agreements provide that such
milestones may be revised at the request of the Company if it can demonstrate
its diligence in seeking the FDA approvals necessary to sell products
encompassing the licensed technology. Under the MIT License Agreement covering
the T-wave alternans technology, the Company must achieve sales of $50,000 in
1998, $100,000 in 1999 and $500,000 in 2000 and each year thereafter. The MIT
License Agreement covering cardiac imaging technology requires that the
Company achieve sales of related products of $100,000 in 1998, $500,000 in
1999 and $1,000,000 in 2000 and each year thereafter. The MIT License
Agreements also set forth certain royalties to be paid by the Company to MIT
and contain provisions relating to potential infringement of the patent rights
that allow, but do not require, either party to take action against such
infringement. The MIT License Agreements further provide that the Company will
indemnify MIT for all losses suffered by MIT through the Company's use of the
licensed technology. The royalty rate under each of the licenses is 2%, but
has been reduced in accordance with the terms of the agreement relating to the
T-wave alternans technology to 1.5% due to the significant value added by the
Company. For a description of the Company's license agreement with Dr. Cohen,
see "Certain Transactions".
The Company also relies on unpatented trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire substantially equivalent
technologies or otherwise gain access to the Company's proprietary technology
or disclose such technology or that the Company can ultimately protect
meaningful rights to such unpatented proprietary technology. The Company
relies on confidentiality agreements with its
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<PAGE>
collaborators, employees, advisors, vendors and consultants to protect its
trade secrets. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be
independently developed by competitors. Failure to obtain or maintain patent
and trade secret protection for the Company's products, for any reason, would
have a material adverse effect on the Company's business, financial condition
and results of operations.
COMPETITION
The medical device market is characterized by intensive development efforts
and rapidly advancing technology. The future success of the Company will
depend, in large part, upon its ability to anticipate and keep pace with
advancing technology and competitive innovations. However, there can be no
assurance that the Company will be successful in identifying, developing and
marketing new products or enhancing its existing products. In addition, there
can be no assurance that new products or alternative diagnostic techniques
will not be developed that will render the Company's current or planned
products obsolete or inferior. Rapid technological development by competitors
may result in the Company's products becoming obsolete before the Company
recovers a significant portion of the research, development and
commercialization expenses incurred with respect to such products. Alternative
technologies exist today in each of the areas being addressed by the Company,
including ECGs, Holter monitors, ultrasound tests and systems for measuring
cardiac late potentials.
Competition from medical devices which help to diagnose cardiac disease is
intense and likely to increase. The Company's competitors include
manufacturers of ECG stress test equipment, including major multinational
companies. Many of the Company's competitors and potential competitors have
substantially greater capital resources, name recognition, research and
development experience and regulatory, manufacturing and marketing
capabilities. Many of these competitors offer well established, broad product
lines and ancillary services not offered by the Company. Some of the Company's
competitors have long-term or preferential supply arrangements with hospitals
that may act as a barrier to market entry. Other large health care companies
may enter the non-invasive cardiac diagnostic product market in the future.
Competing companies may succeed in developing products that are more
efficacious or less costly than any that may be developed by the Company, and
such companies also may be more successful than the Company in producing and
marketing such products or their existing products. Competing companies may
also introduce competitive pricing pressures that may adversely affect the
Company's sales levels and margins. There can be no assurance that the Company
will be able to compete successfully with existing or new competitors.
GOVERNMENT REGULATION
The manufacture and sale of medical devices intended for commercial
distribution are subject to extensive governmental regulation in the United
States. Medical devices are regulated in the United States by the FDA and
generally require pre-market clearance or pre-market approval prior to
commercial distribution. In addition, certain material changes or
modifications to medical devices also are subject to FDA review and clearance
or approval. The FDA regulates the research, testing, manufacture, safety,
labeling, storage, record keeping, advertising and distribution of medical
devices in the United States. Noncompliance with applicable requirements can
result in failure of the government to grant pre-market clearance or approval
for devices, withdrawal of approval, total or partial suspension of
production, fines, injunctions, civil penalties, recall or seizure of
products, and criminal prosecution.
Medical devices are classified into one of three classes, Class I, II or
III, on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness.
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Class I devices are subject to general controls (e.g., labeling, pre-market
notification and adherence to GMP standards). Class II devices are subject to
general controls and special controls (e.g., performance standards, post-
market surveillance, patient registries and FDA guidelines). Generally, Class
III devices are those that must receive pre-market approval by the FDA to
ensure their safety and effectiveness (e.g., life-sustaining, life-supporting
and implantable or new devices which have not been found to be substantially
equivalent to legally marketed devices), and require clinical testing to
ensure safety and effectiveness and FDA approval prior to marketing and
distribution. The FDA also has the authority to require clinical testing of
Class I and Class II devices. A PMA application must be filed if a proposed
device is not substantially equivalent to a legally marketed predicate device
or if it is a Class III device for which the FDA has called for such
application.
Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
pre-market notification ("510(k) notification") submission or approval of a
PMA application. If a medical device manufacturer or distributor can establish
that a device is "substantially equivalent" to a legally marketed Class I or
Class II device, or to a Class III device for which the FDA has not called for
PMAs, the manufacturer or distributor may seek clearance from the FDA to
market the device by filing a 510(k) notification. The 510(k) notification may
need to be supported by appropriate data establishing the claim of substantial
equivalence to the FDA. The FDA recently has been requiring a more rigorous
demonstration of substantial equivalence.
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an
order clearing the 510(k) is issued by the FDA. At this time, the FDA
typically responds to the submission of a 510(k) notification within 90 to 200
days. An FDA order may declare that the device is substantially equivalent to
a legally marketed device and allow the proposed device to be marketed in the
United States. The FDA, however, may determine that the proposed device is not
substantially equivalent or requires further information, including clinical
data, to make a determination regarding substantial equivalence. Such
determination or request for additional information generally delays market
introduction of the product that is the subject of the 510(k) notification.
All clinical investigations involving the use of an unapproved or uncleared
device on humans to determine the safety or effectiveness of the device must
be conducted in accordance with the FDA's IDE regulations. If the device
presents a "significant risk," the manufacturer or distributor of the device
is required to file an IDE application with the FDA prior to commencing human
clinical trials. The IDE application must be supported by data, typically the
result of animal and, possibly, mechanical testing. If the IDE application is
approved by the FDA, human clinical trials may begin at a specific number of
investigational sites with a maximum number of patients, as approved by the
FDA. If the device presents a "non-significant risk," approval by an
Institutional Review Board prior to commencing human clinical trials is
required.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to a legally marketed device, the
manufacturer or distributor must seek pre-market approval of the proposed
device through submission of a PMA application. A PMA application must be
supported by extensive data, including preclinical and clinical trial data, as
well as an extensive literature review to prove the safety and effectiveness
of the device. Following receipt of a PMA application, if the FDA determines
that the application is sufficiently complete to permit a substantive review,
the agency will "file" the application. The FDA has 180 days to review a PMA
application, although the review of an application more often occurs over a
protracted time period, and generally takes two years or more from the filing
date to complete.
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The PMA approval process can be expensive, uncertain and lengthy. A number
of devices for which pre-market approval has been sought have never been
approved for marketing. The review time is often significantly extended by the
FDA, which may require more information or clarification of information
already provided in the submission. During the review period, an advisory
committee likely will be convened by the FDA to review and evaluate the
application and provide recommendations to the agency as to whether the device
should be approved. 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 granted, the approval may include
significant limitations on the indicated uses for which a product may be
marketed.
Any products manufactured or distributed by the Company are subject to
pervasive and continuing regulation by the FDA including record keeping
requirements, reporting of adverse experience with the use of the device,
post-market surveillance, post-market registry and other actions deemed
necessary by the FDA. A 510(k) submission is also required when a medical
device manufacturer makes a change or modification to a legally marketed
device that could significantly affect the safety or effectiveness of the
device, or where there is a major change or modification in the intended use
of the device. When any change or modification is made to a device or its
intended use, the manufacturer is expected to make the initial determination
as to whether the change or modification is of a kind that would necessitate
the filing of a new 510(k) application. The FDA's regulations provide only
limited guidance for making this determination. The FDA's regulations also
require agency approval of a PMA or 510(k) supplement for certain changes to a
PMA device if they affect the safety and effectiveness of the device,
including, but not limited to, new indications for use, labeling changes, the
use of a different facility to manufacture, process or package the device,
changes in manufacturing methods or quality control systems and changes in
performance or design specifications. Failure by the Company to receive
approval of a PMA supplement regarding the use of a different manufacturing
facility or any other change affecting the safety or effectiveness of an
approved or cleared device on a timely basis, or at all, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Sales of medical device products outside the United States are subject to
foreign regulatory requirements that vary from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing
may differ from FDA requirements. Failure to comply with regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. The current regulatory
environment in Europe for medical devices differs significantly from that in
the United States. There is currently no universally accepted definition of a
medical device in Europe and there is no common approach to medical device
regulation among the various countries. There are several different regulatory
regimes operating within the different European countries. Regulatory
requirements for medical devices range from no regulations in some countries
to rigorous regulations approaching the requirements of the FDA's regulations
for Class III medical devices. Several countries require that device safety be
demonstrated prior to approval for commercialization. The regulatory
environment in certain European countries is expected to undergo major changes
as a result of the creation of medical directives by the European Union.
The CH 2000 System has received 510(k) clearance from the FDA for sale in
the United States. A 510(k) pre-market approval application for the Hi-Res
electrodes was filed in May 1996 and clearance is expected to be received in
the fourth quarter of 1996. The timing of the electrode clearance cannot be
predicted with great accuracy. However, because no claims concerning T-wave
alternans are being made for the electrodes (the only claim is that they
reduce noise in the ECG which is readily demonstrable), and because the
Company believes the electrodes meet all applicable safety and performance
standards, it is anticipated that the electrodes will be cleared under the
510(k) process. There can, however, be no assurance that the electrodes will
be cleared by the FDA under
36
<PAGE>
the 510(k) process, if at all. At present, the Company can, however, market
and sell the CH 2000 System without the Hi-Res electrodes as well as make the
electrodes available at cost to those conducting clinical studies of T-wave
alternans. However, the Company has chosen to limit sales of the CH2000 System
in the United States to a limited number of clinical sites until the Hi-Res
electrodes receive FDA clearance.
The 510(k) clearance for the CH 2000 System includes the claim that the CH
2000 System can measure T-wave alternans but no claim about the applicability
or prognostic use of the alternans measurement. The Company is currently
conducting further clinical studies and expects to make a subsequent 510(k)
submission to the FDA with additional clinical data in order to obtain a
subsequent clearance with broader claims. This submission is expected to be
made in the first half of 1997, with clearance possible by early 1998, but
there can be no assurance that such clearance will be obtained on a timely
basis, if at all. Until clearance or approval of the broader prognostic claims
is obtained, the Company may not publicize the prognostic capabilities of its
T-wave alternans technology.
Internationally, the Company received the CE mark for sale in Europe for the
CH 2000 System in April 1996, and application has been made for approval with
the Ministry of Health in Japan.
REIMBURSEMENT
Suppliers of health care products and services are greatly affected by
Medicare, Medicaid and other government insurance programs, as well as by
private insurance reimbursement programs. Third party payors (Medicare,
Medicaid, private health insurance, health administration authorities in
foreign countries and other organizations) may affect the pricing or relative
attractiveness of the Company's products by regulating the maximum amount of
reimbursement provided for by such payors to the physicians and clinics
utilizing the CH 2000 System or by taking the position that such reimbursement
is not available at all.
The Company believes that the availability and level of third party
reimbursement will influence the decisions of physicians, clinics and
hospitals to purchase and use the Company's products and thereby affect the
pricing of the Company's products. The Company's strategy to obtain approval
of payments to physicians using its products includes (i) enlisting the
assistance of leading cardiac specialists in making presentations to health
care administrators to inform them of the benefits of the additional data
provided by the CH 2000 System, and of the potential pharmacoeconomic benefits
resulting from the use of the products and (ii) working with professional
organizations to foster awareness and support for its products.
Several states and the federal government are investigating a variety of
alternatives to reform the health care delivery system and reduce and control
health care spending. These reform efforts include proposals to limit spending
on health care items and services, limit coverage for new technology and limit
or control directly the price health care providers and drug and device
manufacturers may charge for their services and products. The scope and timing
of such reforms cannot be predicted, but if adopted and implemented, such
reforms could have a material adverse effect on the Company. See "Risk
Factors--Uncertainty Relating to Third-Party Reimbursement".
SCIENTIFIC ADVISORY BOARD
The Company utilizes a number of scientists and physicians to advise it on
scientific and medical matters. The Company's Scientific Advisory Board meets
quarterly and its members consult individually with the Company on a periodic
basis. Generally, each of its members have been awarded options to purchase
shares of the Company's Common Stock. The current members of the Company's
Scientific Advisory Board are:
Richard J. Cohen, M.D., Ph.D., is the scientific founder of Cambridge Heart,
serves as Chairman of its Scientific Advisory Board, and as a director and
consultant to the Company. See "Management--Executive Officers and Directors".
37
<PAGE>
Jeremy Ruskin, M.D., has been the Director of the Cardiac Arrhythmia Service
and the Electrophysiology Laboratory of the Massachusetts General Hospital
since 1978. He has been an Associate Professor of Medicine at the Harvard
Medical School since 1983. He has served on the editorial boards of seven
medical journals including Annals of Internal Medicine, The Journal of the
American College of Cardiology and The Journal of Cardiovascular
Electrophysiology, and is a reviewer for 12 major medical and cardiology
journals including the New England Journal of Medicine, Circulation and the
Journal of Electrophysiology. He has been an advisor to various medical
committees and associations including a member of the FDA Cardiovascular and
Renal Drugs Advisory Committee (1986-1991) and has served as program chairman
of the 42nd Annual Scientific Session of the American College of Cardiology.
Dr. Ruskin earned a B.S. from Tufts University and an M.D. from Harvard
Medical School.
Myron L. Weisfeldt, M.D., is the Chairman of the Department of Medicine at
Columbia University College of Physicians and Surgeons, the Director of
Medical Service at The Presbyterian Hospital and is Head of the Cardiovascular
Center at Columbia Presbyterian Medical Center. He obtained his Clinical and
Research Fellowship in Cardiology at Massachusetts General Hospital. From 1987
to 1990, Dr. Weisfeldt was Chairman of the Cardiology Advisory Board of the
National Heart, Lung and Blood Institute and held the position of President of
the American Heart Association from 1989 to 1990. Through 1991, he held
various positions with The Johns Hopkins University School of Medicine
including Director of the Peter Belfer Laboratory for Myocardial Research,
Director of the Cardiology Division and Professor of Medicine. Dr. Weisfeldt
serves on the editorial board of Circulation and the Journal of American
College of Cardiology. Dr. Weisfeldt received a B.A. from The Johns Hopkins
University and an M.D. from The Johns Hopkins University School of Medicine.
Douglas P. Zipes, M.D., has been Professor of Medicine at the Indiana
University School of Medicine since 1976 and since 1995 has been Chairman of
the Department of Cardiology. Dr. Zipes serves as the Chairman of the Medical
Advisory Board of Medtronic, Inc. Dr. Zipes serves on the Board of Trustees of
the American College of Cardiology and North American Society of Pacing and
Electrophysiology, of which he was President in 1989. He is a member of the
Cardiology Advisory Committee of the National Heart, Lung and Blood Institute,
a member of the Subspeciality Board on Cardiovascular Disease of the American
Board of Internal Medicine and Chairman of the Test Committee on Clinical
Cardiac Electrophysiology. Dr. Zipes is Editor in Chief of Cardiology in
Review and the Journal of Cardiovascular Electrophysiology. He presently
serves on the editorial boards of the American Journal of Cardiology, American
Heart Journal, American Journal of Medicine, Cardiovascular Drugs and Therapy,
Circulation, PACE and the Japanese Heart Journal. Dr. Zipes earned a B.A. from
Dartmouth College, a Bachelors in Medical Science from Dartmouth Medical
School and an M.D. from Harvard Medical School.
EMPLOYEES
As of June 30, 1996, the Company had 20 full-time employees, of whom 5 hold
Ph.D. degrees and 8 hold other advanced degrees. None of the Company's
employees is represented by a collective bargaining agreement, nor has the
Company experienced work stoppages. The Company believes that its relations
with its employees are good.
FACILITIES
The Company's facilities consist of approximately 11,000 square feet of
office, research and manufacturing space located at 1 Oak Park Drive, Bedford,
Massachusetts pursuant to a lease which expires in the year 2000. The Company
believes that suitable additional space will be available to it, when needed,
on commercially reasonable terms.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
38
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeffrey M. Arnold.............. 47 President, Chief Executive Officer and
Director
Thomas V. Hennessey, Jr. ...... 47 Vice President of Operations, Treasurer and
Chief Financial Officer
Paul Albrecht, Ph.D. .......... 39 Vice President of Engineering and Secretary
J. Alex Martin................. 43 Vice President of Sales and Business
Development
Robert T. Miragliuolo.......... 43 Vice President of Clinical and Regulatory
Affairs
Marlene Krauss, M.D.(1)........ 51 Chairperson
Zachary C. Berk, O.D.(2)....... 48 Director
Laurence J. Blumberg, M.D...... 34 Director
Richard J. Cohen, M.D., 45 Director
Ph.D. ........................
M. Fazle Husain(1)............. 32 Director
David F. Muller, Ph.D.(1)...... 47 Director
David F. Rollo, M.D., Ph.D. ... 57 Director
Rolf S. Stutz(2)............... 47 Director
</TABLE>
- --------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
Jeffrey M. Arnold. Mr. Arnold has been President and Chief Executive Officer
of the Company since September 1993. From 1990 to 1992, Mr. Arnold was
President and Chief Executive Officer and a director of Molecular Simulations
Inc., formerly Polygen Corporation, a leading supplier of software for
rational drug design. From 1992 until 1993, Mr. Arnold was an independent
management consultant providing interim executive management to high
technology companies. He was formerly Vice President of Operations,
Instrumentation Products for Datascope Corporation and has held positions as
director of marketing and director of research and development positions for
the medical systems division of Becton Dickinson. Mr. Arnold is a director of
Momentum Software Corporation. Mr. Arnold received a B.S. in Electrical
Engineering from MIT.
Thomas V. Hennessey, Jr. Mr. Hennessey has been Vice President of Operations
and Chief Financial Officer since November 1995. From 1992 to 1995, Mr.
Hennessey was the Chief Financial Officer at AutoImmune, Inc., a biotechnology
company. From 1991 to 1992 he was Vice President and Chief Financial Officer
of Medical Diagnostics, Inc., a provider of medical imaging services. Earlier
in his career he held positions at the Mansfield Division of Boston Scientific
Corporation and at Digital Equipment Corporation. Mr. Hennessey received a
B.S. and an M.S. in Mechanical Engineering from MIT and an M.B.A. from Harvard
Graduate School of Business Administration.
Paul Albrecht, Ph.D. Dr. Albrecht has been Vice President of Engineering
since June 1993. From 1991 to 1993, Dr. Albrecht was Engineering Manager at
Cerner Corporation, where he previously served as Director of Research and
Development and Principal of Intellimetrics Corporation (which was acquired by
Cerner in 1991). Dr. Albrecht received a B.A. in Physics from Dartmouth
College, an M.S. in Electrical Engineering from MIT and a Ph.D. in Medical
Engineering from the Harvard-MIT Division of Health Sciences and Technology.
J. Alex Martin. Mr. Martin has been Vice President of Sales and Business
Development since June 1995. From 1989 to 1995, Mr. Martin was employed by the
USCI Division of C.R. Bard Inc., during which time he served in various
positions, including Director of Marketing for the Angioplasty Division
39
<PAGE>
and National Sales Manager for USCI. Mr. Martin has over 15 years of sales and
marketing experience in the vascular and cardiovascular medical device
industry. Mr. Martin received a B.G.S. from the University of Kentucky.
Robert T. Miragliuolo. Mr. Miragliuolo has been Vice President of Regulatory
and Clinical Affairs since April 1996. From 1987 until April 1996, Mr.
Miragliuolo was employed by C.R. Bard, Inc. During this time he served in
several positions, including Corporate Director of Scientific Affairs and then
Director of Regulatory Affairs for Cardiology. Prior to that he was Principal
Research Scientist at Lever Brothers Company. Mr. Miragliuolo has a B.S. in
Biology from Providence College and an M.S. in Biostatistics from the
University of Vermont.
Marlene Krauss, M.D. Dr. Krauss, a founder of the Company, has been
Chairperson and a Director of the Company since 1990. Since August 1991 Dr.
Krauss has served as Chairperson and Chief Executive Officer of KBL
Healthcare, Inc., a merchant and investment banking firm focused exclusively
on the health care industry. In November 1992, Dr. Krauss co-founded KBL
Healthcare Acquisition Corporation, a publicly traded acquisition company, and
served as its Chairperson and Chief Executive Officer through its acquisition
of Concord Health Group, Inc. ("CHG"), an operator of long term care
facilities, in August 1994. Dr. Krauss served as Vice Chairperson of the Board
of CHG from August 1994 until the sale of CHG to the Multicare Companies,
Inc., in February 1996. Dr. Krauss was formerly President and Managing
Director of the Med-Tech Group, a division of D.H. Blair & Co. Dr. Krauss
received a B.A. from Cornell University, an M.B.A. from Harvard Graduate
School of Business Administration and an M.D. from Harvard Medical School.
Zachary C. Berk, O.D., Dr. Berk, a founder of the Company, has been a
Director of the Company since 1993. Since August 1991 Dr. Berk has been
Managing Director of KBL Healthcare, Inc., a merchant and investment banking
firm which he co-founded. In November 1992, Dr. Berk co-founded KBL Healthcare
Acquisition Corporation, a publicly traded acquisition company, and served as
Vice President, Treasurer and director through its acquisition of Concord
Health Group, Inc. ("CHG"), an operator of long term care facilities, in
August 1994. Dr. Berk served as a director of CHG from August 1994 until the
sale of CHG to the Multicare Companies, Inc., in February 1996. Dr. Berk is a
former Senior Vice President of the Med-Tech Group, a division of D.H. Blair &
Co. Dr. Berk received a B.S. and Doctorate of Optometry from Pacific
University.
Laurence J. Blumberg, M.D., Dr. Blumberg, a founder of the Company, has
served as a director of the Company since June 1996. From June 1994 to
present, Dr. Blumberg has also served as Vice President, Equity Research at
Alliance Capital Management, L.P., an investment fund manager. From August
1992 to June 1994, Dr. Blumberg was an independent healthcare consultant.
During this time he consulted for KBL Healthcare, Inc. and S Squared
Technology, a money management firm. From October 1991 to August 1992, he was
vice president of Castle Group Ltd, a medical technology venture capital
group. From June 1989 until October 1991, he was with D.H. Blair & Co. Dr.
Blumberg received a B.A. in physics from Brandeis University, an M.D. from
Temple University School of Medicine and completed an M.B.A. at Columbia
Business School.
Richard J. Cohen, M.D., Ph.D. Dr. Cohen, the scientific founder of the
Company, has been a director of and consultant to the Company since February
1993. Dr. Cohen has been, since 1979, Professor of Health Sciences and
Technology at the Harvard-MIT Division of Health Sciences and Technology and
is on the staff at the Brigham and Women's Hospital and Children's Hospital,
both in Boston. From 1985 to 1995, Dr. Cohen was the Director of the Harvard-
MIT Center for Biomedical Engineering, and he is currently the Director of the
NASA Center for Quantitative Cardiovascular Physiology, Modeling and Data
Analysis located at MIT. He serves on the editorial board of the Journal of
Cardiovascular Electrophysiology and The Annals of Noninvasive
Electrocardiology. Dr. Cohen received a B.A. from Harvard College, an M.D.
from Harvard Medical School and a Ph.D. in Physics from MIT.
M. Fazle Husain. Mr. Husain has been a director of the Company since July
1995. Since August 1991 Mr. Husain has been a Vice President of Morgan Stanley
& Co. Incorporated and of the Managing General Partner of certain partnerships
which beneficially own Common Stock of the
40
<PAGE>
Company. Mr. Husain also serves on the Board of Directors of Enterprise
Systems, Inc. Mr. Husain received an Sc.B. in Chemical Engineering from Brown
University, and an M.B.A. from the Harvard Graduate School of Business
Administration.
David F. Muller, Ph.D. Dr. Muller has been a director of the Company since
1993. Since 1986 Dr. Muller has been President and Director of Summit
Technology, Inc., a manufacturer of excimer lasers for ophthalmology which he
helped to found. He also was a founder of ExciMed Technologies, a joint
venture, and the predecessor of Summit Technology. Dr. Muller received his
A.B. in Chemistry and Physics from Boston University, a Ph.D. in Physical
Chemistry from Cornell University and an M.B.A. from the Wharton School of
Finance.
David F. Rollo, M.D., Ph.D. Dr. Rollo has been a director of the Company
since 1993. Since June 1996 Dr. Rollo has been the Senior Vice President of
Medical Affairs & Medical Director of Raytel Medical Corporation. From April
1995 until June 1996, Dr. Rollo was Senior Vice President of HCIA HealthInfo
Co., a medical device company. From October 1992 to April 1995, he was
President and Chief Executive Officer of Metricor, Inc., a health care
consulting organization and former subsidiary of Humana, Inc., where he was
Senior Vice President of Medical Affairs from September 1980 to October 1992.
Dr. Rollo is a Director of Positron Corporation, ADAC Laboratories and Raytel
Medical Corp. He received a B.A. in Mathematics, Physics and Chemistry from
Harper College, Binghamton, New York, an M.D. from Upstate Medical Center, a
Ph.D. in Physics from the Johns Hopkins Medical Institute, and an M.S. in
Radiological Physics from the University of Miami.
Rolf S. Stutz. Mr. Stutz has been a director of the Company since 1993.
Since 1983, he has been Chief Executive Officer and director of Zoll Medical,
a medical device manufacturer, where he was named Chairman in June 1996. Mr.
Stutz is also a Director of Hemasure, Inc. Mr. Stutz received an A.B. from the
University of North Carolina and an M.B.A. from the Harvard Graduate School of
Business Administration.
Following this Offering, the Board of Directors will be divided into three
classes, each of whose members will serve for a staggered three-year term. The
Board will consist of three Class I Directors (Dr. Berk, Mr. Arnold and Dr.
Rollo), three Class II Directors (Dr. Cohen, Mr. Husain and Dr. Muller) and
three Class III Directors (Dr. Blumberg, Dr. Krauss and Mr. Stutz). At each
annual meeting of stockholders, a class of directors will be elected for a
three-year term to succeed the directors of the same class whose terms are
then expiring. The terms of the Class I Directors, Class II Directors and
Class III Directors will expire upon the election and qualification of
successor directors at the annual meeting of stockholders to be held during
the calendar years 1997, 1998 and 1999, respectively.
Each officer serves at the discretion of the Board of Directors. Dr. Krauss
is married to Dr. Berk. There are no other family relationships among any
executive officers or directors of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a Compensation Committee, which makes
recommendations concerning salaries and incentive compensation for employees
of and consultants to the Company, establishes and approves salaries and
incentive compensation for certain senior officers and employees and
administers and grants stock options pursuant to the Company's stock plans.
The current members of the Compensation Committee are Dr. Krauss, Mr. Husain
and Dr. Muller. The Board of Directors also has an Audit Committee, which
reviews the results and scope of the audit and other services provided by the
Company's independent public accountants. The current members of the Audit
Committee are Dr. Berk and Mr. Stutz.
COMPENSATION OF DIRECTORS
The Company's non-employee directors, other than those representing major
stockholders of the Company, receive a fee of $500 per meeting of the Board of
Directors. All non-employee directors
41
<PAGE>
receive reasonable travel and out-of-pocket expenses for attendance at
meetings of the Board of Directors. Directors are also eligible to receive
stock options under the 1996 Director Stock Option Plan (the "Director Plan").
See--"Director Option Plan."
DIRECTOR OPTION PLAN
The Director Plan was adopted by the Board of Directors in May 1996, was
approved by the stockholders in June 1996, and will become effective upon the
closing of this Offering. Under the terms of the Director Plan, options (the
"Director Options") to purchase 10,000 shares of Common Stock will be granted
to each of Dr. Muller, Dr. Rollo and Mr. Stutz on the closing of the Offering
and thereafter to each person who becomes a non-employee director after the
closing date of the Offering and who is not otherwise affiliated with the
Company, effective as of the date of election to the Board of Directors. The
Director Options will vest in equal annual installments over three years after
the date of grant. Director Options will become immediately exercisable upon
the occurrence of a change in control (as defined in the Director Plan). A
total of 100,000 shares of Common Stock may be issued upon the exercise of
stock options granted under the Director Plan. The exercise price of options
granted under the Director Plan will equal the closing price of the Common
Stock on the Nasdaq National Market on the date of grant.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned by the
Chief Executive Officer of the Company and each of the other most highly
compensated executive officers during the fiscal year ended December 31, 1995
(the Chief Executive Officer and such other executive officers are referred to
as the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------- ------------
NUMBER OF
SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION(S) ($) ($) OPTIONS ($)
------------------------------ ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Jeffrey M. Arnold............... $ 157,466 $ 30,000 191,500 --
President and Chief Executive
Officer
Thomas V. Hennessey, Jr.(1)..... 13,564 -- 75,000 --
Vice President of Operations,
Chief Financial Officer and
Treasurer
Paul Albrecht, Ph.D. ........... 107,559 25,000 -- --
Vice President of Engineering
and Secretary
J. Alex Martin(2)............... 57,468 5,417 75,000 --
Vice President of Sales and
Business Development
</TABLE>
- --------
(1) Joined the Company in November 1995.
(2) Joined the Company in June 1995.
42
<PAGE>
OPTION GRANTS
The following table sets forth certain information concerning grants of
stock options made during fiscal 1995 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
------------------------------- REALIZABLE
PERCENT VALUE AT
OF TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERMS(2)
OPTIONS IN FISCAL PRICE EXPIRATION --------------------
NAME GRANTED (#)(1) YEAR ($/SHARE) DATE 5% 10%
---- -------------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey M. Arnold....... 191,500 48.3% $0.50 05/22/05 $ 60,217 $ 152,601
Thomas V. Hennessey,
Jr. ................... 75,000 18.9 1.00 11/20/05 47,167 119,531
Paul Albrecht, Ph.D..... -- -- -- -- -- --
J. Alex Martin.......... 75,000 18.9 1.00 06/15/05 47,167 119,531
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
- --------
(1) The expiration date of each option is the tenth anniversary of the date on
which it was originally granted. These options are intended to qualify as
incentive stock options and are exercisable in five equal installments
commencing on the first anniversary of the date of grant.
(2) The amounts shown on this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock appreciation of 5%
and 10%, compounded annually from the date the respective options were
granted to their expiration date. The gains shown are net of the option
exercise price, but do not include deductions for taxes or other expenses
associated with the exercise. Actual gains, if any, on stock option
exercises will depend on the future performance of the Common Stock, the
option holders' continued employment through the option period, and the
date on which the options are exercised.
The following table sets forth certain information concerning the number and
value of unexercised options held by each of the Named Executive Officers on
December 31, 1995, and the number and value of any options exercised during
the year ended December 31, 1995 by each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END($)(1)
ACQUIRED REALIZED ------------------------------ -------------------------
NAME ON EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey M. Arnold....... 91,163 $16,409 155,300 561,199 $130,012 $318,578
Thomas V. Hennessey,
Jr..................... -- -- -- 75,000 -- --
Paul Albrecht, Ph.D..... 22,500 22,455 45,000 135,000 36,000 121,365
J. Alex Martin.......... -- -- -- 75,000 -- --
</TABLE>
- --------
(1) The value of the unexercised, in-the-money options on December 31, 1995 is
based on the difference between the fair market value of the shares as of
such date and the per share option exercise price, multiplied by the
number of shares of Common Stock underlying the options.
43
<PAGE>
EMPLOYMENT AGREEMENTS
The Company is a party to an employment agreement with Mr. Arnold for the
period commencing September 1, 1993 and ending September 1, 1998. The
agreement provides that Mr. Arnold is entitled to receive a base salary of
$150,000 and is eligible to receive a bonus of up to $50,000 per year based
upon the achievement of mutually agreed-upon objectives determined annually by
the Company's Board of Directors. The Company also granted Mr. Arnold an
option to purchase 616,162 shares of Common Stock, of which 123,232 have an
exercise price of $.02 per share, 401,767 have an exercise price of $.20 per
share and 91,163 have an exercise price of $2.00 per share. If his employment
is terminated by the Company without cause, Mr. Arnold will be entitled to
receive severance compensation in an amount equal to nine months' base salary.
In the event of a Change in Control of the Company (as defined in the
employment agreement), all options which are currently outstanding will become
immediately exercisable. Furthermore, Mr. Arnold is entitled to terminate his
employment agreement within 90 days of a Change in Control of the Company and
to receive severance compensation equal to nine months' base salary. The
agreement also contains a non-competition covenant pursuant to which Mr.
Arnold is prohibited from competing with the Company during his employment
with the Company and for a period of one year thereafter. Throughout the term
of this employment agreement, the Board agrees to nominate Mr. Arnold, and the
Company agrees to use its best efforts to cause Mr. Arnold to be elected, to
the Board of Directors of the Company.
The Company is a party to an employment agreement with Dr. Albrecht which
provides for a five-year term ending on June 15, 1998. The agreement provides
for an annual base salary of $100,000, as well as an annual bonus of up to
$30,000 based upon the achievement of mutually agreed-upon objectives
determined annually by the Company's Board of Directors. The Company also
granted Dr. Albrecht an option to purchase 225,000 shares of Common Stock, of
which 112,500 have an exercise price of $.002 per share and 112,500 have an
exercise price of $.20 per share. If his employment is terminated by the
Company without cause, Dr. Albrecht will be entitled to receive severance
compensation in an amount equal to six months' base salary. The agreement also
contains a non-competition covenant pursuant to which Dr. Albrecht is
prohibited from competing with the Company during his employment by the
Company and for a period of 18 months thereafter.
EMPLOYEE BENEFIT PLANS
1993 AMENDED AND RESTATED INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
The Company's 1993 Incentive and Non-Qualified Stock Option Plan (the "1993
Option Plan") was adopted by the Company in September 1993. The 1993 Option
Plan provides for the grant of stock options to key employees and consultants
of the Company and any parent or subsidiary of the Company. Under the 1993
Option Plan, the Company may grant options that are intended to qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") ("incentive stock options"), or
options not intended to qualify as incentive stock options ("non-statutory
options"). Incentive stock options may be granted only to employees of the
Company. A total of 1,688,663 shares of Common Stock may be issued upon the
exercise of options granted under the 1993 Option Plan.
The 1993 Option Plan is administered by the Stock Option Committee of the
Board of Directors. Subject to the provisions of the 1993 Option Plan, the
Stock Option Committee has the authority to select the employees to whom
options are granted and determine the terms of each option, including (i) the
number of shares of Common Stock subject to the option, (ii) when the option
becomes exercisable, (iii) the option exercise price, which, in the case of
incentive stock options, must be at least 100% (110% in the case of incentive
stock options granted to a stockholder owning in excess of 10% of the
Company's Common Stock) of the fair market value of the Common Stock as of the
date of grant, and (iv) the duration of the option (which, in the case of
incentive stock options, may not exceed ten years (five years in the case of a
stockholder owning in excess of 10% of the Company's Common Stock).
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<PAGE>
Payment of the option exercise price may be made in cash, by check or, in
some circumstances, by delivery of shares of Common Stock, provided such
shares have been held for at least six months. The 1993 Option Plan provides
further that the Stock Option Committee may allow additional forms of payment,
so long as such forms of payment are consistent with applicable laws and
regulations. Options are not assignable or transferable except by will or the
laws of descent and distribution and, in the case of non-statutory options,
pursuant to a qualified domestic relations order (as defined in the Code).
As of June 30, 1996, the Company had 20 full-time employees, all of whom
were eligible to participate in the 1993 Option Plan; however, the Company
does not intend to award options under the 1993 Option Plan after the closing
of the Offering.
The 1993 Stock Option Plan places certain restrictions on the transfer of
stock acquired upon the exercise of incentive stock options granted under the
1993 Option Plan. The Stock Option Committee may, in its sole discretion,
include additional provisions in any option or award granted or made under the
1993 Option Plan, including without limitation restrictions on transfer,
repurchase rights, commitments to pay cash bonuses, to make, arrange for or
guaranty loans or to transfer other property to optionees upon exercise of
options, or such other provisions as shall be determined by the Stock Option
Committee, so long as not inconsistent with the 1993 Option Plan or with
applicable law. The Stock Option Committee may also, in its sole discretion,
accelerate or extend the date or dates on which all or any particular option
or options granted under the 1993 Option Plan may be exercised.
1996 EQUITY INCENTIVE PLAN
The Company's 1996 Equity Incentive Plan (the "1996 Plan") was adopted by
the Board of Directors on May 29, 1996 and approved by the stockholders of the
Company in June 1996. The 1996 Plan provides for the grant of stock awards,
restricted stock awards, stock options, stock appreciation rights and
performance shares, to employees, officers and directors of, and consultants
or advisors to, the Company and its subsidiaries. Under the 1996 Plan, the
Company may grant incentive stock options or nonstatutory stock options.
Incentive stock options may only be granted to employees of the Company. A
total of 1,000,000 shares of Common Stock may be granted under the 1996 Plan.
Unless otherwise terminated, the 1996 Plan will terminate in June 2006.
The 1996 Plan is administered by the Compensation Committee of the Board of
Directors. Subject to the provisions of the 1996 Plan, the Compensation
Committee has the authority to select the employees to whom options are
granted and determine the terms of each option, including (i) the number of
shares of Common Stock subject to the option, (ii) when the option becomes
exercisable, (iii) the option exercise price, which, in the case of incentive
stock options, must be at least 100% (110% in the case of incentive stock
options granted to a stockholder owning in excess of 10% of the Company's
Common Stock) of the fair market value of the Common Stock as of the date of
grant, and (iv) the duration of the option (which, in the case of incentive
stock options, may not exceed ten years; five years in the case of incentive
stock options granted to stockholders owning in excess of 10% of the Company's
Common Stock). The Compensation Committee may, in its sole discretion, include
additional provisions in any option or award granted or made under the 1996
Plan, so long as not inconsistent with the 1996 Plan or applicable law. The
Compensation Committee may also, in its sole discretion, accelerate or extend
the date or dates on which all or any particular option or options granted
under the 1996 Plan may be exercised.
Payment of the option exercise price may be made in cash, shares of Common
Stock, a combination of cash or stock, by a broker-assisted cashless exercise
or by any other method (including delivery of a promissory note payable on
terms specified by the Compensation Committee) approved by the Compensation
Committee consistent with Section 422 of the Code and Rule 16b-3 ("Rule 16b-
3") under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
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As of June 30, 1996, the Company had 20 employees, all of whom were eligible
to participate in the 1996 Plan. The maximum number of shares which may be
granted in any calendar year to any optionee is 300,000. The number of
individuals receiving stock options varies from year to year depending upon
various factors, such as the number of promotions and the Company's hiring
needs during the year, and thus the Company cannot now determine the number of
shares of Common Stock to be awarded to any particular current executive
officer, to all current executive officers as a group or to non-executive
employees as a group.
All options are nontransferable other than by will or the law of descent and
distribution and, in the case of options which are not incentive stock
options, pursuant to a qualified domestic relations order. Incentive stock
options are exercisable during the lifetime of the option holder only while
the option holder is in the employ of the Company, or within three months
after termination of employment. In the event that termination is due to death
or disability, or if death occurs within three months after termination, the
option is exercisable for a one-year period thereafter.
To the extent not exercised, all options granted under the 1996 Plan shall
terminate immediately prior to a dissolution or liquidation of the Company. In
the event of a merger of the Company or the sale of substantially all of the
assets of the Company, the Board of Directors shall have the discretion to
accelerate the vesting of the options granted under the 1996 Plan.
Federal Income Tax Consequences. No taxable income will be recognized by an
optionee upon the grant or exercise of an incentive stock option (provided
that the difference between the option exercise price and the fair market
value of the stock on the date of exercise must be included in the optionee's
"alternative minimum taxable income"), and no corresponding expense deduction
will be available to the Company. Generally, if an optionee holds shares
acquired upon the exercise of incentive stock options until the later of (i)
two years from the grant of the option and (ii) one year from the date of
transfer of the purchased shares to him or her (the "Statutory Holding
Period"), any gain to the optionee upon a sale of such shares will be treated
as capital gain. The gain recognized upon the sale of the stock is the
difference between the option price and the sale price of the stock. The net
federal income tax effect on the holder of incentive stock options is to
defer, until the stock is sold, taxation of any increase in the stock's value
from the time of grant to the time of exercise, and to cause such increase to
be treated as capital gain.
If the optionee sells the shares prior to the expiration of the Statutory
Holding Period, he or she will realize taxable income at ordinary income tax
rates in an amount equal to the lesser of (i) the fair market value of the
shares on the date of exercise less the option price, or (ii) the amount
realized on the sale less the option price, and the Company will receive a
corresponding business expense deduction. Any additional gain will be treated
as long-term capital gain if the shares are held for more than one year prior
to the sale and as short-term capital gain if the shares are held for a
shorter period. If the optionee sells the stock for less than the option
price, he or she will recognize a capital loss equal to the difference between
the sale price and the option price. The loss will be a long-term capital loss
if the shares are held for more than one year prior to the sale and short-term
capital loss if the shares are held for a shorter period.
No taxable income is recognized by the optionee upon the grant of a
nonstatutory option. The optionee must recognize as ordinary income in the
year in which the option is exercised the amount by which the fair market
value of the purchased shares on the date of exercise exceeds the option price
(and the Company may be required to withhold an appropriate amount for tax
purposes). If the optionee is a person who is required to file reports
pursuant to Section 16(a) of the Exchange Act, then upon the exercise of an
option within six months from the date of grant no income will be recognized
by the optionee until six months have expired from the date the option was
granted, and the income then recognized will include any appreciation in the
value of the shares during the period between the date of exercise and the
date six months after the date of grant (unless the optionee makes an election
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under Section 83(b) of the Code to have the difference between the exercise
price and fair market value on the date of exercise recognized as ordinary
income as of the time of exercise). The Company will be entitled to a business
expense deduction equal to the amount of ordinary income recognized by the
optionee, subject to the limitations of Section 162(m) of the Code. Any
additional gain or any loss recognized upon the subsequent disposition of the
purchased shares will be a capital gain or loss, and will be a long-term gain
or loss if the shares are held for more than one year.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in May 1996, was approved by the
stockholders in June 1996, and will become effective upon the closing of this
Offering. The Purchase Plan authorizes the issuance of up to a total of
100,000 shares of Common Stock to participating employees.
All employees of the Company, including directors of the Company who are
employees, are eligible to participate in the Purchase Plan. Employees who
would immediately after the grant own 5% or more of the total combined voting
power or value of the stock of the Company or any subsidiary are not eligible
to participate. As of June 30, 1996, 19 of the Company's employees would have
been eligible to participate in the Purchase Plan.
On the first day of a designated payroll deduction period (the "Offering
Period"), the Company will grant to each eligible employee who has elected to
participate in the Purchase Plan an option to purchase shares of Common Stock
as follows: The employee may authorize an amount (a whole percentage from 1%
to 10% of such employee's regular pay) to be deducted by the Company from such
pay during the Offering Period. On the last day of the Offering Period, the
employee is deemed to have exercised the option, at the option exercise price,
to the extent of accumulated payroll deductions. Under the terms of the
Purchase Plan, the option price is an amount equal to 85% of the fair market
value per share of the Common Stock on either the first day or the last day of
the Offering Period, whichever is lower. In no event may an employee purchase
in any one Offering Period a number of shares which is more than 15% of the
employee's annualized base pay divided by 85% of the market value of a share
of Common Stock on the commencement date of the Offering Period. The
Compensation Committee may, in its discretions, choose an Offering Period of
12 months or less for each of the Offerings and choose a different Offering
Period for each Offering.
If an employee is not a participant on the last day of the Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded. An employee's
rights under the Purchase Plan terminate upon voluntary withdrawal from the
Purchase Plan at any time or when such employee ceases employment for any
reason, except that upon termination of employment because of death, the
employee's beneficiary has certain rights to elect to exercise the option to
purchase the shares which the accumulated payroll deductions in the
participant's account would purchase at the date of death.
Federal Income Tax Consequences. The Purchase Plan is intended to be an
"Employee Stock Purchase Plan" within the meaning of Section 423 of the Code
which provides that the participant does not have to pay any federal income
tax upon enrolling in an offering under the Purchase Plan or upon purchasing
shares of the Common Stock at the end of an offering. The participant is,
however, required to pay federal income tax at the time he or she sells such
shares on the excess, if any, of the price at which he or she sells the shares
over the price he or she paid for them.
If the participant has owned the shares for more than one year and disposes
of them at least two years after the day the offering commenced, he will be
taxed as follows. If the sale of the shares is less than the price paid for
the shares under the Purchase Plan, the participant will incur a long-term
capital loss in an amount equal to the excess of the price paid over the sale
price. If the sale price is
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<PAGE>
higher than the price paid under the Purchase Plan, the participant will have
to recognize ordinary income in an amount equal to the lesser of (a) the
excess of the market price of the shares on the day the offering commenced
over the price paid (in which case the balance of the gain realized on sale
will be treated as long-term capital gain) or (b) the excess of the sale price
over the price paid.
If the participant sells the shares before he or she has owned them for more
than one year or before the expiration of a two-year period commencing on the
day the offering period commenced, the participant will have to recognize
ordinary income on the amount of the excess of the purchase price paid over
the market price of the shares on the date of purchase, and the Company will
receive an expense deduction for the same amount, subject to the limitations
imposed by Section 162(m) of the Code. The participant will recognize a
capital gain or loss (long- or short-term, depending on the period he has
owned the shares) for the excess of the sale price over the market value on
the date of purchase.
Except as described in the preceding paragraph, the Company will not be
entitled to a tax deduction upon the purchase or sale of shares under the
Purchase Plan.
401(K) SAVINGS AND RETIREMENT PLAN
In 1995, the Company adopted a 401(k) Savings and Retirement Plan (the
"401(k) Plan"), a tax-qualified plan covering all of its employees who are at
least 21 years of age. Each employee may elect to reduce his or her current
compensation by up to 15%, subject to the statutory limit (a maximum of $9,500
in 1996) and have the amount of the reduction contributed to the 401(k) Plan.
The 401(k) Plan provides that the Company may, as determined from time to time
by the Board of Directors, provide a matching cash contribution. In addition,
the Company may contribute an additional amount to the 401(k) Plan, as
determined by the Board of Directors, which will be allocated based on the
proportion of the employee's compensation for the plan year to the aggregate
compensation for the plan year for all eligible employees.
All employee and Company contributions to the 401(k) Plan are fully vested
at all times.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1995 the members of the Company's Compensation Committee were Dr. Krauss,
Mr. Husain and Dr. Muller, none of whom are employees of the Company. Dr.
Krauss, who was both Chairperson and Secretary of the Company in 1995, is also
Chairperson of KBL Healthcare, Inc., a major stockholder of the Company, which
has received fees from the Company in each of the last three years. Mr.
Husain, a director of the Company, is a Vice President of Morgan Stanley & Co.
Incorporated, which is affiliated with certain major stockholders of the
Company. See "Certain Transactions".
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<PAGE>
CERTAIN TRANSACTIONS
Since 1993, the Company has engaged in the following transactions with the
following directors, officers and stockholders who beneficially own more than
5% of the outstanding Common Stock of the Company and affiliates of such
directors, officers and stockholders. The Company believes that, with regard
to each transaction with related parties, the Company has received goods or
services at prices no greater than it would have paid to non-affiliated
persons.
RELATED PARTY TRANSACTIONS
CONSULTING FEES AND PREFERRED STOCK ISSUANCE COSTS
In February 1993, the Company entered into a consulting and financial
advisory agreement with KBL Healthcare, Inc., the selling agent involved with
the issuance of the Company's Series A Preferred Stock. Dr. Krauss, the Chief
Executive Officer of the selling agent, is Chairperson of the Company's Board
of Directors. Total fees paid under this agreement during 1994 and 1993 were
approximately $41,000 and $63,000, respectively. In addition, in conjunction
with the Series A Preferred Stock issuance in 1993, the Company paid the
selling agent approximately $648,000 in commissions and expenses and warrants
to purchase 328,904 shares of Common Stock at an exercise price of $2.00 per
share were issued to the selling agent. The warrants contain a cashless
exercise provision whereby the warrant holder can surrender in-the-money
warrants in exchange for a net number of shares of Common Stock based on the
fair market value of the Common Stock at the time of exercise.
During 1995, the Company entered into an additional agreement with the
selling agent. Under this agreement, the Company obtained consulting and
financial advisory services in relation to the issuance of the Company's
Series B Preferred Stock. Total fees paid under this agreement during 1995
amounted to $87,500.
SALE OF SERIES B PREFERRED STOCK
In April 1995, the Company sold 1,546,612, 385,318 and 401,403 shares of
Series B Convertible Preferred Stock (convertible into 773,306, 192,659, and
200,702 of Common Stock, respectively) to Morgan Stanley Venture Capital Fund
II, L.P., Morgan Stanley Venture Capital Fund II, C.V. and Morgan Stanley
Venture Investors, L.P., respectively, at $1.50 per share, for aggregate
consideration of $3,500,000. Mr. Husain, a member of the Company's Board of
Directors, is a Vice President of Morgan Stanley & Co. Incorporated, an
affiliate of which is the managing general partner of such partnerships.
CONSULTING AND TECHNOLOGY AGREEMENT/LICENSE AGREEMENT
In February 1993, the Company entered into a consulting and technology
agreement with Dr. Cohen pursuant to which Dr. Cohen spends one day a week at
the Company working on the development and commercialization of the technology
licensed to the Company pursuant to the MIT License Agreements. This
agreement, which expires in February 1998, requires the Company to pay monthly
consulting fees of up to $12,500. Total payments made during 1995, 1994 and
1993 were approximately $100,000, $142,000 and $116,000, respectively. The
Company is also required to remit a royalty of 1% of net sales from products
and 7% of gross revenue from sublicenses derived by the Company from the
technologies licensed under the MIT License Agreements. In connection with
this agreement, a warrant to purchase 109,634 shares of Common Stock for $2.00
per share was issued to Dr. Cohen. During the term of the consulting
agreement, and for a period of up to two additional years following the
termination or expiration of this agreement, Dr. Cohen is obligated not to
compete with the Company so long as the Company makes continuing payments to
Dr. Cohen during such two year period.
In February 1993, the Company also entered into a license agreement with Dr.
Cohen, pursuant to which Dr. Cohen granted to the Company an exclusive license
to certain cardiac output monitoring technology developed by Dr. Cohen. The
Cohen License Agreement provides that the Company must
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<PAGE>
achieve certain milestones, which include raising equity capital, spending a
minimum of $200,000 in each two-year period during the term of the agreement
and conducting clinical trials. If such milestones are not achieved, Dr. Cohen
has the right to terminate the agreement. The Cohen License Agreement also
sets forth certain provisions relating to potential infringement of the patent
rights that allow, but do not require, either party to take action against
such infringement. The Company is required to pay Dr. Cohen a royalty based on
3% of net sales of products developed from such technology. If the Company
chooses to sublicense this technology to an unrelated party, the royalty will
be based on 20% of the gross revenue received from the unrelated party for
products developed from such technology. This technology is at an early stage
of development and it is uncertain when, if at all, the Company will seek to
commercialize this technology.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of June 30, 1996 (assuming the
conversion of all outstanding shares of Convertible Preferred Stock into an
aggregate of 4,455,708 shares of Common Stock) by (i) each person or entity
known to the Company to own beneficially more than 5% of the Company's Common
Stock, (ii) each of the Company's directors, (iii) each of the Named Executive
Officers, (iv) all directors and executive officers as a group and (v) each of
the Selling Stockholders.
<TABLE>
<CAPTION>
SHARES SHARES TO BE
BENEFICIALLY BENEFICIALLY
OWNED BEFORE THE OWNED AFTER
OFFERING(2) THE OFFERING(2)
----------------- -----------------
NAME AND ADDRESS OF SHARES TO
BENEFICIAL OWNER(1) NUMBER PERCENT BE OFFERED NUMBER PERCENT
------------------- ------ ------- ---------- ------ -------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
Dr. Richard J. Cohen(3)......... 1,362,134 17.4% -- 1,362,134 12.5%
Funds Managed by Invesco
Funds(4)....................... 1,250,000 16.2 -- 1,250,000 11.6
7800 East Union Avenue --
Denver, CO 80237 --
Venture capital partnerships
affiliated with Morgan Stanley
& Co. Incorporated(5).......... 1,166,667 15.1 -- 1,166,667 10.8
1221 Avenue of the Americas --
New York, NY 10020 --
Zachary C. Berk(6).............. 926,796 11.9 -- 926,796 8.6
Marlene Krauss(6)............... 926,796 11.9 -- 926,796 8.6
OTHER DIRECTORS AND NAMED
EXECUTIVE OFFICERS
Jeffrey M. Arnold(7)............ 407,998 5.1 -- 407,998 3.7
Thomas V. Hennessey, Jr. ....... -- -- -- -- --
Paul Albrecht................... 139,250 1.8 -- 139,250 1.3
J. Alex Martin.................. 15,000 * -- 15,000 *
Robert T. Miragliuolo........... -- -- -- -- --
Laurence Blumberg............... 324,000 4.2 -- 324,000 3.0
M. Fazle Husain(8).............. 1,166,667 15.1 -- 1,166,667 10.8
David F. Muller(9).............. 16,666 * -- 16,666 *
David F. Rollo.................. 16,666 * -- 16,666 *
Rolf S. Stutz(10)............... 16,666 * -- 16,666 *
All directors and executive
officers as a group (13
persons)(11)................... 4,391,843 53.2% -- 4,391,843 38.9%
SELLING STOCKHOLDERS
D.H. Blair & Co................. 45,035 * 45,025 10 *
Jordan Davis.................... 187,137 2.4% 37,500 149,637 1.4%
Pamela Fenwick.................. 6,250 * 6,000 250 *
Steven Francis.................. 25,000 * 25,000 -- --
Irene French.................... 3,000 * 1,500 1,500 *
Jerome Herskowitz............... 50,000 * 5,000 45,000 *
Lisette Jacobs.................. 12,500 * 6,250 6,250 *
Jeffrey Katz.................... 25,000 * 5,000 20,000 *
Jack & Madeleine Kern........... 6,250 * 2,250 4,000 *
Neil Lowenbraun................. 25,000 * 5,000 20,000 *
Daniel Lubin.................... 283,575 3.7 20,000 263,575 2.4
Karl & Janet Mangold............ 50,000 * 8,000 42,000 *
Edwin Miller.................... 25,000 * 12,500 12,500 *
Melvin Miller................... 100,000 1.3 12,500 87,500 *
Ron Miller...................... 12,500 * 2,000 10,500 *
Melvin Speilman................. 37,500 * 5,000 32,500 *
Blanche Strojny................. 12,500 * 2,500 10,000 *
Paul Wang....................... 5,000 * 1,500 3,500 *
</TABLE>
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- --------
* Represents less than 1% of the outstanding Common Stock.
(1) The address for each director and officer of the Company is c/o Cambridge
Heart, Inc., 1 Oak Park Drive, Bedford, MA 01730.
(2) Each stockholder has sole voting and investment power with respect to the
shares listed, except as otherwise noted. Shares of Common Stock which an
individual or group has a right to acquire within the 60-day period
following June 30, 1996 pursuant to the exercise of options or warrants
are deemed to be outstanding for the purposes of computing the percentage
ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person shown in the table.
(3) Includes 111,634 shares of Common Stock issuable to Dr. Cohen within 60
days of June 30, 1996 upon exercise of stock options and warrants.
(4) Includes 650,000 shares of Common Stock held by The Global Health Sciences
Fund and 600,000 shares of Common Stock held by The Invesco Strategic
Portfolios, Inc.
(5) Includes 773,306 shares of Common Stock held by Morgan Stanley Venture
Capital Fund II, L.P., 200,702 shares of Common Stock held by Morgan
Stanley Venture Investors, L.P. and 192,659 shares of Common Stock held by
Morgan Stanley Venture Capital Fund II, C.V.
(6) Dr. Berk and Dr. Krauss are married to each other. Includes 35,384 shares
held by KBL Healthcare, Inc., 54,290 shares issuable upon the exercise of
warrants held by KBL Healthcare, Inc., 483,538 shares of Common Stock held
by Dr. Krauss, 237,300 shares of Common Stock held by Dr. Berk, and
116,284 shares of Common Stock held in trust for the benefit of their
children.
(7) Includes 316,835 shares of Common Stock issuable to Mr. Arnold within 60
days of June 30, 1996 upon exercise of stock options.
(8) Includes 1,166,667 shares of Common Stock held by venture capital
partnerships affiliated with Morgan Stanley & Co. Incorporated. See
footnote (5). Mr. Husain is a Vice President of Morgan Stanley & Co.
Incorporated.
(9) Includes 16,666 shares of Common Stock issuable to Dr. Muller within 60
days of June 30, 1996 upon exercise of stock options.
(10) Includes 16,666 shares of Common Stock issuable to Mr. Stutz within 60
days of June 30, 1996 upon exercise of stock options.
(11) Represents the shares referenced in footnotes (3) and (5)-(10).
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offering, the Company will be authorized to issue
25,000,000 shares of Common Stock, $.001 par value per share of which
10,778,813 will be issued and outstanding, and 2,000,000 shares of
undesignated Preferred Stock, $.001 par value per share, of which no shares
will be issued and outstanding.
COMMON STOCK
As of June 30, 1996 (after giving effect to the automatic conversion into
Common Stock of all outstanding shares of Preferred Stock upon the closing of
this Offering), there were 7,732,288 shares of Common Stock outstanding, held
of record by approximately 140 stockholders. 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,
subject to any preferential dividend rights of outstanding Preferred Stock.
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 and subject to
the prior rights of any outstanding Preferred Stock. Holders of Common Stock
have no preemptive, subscription, redemption or conversion rights. 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 shares of any series of Preferred Stock which the Company may
designate and issue in the future.
WARRANTS
As of June 30, 1996, a total of 438,538 shares of Common Stock were issuable
upon exercise of outstanding warrants at an exercise price of $2.00 per share.
PREFERRED STOCK
Upon the closing of this Offering, the Company's Restated Certificate of
Incorporation will authorize the issuance of up to 2,000,000 shares of
Preferred Stock, $.001 par value per share. Under the terms of the Restated
Certificate of Incorporation, the Board of Directors is authorized, subject to
any limitations prescribed by law, without stockholder approval, to issue such
shares of Preferred Stock in one or more series. Each such series of Preferred
Stock shall have such rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the Board of
Directors.
The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated
with a stockholder vote on specific issuances. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is
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approved in a prescribed manner. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder. Subject to certain exceptions, an "interested
stockholder" is (i) a person who, together with affiliates and associates,
owns 15% or more of the corporation's voting stock or (ii) is an affiliate or
associate of the Company and was the owner, together with affiliates and
associates of 15% or more of the outstanding voting stock of the Company at
any time within the 3-year period prior to the date for determining whether
such person is "interested".
The Restated Certificate of Incorporation provides for the division of the
Board of Directors into three classes as nearly equal in size as possible with
staggered three-year terms. See "Management--Executive Officers and
Directors". In addition, the Restated Certificate of Incorporation provides
that directors may be removed only for cause by the affirmative vote of the
holders of two-thirds of the shares of capital stock of the corporation
entitled to vote. Under the Restated Certificate of Incorporation, any vacancy
on the Board of Directors, however occurring, including a vacancy resulting
from an enlargement of the Board, may only be filled by vote of a majority of
the directors then in office. The classification of the Board of Directors and
the limitations on the removal of directors and filling of vacancies could
have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from acquiring, control of the Company.
The Restated Certification of Incorporation also provides that after the
closing of this Offering, any action required or permitted to be taken by the
stockholders of the Company at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting
and may not be taken by written action in lieu of a meeting. The Restated
Certificate of Incorporation further provides that special meetings of the
stockholders may only be called by the President of the Company or by the
Board of Directors. Under the Company's By-Laws, as amended (the "By-Laws"),
in order for any matter to be considered "properly brought" before a meeting,
a stockholder must comply with certain requirements regarding advance notice
to the Company. The foregoing provisions could have the effect of delaying
until the next stockholders' meeting stockholder actions which are favored by
the holders of a majority of the outstanding voting securities of the Company.
These provisions may also discourage another person or entity from making a
tender offer for the Company's Common Stock, because such person or entity,
even if it acquired a majority of the outstanding voting securities of the
Company, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders' meeting,
and not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's Restated Certificate of Incorporation or By-
Laws, unless a corporation's Restated Certificate of Incorporation or By-Laws,
as the case may be, requires a greater percentage. The Restated Certificate of
Incorporation and the By-Laws require the affirmative vote of the holders of
at least 75% of the shares of capital stock of the Company issued and
outstanding and entitled to vote to amend or repeal any of the provisions
described in the prior two paragraphs.
The Restated Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain
circumstances involving wrongful acts, such as the breach of a director's duty
of loyalty or acts or omissions which involve intentional misconduct or a
knowing violation of law. Further, the Restated Certificate of Incorporation
contains provisions to indemnify the Company's directors and officers to the
fullest extent permitted by the General Corporation Law of Delaware. The
Company believes that these provisions will assist the Company in attracting
and retaining qualified individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering there will be 10,778,813 shares of Common
Stock of the Company outstanding. There were also 847,456 shares covered by
vested options and warrants outstanding at June 30, 1996, which are not
considered to be outstanding shares. Of the outstanding shares, 3,428,678
shares, including the 3,202,525 shares of Common Stock sold in this Offering,
will be immediately eligible for resale in the public market without
restriction under the Securities Act, except that any shares purchased in this
Offering by affiliates of the Company ("Affiliates"), as that term is defined
in Rule 144 under the Securities Act ("Rule 144"), may generally only be
resold in compliance with applicable provisions of Rule 144. Beginning
approximately 90 days after the date of this Prospectus, approximately
7,153,607 additional shares of Common Stock (including approximately 866,264
shares covered by options and warrants exercisable within the 90-day period
following the date of this Prospectus) will become eligible for immediate
resale in the public market, subject to compliance as to certain of such
shares with applicable provisions of Rules 144 and 701.
The Company, the executive officers and directors of the Company, and
certain security holders, have agreed pursuant to certain agreements that they
will not, without the prior written consent of the representatives of the
Underwriters, offer, sell or otherwise dispose of the shares of Common Stock
beneficially owned by them for a period of 180 days from the date of this
Prospectus. The shares subject to the lock-up agreements include approximately
161,278 of the shares of Common Stock that would otherwise have become
immediately eligible for resale in the public market upon completion of this
Offering, and approximately 5,763,728 of the shares of Common Stock (including
approximately 577,333 shares of Common Stock covered by options and warrants
exercisable within the 90-day period following the date of this Prospectus)
that would otherwise have become eligible for resale in the public market
beginning approximately 90 days after the date of this Prospectus, subject to
compliance as to certain of such shares with the applicable provisions of
Rules 144 and 701.
In general, under Rule 144 as currently in effect, beginning approximately
90 days after the effective date of the Registration Statement of which this
Prospectus is a part, a stockholder, including an Affiliate, who has
beneficially owned his or her restricted securities (as that term is defined
in Rule 144) for at least two years from the later of the date such securities
were acquired from the Company or (if applicable) the date they were acquired
from an Affiliate is entitled to sell, within any three-month period, a number
of such shares that does not exceed the greater of 1% of the then outstanding
shares of Common Stock (approximately 107,788 immediately after this Offering)
or the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the date on which notice of such sale was filed under
Rule 144, provided certain requirements concerning availability of public
information, manner of sale and notice of sale are satisfied. In addition,
under Rule 144(k), if a period of at least three years has elapsed between the
later of the date restricted securities were acquired from the Company or (if
applicable) the date they were acquired from an Affiliate of the Company, a
stockholder who is not an Affiliate of the Company at the time of sale and has
not been an Affiliate of the Company for at least three months prior to the
sale is entitled to sell the shares immediately without compliance with the
foregoing requirements under 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 of Rule 144(k).
Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted under
the 1993 Option Plan) are also restricted securities and, beginning 90 days
after the date of this Prospectus, may be sold by stockholders other than an
Affiliate of the Company subject only to the manner of sale provisions of Rule
144 and by an Affiliate under Rule 144 without compliance with its two-year
holding period requirement.
55
<PAGE>
At the completion of this Offering, certain persons and entities (the
"Rightholders"), will be entitled to certain rights with respect to the
registration under the Securities Act of a total of approximately 5,628,680
shares of Common Stock (the "Registrable Shares"), including 392,013 shares of
Common Stock that may be acquired pursuant to the exercise of outstanding
warrants (assuming an initial public offering price of $12.00 per share),
under the terms of agreements among the Company and the Rightholders (the
"Registration Agreements") and various outstanding warrants (the "Warrants",
and together with the Registration Agreement, the "Registration Instruments").
Pursuant to the Registration Instruments, certain Rightholders are entitled,
in the event the Company proposes to register any of its securities under the
Securities Act at any time, with certain exceptions, to include Registrable
Shares with respect to 5,628,680 shares of Common Stock in such registration,
subject to the right of the managing underwriter of any underwritten offering
to exclude from such registration for marketing reasons some or all of such
Registrable Shares. Pursuant to the Registration Instruments, certain
Rightholders have the right under certain circumstances to require the Company
to prepare and file registration statements under the Securities Act with
respect to a total of approximately 5,628,680 Registrable Shares, including
shares of Common Stock that may be acquired upon the exercise of outstanding
warrants, and the Company is required to use its best efforts to effect such
registration, subject to certain conditions and limitations. The Company is
generally required to bear the expense of all such registrations.
Prior to this Offering, there has been no public market for the Common
Stock. No prediction can be made as to the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
of the Common Stock prevailing from time to time. The Company is unable to
estimate the number of shares that may be sold in the public market pursuant
to Rule 144, since this will depend on the market price of the Common Stock,
the personal circumstances of the sellers and other factors. Nevertheless,
sales of significant amounts of the Common Stock of the Company in the public
market could adversely affect the market price of the Company's Common Stock
and could impair the Company's ability to raise capital through an offering of
its equity securities.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Hale and Dorr, Boston, Massachusetts and for the
Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The financial statements as of December 31, 1994 and 1995 and for each of
the three years in the period ended December 31, 1995 and for the period from
inception (January 16, 1990) through December 31, 1995 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
56
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement (which term
shall include all amendments, exhibits and schedules thereto) on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission, to which Registration Statement
reference is hereby made. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such
reference. The Registration Statement and the exhibits thereto may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
----------------
As a result of the Offering, the Company will become subject to the
information and reporting requirements of the Exchange Act, and in accordance
therewith will file periodic reports, proxy statements and other information
with the Commission. The Company intends to furnish to its stockholders annual
reports containing audited financial statements and to make available to its
stockholders quarterly reports containing unaudited financial information for
the first three quarters of each fiscal year of the Company.
57
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Balance Sheet at December 31, 1994 and 1995 and March 31, 1996
(unaudited).............................................................. F-3
Statement of Operations for the three years ended December 31, 1995, for
the period from inception (January 16, 1990) through December 31, 1995,
for the three months ended March 31, 1995 and 1996 (unaudited) and for
the period from inception (January 16, 1990) through March 31, 1996
(unaudited).............................................................. F-4
Statement of Changes in Stockholders' Equity (Deficit) for the period from
inception (January 16, 1990) through December 31, 1995 and for the three
months ended March 31, 1996 (unaudited).................................. F-5
Statement of Cash Flows for the three years ended December 31, 1995, for
the period from inception (January 16, 1990) through December 31, 1995,
for the three months ended March 31, 1995 and 1996 (unaudited) and for
the period from inception (January 16, 1990) through March 31, 1996
(unaudited).............................................................. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cambridge Heart, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Cambridge
Heart, Inc. (a development stage enterprise) at December 31, 1995 and 1994,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, and for the period from inception
(January 16, 1990) 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 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 provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
March 24, 1996, except as
to the first paragraph of
Note 5 which is as of
July 8, 1996
F-2
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 3,329,490 $ 3,948,147 $ 3,026,938
Accounts receivable................... -- -- 56,916
Inventory............................. -- 118,865 205,597
Prepaid expenses and other current
assets............................... 18,210 48,370 42,123
----------- ----------- -----------
Total current assets................ 3,347,700 4,115,382 3,331,574
Fixed assets, net....................... 73,306 161,978 191,456
Other assets............................ -- -- 12,791
----------- ----------- -----------
$ 3,421,006 $ 4,277,360 $ 3,535,821
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 56,356 $ 108,471 $ 74,267
Accrued expenses...................... 106,977 126,738 76,869
License fees payable.................. 102,892 31,212 31,212
----------- ----------- -----------
Total current liabilities........... 266,225 266,421 182,348
----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Series B convertible preferred stock,
$0.001 par value; 2,500,000 shares
authorized; 2,333,333 shares issued
and outstanding at December 31, 1995
and March 31, 1996 (liquidating
preference of $3,500,000)............ -- 2,333 2,333
Series A convertible preferred stock,
$0.001 par value; 6,900,000 shares
authorized; 6,578,083 shares issued
and outstanding (liquidating
preference of $6,578,083)............ 6,578 6,578 6,578
Common stock, $0.001 par value;
20,000,000 shares authorized;
3,030,833, 3,163,163 and 3,208,163
shares issued and outstanding at
December 31, 1994 and 1995 and March
31, 1996, respectively............... 3,031 3,163 3,208
Additional paid-in-capital............ 5,729,020 9,079,671 9,517,376
Deficit accumulated during the
development stage.................... (2,583,848) (5,080,806) (5,747,272)
----------- ----------- -----------
3,154,781 4,010,939 3,782,223
Less: deferred compensation........... -- -- (428,750)
----------- ----------- -----------
Total stockholders' equity.......... 3,154,781 4,010,939 3,353,473
----------- ----------- -----------
Commitments (Notes 10 and 11)
----------- ----------- -----------
$ 3,421,006 $ 4,277,360 $ 3,535,821
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(JANUARY 16, (JANUARY 16,
1990) THREE MONTHS ENDED 1990)
YEAR ENDED DECEMBER 31, THROUGH MARCH 31, THROUGH
----------------------------------- DECEMBER 31, -------------------- MARCH 31,
1993 1994 1995 1995 1995 1996 1996
--------- ----------- ----------- ------------ --------- --------- ------------
(UNAUDITED)
----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Product revenue......... $ -- $ -- $ 68,047 $ 68,047 $ -- $ 55,220 $ 123,267
Revenue from research
and option agreement... -- 25,000 -- 25,000 -- -- 25,000
--------- ----------- ----------- ----------- --------- --------- -----------
Total revenue.......... -- 25,000 68,047 93,047 -- 55,220 148,267
Cost of goods sold...... -- -- 141,312 141,312 -- 49,037 190,349
--------- ----------- ----------- ----------- --------- --------- -----------
-- 25,000 (73,265) (48,265) -- 6,183 (42,082)
Costs and expenses:
Research and
development........... 588,941 1,123,752 1,559,915 3,286,105 413,905 352,891 3,638,996
Selling, general and
administrative........ 321,660 723,918 1,109,724 2,183,693 190,733 366,312 2,550,005
--------- ----------- ----------- ----------- --------- --------- -----------
Loss from operations... (910,601) (1,822,670) (2,742,904) (5,518,063) (604,638) (713,020) (6,231,083)
Interest expense........ (5,620) -- -- (5,620) -- -- (5,620)
Interest income......... 32,974 163,957 245,946 442,877 43,584 46,554 489,431
--------- ----------- ----------- ----------- --------- --------- -----------
Net loss................ $(883,247) $(1,658,713) $(2,496,958) $(5,080,806) $(561,054) $(666,466) $(5,747,272)
========= =========== =========== =========== ========= ========= ===========
Pro forma net loss per
share (unaudited)...... $ (.32) $ (.08)
=========== =========
Pro forma weighted
average common and
common equivalent
shares outstanding
(unaudited)............ 7,727,524 8,102,288
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES B SERIES A
CONVERTIBLE CONVERTIBLE DEFICIT
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ACCUMULATED
------------------- ------------------- ------------------- ADDITIONAL DURING THE
NUMBER OF NUMBER OF NUMBER OF PAID-IN DEVELOPMENT DEFERRED
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE CAPITAL STAGE COMPENSATION
--------- --------- --------- --------- --------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock in
January 1990.... -- $ -- -- $ -- 50 $ 1 $ -- $ -- $ --
--------- ------ --------- ------ --------- ------ ---------- ----------- ---------
Balance at
December 31,
1990 and 1991... 50 1
Thirty one
thousand-for-one
stock split and
capital
contribution in
June 1992....... 1,549,950 1,549 1,550
Issuance of
common stock in
June 1992....... 1,250,000 1,250 1,250
Net loss........ (41,888)
--------- ------ --------- ------ --------- ------ ---------- ----------- ---------
Balance at
December 31,
1992............ -- -- -- -- 2,800,000 2,800 2,800 (41,888) --
Issuance of
common stock in
February 1993... 20,000 20 20
Issuance of
Series A
convertible
preferred stock
during September
to December
1993, net of
issuance costs
of $881,306
(including
$648,000 paid to
a related
party--see Note
11)............. 6,478,083 6,478 5,590,299
Conversion of
$100,000 of
notes payable to
Series A
convertible
preferred stock
in September
1993............ 100,000 100 99,900
Issuance of
common stock in
December 1993
through grant
and exercise of
stock purchase
right........... 180,000 180 35,820
Net loss........ (883,247)
--------- ------ --------- ------ --------- ------ ---------- ----------- ---------
Balance at
December 31,
1993............ -- -- 6,578,083 6,578 3,000,000 3,000 5,728,839 (925,135) --
Issuance of
common stock
through exercise
of stock
options......... 30,833 31 181
Net loss........ (1,658,713)
--------- ------ --------- ------ --------- ------ ---------- ----------- ---------
Balance at
December 31,
1994............ -- -- 6,578,083 6,578 3,030,833 3,031 5,729,020 (2,583,848) --
Issuance of
Series B
convertible
preferred stock
in April 1995,
net of issuance
costs of
$149,487
(including
$87,500 paid to
a related
party--see Note
11)............. 2,333,333 2,333 3,348,180
Issuance of
common stock
through exercise
of stock
options......... 132,330 132 2,471
Net loss........ (2,496,958)
--------- ------ --------- ------ --------- ------ ---------- ----------- ---------
Balance at
December 31,
1995............ 2,333,333 2,333 6,578,083 6,578 3,163,163 3,163 9,079,671 (5,080,806) --
Issuance of
common stock
through exercise
of stock options
(unaudited)..... 45,000 45 8,955
Deferred
compensation
related to
common stock
options granted
(unaudited)..... 428,750 (428,750)
Net loss
(unaudited)..... (666,466)
--------- ------ --------- ------ --------- ------ ---------- ----------- ---------
Balance at March
31, 1996
(unaudited)..... 2,333,333 $2,333 6,578,083 $6,578 3,208,163 $3,208 $9,517,376 $(5,747,272) $(428,750)
========= ====== ========= ====== ========= ====== ========== =========== =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------
<S> <C>
Issuance of
common stock in
January 1990.... $ 1
----------------
Balance at
December 31,
1990 and 1991... 1
Thirty one
thousand-for-one
stock split and
capital
contribution in
June 1992....... 3,099
Issuance of
common stock in
June 1992....... 2,500
Net loss........ (41,888)
----------------
Balance at
December 31,
1992............ (36,288)
Issuance of
common stock in
February 1993... 40
Issuance of
Series A
convertible
preferred stock
during September
to December
1993, net of
issuance costs
of $881,306
(including
$648,000 paid to
a related
party--see Note
11)............. 5,596,777
Conversion of
$100,000 of
notes payable to
Series A
convertible
preferred stock
in September
1993............ 100,000
Issuance of
common stock in
December 1993
through grant
and exercise of
stock purchase
right........... 36,000
Net loss........ (883,247)
----------------
Balance at
December 31,
1993............ 4,813,282
Issuance of
common stock
through exercise
of stock
options......... 212
Net loss........ (1,658,713)
----------------
Balance at
December 31,
1994............ 3,154,781
Issuance of
Series B
convertible
preferred stock
in April 1995,
net of issuance
costs of
$149,487
(including
$87,500 paid to
a related
party--see Note
11)............. 3,350,513
Issuance of
common stock
through exercise
of stock
options......... 2,603
Net loss........ (2,496,958)
----------------
Balance at
December 31,
1995............ 4,010,939
Issuance of
common stock
through exercise
of stock options
(unaudited)..... 9,000
Deferred
compensation
related to
common stock
options granted
(unaudited).....
Net loss
(unaudited)..... (666,466)
----------------
Balance at March
31, 1996
(unaudited)..... $ 3,353,473
================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(JANUARY 16, (JANUARY 16,
1990) THREE MONTHS ENDED 1990)
YEAR ENDED DECEMBER 31, THROUGH MARCH 31, THROUGH
------------------------------------ DECEMBER 31, ---------------------- MARCH 31,
1993 1994 1995 1995 1995 1996 1996
---------- ----------- ----------- ------------ ---------- ---------- ------------
(UNAUDITED)
------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............... $ (883,247) $(1,658,713) $(2,496,958) $(5,080,806) $ (561,054) $ (666,466) $(5,747,272)
Adjustments to
reconcile net loss to
net cash used for
operating activities:
Issuance of common
stock purchase right
to a licensor........ 35,640 -- -- 35,640 -- -- 35,640
Depreciation.......... 2,732 12,786 30,392 45,910 5,473 12,316 58,226
Changes in assets and
liabilities:
Increase in accounts
receivable........... -- -- -- -- -- (56,916) (56,916)
Increase in
inventory............ -- -- (118,865) (118,865) -- (86,732) (205,597)
(Increase) decrease in
prepaid expenses and
other current
assets............... (2,200) (16,010) (30,160) (48,370) (1,927) 6,247 (42,123)
(Increase) decrease in
other assets......... (2,800) 2,800 -- -- -- (12,791) (12,791)
Increase (decrease) in
accounts payable and
accrued expenses..... 53,509 107,027 71,876 235,209 (58,449) (84,073) 151,136
Increase (decrease) in
license fees
payable.............. 174,572 (71,680) (71,680) 31,212 -- -- 31,212
Decrease in due to
related party........ (18,635) (15,878) -- -- -- -- --
---------- ----------- ----------- ----------- ---------- ---------- -----------
Net cash used for
operating
activities.......... (640,429) (1,639,668) (2,615,395) (4,900,070) (615,957) (888,415) (5,788,485)
---------- ----------- ----------- ----------- ---------- ---------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of fixed
assets................ (28,540) (60,284) (119,064) (207,888) (17,862) (41,794) (249,682)
---------- ----------- ----------- ----------- ---------- ---------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of notes payable...... 100,000 -- -- 100,000 -- -- 100,000
Proceeds from issuance
of common stock....... 400 212 2,603 5,715 1,824 9,000 14,715
Proceeds from capital
contribution.......... -- -- -- 3,100 -- -- 3,100
Proceeds from issuance
of Series A preferred
stock, net of issuance
costs................. 5,596,777 -- -- 5,596,777 -- -- 5,596,777
Proceeds from issuance
of Series B preferred
stock, net of issuance
costs................. -- -- 3,350,513 3,350,513 -- -- 3,350,513
---------- ----------- ----------- ----------- ---------- ---------- -----------
Net cash provided by
financing
activities.......... 5,697,177 212 3,353,116 9,056,105 1,824 9,000 9,065,105
---------- ----------- ----------- ----------- ---------- ---------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... 5,028,208 (1,699,740) 618,657 3,948,147 (631,995) (921,209) 3,026,938
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD... 1,022 5,029,230 3,329,490 -- 3,329,490 3,948,147 --
---------- ----------- ----------- ----------- ---------- ---------- -----------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD................ $5,029,230 $ 3,329,490 $ 3,948,147 $ 3,948,147 $2,697,495 $3,026,938 $ 3,026,938
========== =========== =========== =========== ========== ========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH FINANCING
ACTIVITIES:
In September 1993, 100,000 shares of Series A Preferred Stock were issued upon
conversion of $100,000 in notes payable (Note 5). Interest of $5,620 was paid
on these notes in 1993 prior to their conversion. Total interest paid during
the period from inception (January 16, 1990) through December 31, 1995 was
$5,620.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
Cambridge Heart, Inc. (the "Company") was incorporated in Delaware on
January 16, 1990 and is engaged in the research, development and
commercialization of products for the non-invasive diagnosis of cardiac
disease. The Company intends to sell its products primarily to hospitals,
research institutions and cardiovascular specialists.
During the period from inception (January 16, 1990) through December 31,
1995, the Company devoted substantially all of its efforts to business
planning, raising financing, recruiting personnel, research and development
and obtaining regulatory approval for its products. Although the Company
commenced its planned principal activities and began selling its products in
1995, it has not generated significant revenue therefrom. Accordingly, the
Company is considered to be in the development stage, as defined in Statement
of Financial Accounting Standards No. 7, at December 31, 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed by the Company in the preparation
of its financial statements are as follows:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. The Company
invests its excess cash primarily in money market accounts and short-term
commercial paper of companies with strong credit ratings and in diversified
industries. Accordingly, these investments are subject to minimal credit and
market risk. The investments held at December 31, 1995 are classified as held
to maturity, and all mature within thirty-five days of December 31, 1995.
These investments have been recorded at amortized cost, which approximates
fair market value. No realized or unrealized gains or losses have been
recognized.
INVENTORIES
Inventories, consisting primarily of purchased components, are stated at
the lower of cost or market. Cost is determined using the first-in, first-out
(FIFO) method.
FIXED ASSETS
Equipment, furniture and sales display items are stated at cost, less
accumulated depreciation. Depreciation is provided using the straight-line
method based on estimated useful lives. Repair and maintenance costs are
expensed as incurred.
REVENUE RECOGNITION
Revenue is recognized upon shipment of goods. Revenue from a research and
option arrangement is recognized pursuant to the agreement as the work is
performed.
RESEARCH AND DEVELOPMENT
Research, engineering and product development costs are expensed as
incurred. Software development costs that would otherwise be capitalizable
under Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," have
not been material to date.
F-7
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(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." Under this method, deferred tax liabilities
and assets are recognized for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of
assets and liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingencies at December 31, 1994 and 1995, and the reported
amounts of revenues and expenses during the three years in the period ended
December 31, 1995 and for the period from inception (January 16, 1990)
through December 31, 1995. Actual results could differ from these estimates.
UNAUDITED PRO FORMA NET LOSS PER SHARE
Unaudited pro forma net loss per share is determined by dividing net loss
by the weighted average number of common shares and common share equivalents
outstanding during the period. Common share equivalents, comprised of common
stock options and warrants and convertible preferred stock, have been
excluded from the calculation as their effect is anti-dilutive, except that,
pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common share equivalents issued and common stock sold at prices below the
offering price in the twelve months preceding the initial filing of the
Company's Registration Statement and through the effective date of the
initial public offering have been included in the calculation as if
outstanding for all periods presented.
As described in Note 5, conversion of all convertible preferred stock will
occur upon the closing of a qualified public offering of the Company's common
stock. The unaudited pro forma net loss per share information included in the
accompanying statement of operations for the year ended December 31, 1995 and
for the three months ended March 31, 1996 reflects the impact on unaudited
pro forma net loss per share of such conversion as of the beginning of each
period or date of issuance, if later, using the if-converted method.
Historical net loss per share has not been presented on the basis that it
is irrelevant due to the significant change in the Company's capital
structure and resultant earnings or loss per share which will result upon
conversion of the convertible preferred stock.
UNAUDITED INTERIM FINANCIAL DATA
The interim financial data as of March 31, 1996 and for the three months
ended March 31, 1995 and 1996 and for the period from inception (January 16,
1990) through March 31, 1996 are unaudited; however, in the opinion of
management, the interim financial data include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
the results of operations for these interim periods. The interim financial
data are not necessarily indicative of the results of operations for a full
fiscal year.
F-8
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
RECENTLY ENACTED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation." The Company has elected to adopt this standard in 1996 through
footnote disclosure only.
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31,
LIFE ----------------
(YEARS) 1994 1995
--------- ------- --------
<S> <C> <C> <C>
Computer equipment............................... 5 $53,566 $125,062
Office furniture................................. 7 12,381 18,095
Sales display equipment.......................... 3 22,877 64,731
------- --------
88,824 207,888
Less--accumulated depreciation................... 15,518 45,910
------- --------
$73,306 $161,978
======= ========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
-------- --------
<S> <C> <C>
Accrued bonus.............................................. $ 58,333 $ 66,540
Accrued other.............................................. 48,644 60,198
-------- --------
$106,977 $126,738
======== ========
</TABLE>
5. STOCKHOLDERS' EQUITY (DEFICIT)
REVERSE COMMON STOCK SPLIT
On May 29, 1996, the Board of Directors authorized a 1-for-2 reverse stock
split of the Company's common stock which was effective on July 8, 1996. All
shares of common stock, common stock options and warrants, preferred stock
conversion ratios 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.
CONVERTIBLE PREFERRED STOCK
The Company has authorized 10,400,000 shares of preferred stock, of which
6,900,000 shares have been designated as Series A convertible preferred stock
("Series A Preferred Stock") and 2,500,000 shares have been designated as
Series B convertible preferred stock ("Series B Preferred Stock"). The
remaining authorized shares have not been designated. The preferred stock has
the following characteristics:
F-9
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
Conversion
Each share of preferred stock is convertible at any time at the option of
the holder into shares of common stock pursuant to a ratio of one share of
common stock for two shares of preferred stock, subject to certain stock
split and stock dividend adjustments. In addition, the conversion ratio is
subject to adjustment, as defined in the respective agreements, in the event
that the Company issues common stock at a per share price less than $3.00 and
$2.00 per share for the Series B Preferred Stock and the Series A Preferred
Stock, respectively. All preferred stock will automatically convert to common
stock upon the earlier of i) the closing of a public offering of the
Company's common stock involving aggregate proceeds of at least $10,000,000
and a per share price of not less than $6.00, or ii) the consent of the
holders of at least 51% of the then outstanding shares of preferred stock.
At December 31, 1995, the Company has reserved 1,166,667 and 3,289,041
shares of common stock for issuance upon the conversion of the Series B
Preferred Stock and the Series A Preferred Stock, respectively.
Dividends
Dividends on the preferred stock are payable prior and in preference to any
declaration or payment of any dividend on the common stock of the Company
when, as and if declared by the Board of Directors of the Company. Through
December 31, 1995 and March 31, 1996, no dividends have been declared or paid
by the Company.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the affairs
of the Company, the holders of the Series B Preferred Stock will be entitled
to receive in preference to the holders of the Series A Preferred Stock and
the common stock an amount per share equal to $1.50. Subsequent to the
repayment of the holders of the Series B Preferred Stock, the holders of the
Series A Preferred Stock will be entitled to receive in preference to the
holders of the common stock an amount per share equal to $1.00.
Voting Rights
Each holder of preferred stock is entitled to the number of votes equal to
the number of shares of common stock into which such holder's shares are
convertible at the date such vote is taken.
CONVERSION OF NOTES PAYABLE
During 1993, the Company issued convertible notes payable totaling $100,000
to common stockholders. These notes bore interest at 8% per annum. The
principal amount of these borrowings were converted into 100,000 shares of
Series A Preferred Stock in September 1993.
WARRANTS
In connection with the Series A Preferred Stock issuance, warrants to
purchase 328,904 shares of common stock were issued to the Company's selling
agent, a related party (Note 11). The warrants were issued with an exercise
price of $2.00 per share and expire in September 1998. The warrants contain a
cashless exercise provision whereby the warrant holder can surrender in-the-
money warrants in exchange for a net number of shares of Common Stock based
on the fair maket value of the Common Stock at the date of exercise. At
December 31, 1995, the Company has reserved 328,904 shares of common stock
for issuance upon the exercise of these warrants.
F-10
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
In addition, warrants to purchase 109,634 shares of common stock were
issued in February 1993 to a related party who provides consulting services
to the Company (Note 11). These warrants were issued with an exercise price
of $2.00 per share and expire on September 24, 1998. At December 31, 1995,
the Company has reserved 109,634 shares of common stock for issuance upon the
exercise of these warrants.
The value of the above warrants at the time of issuance was estimated by
management and determined not to be material to the Company's results of
operations and financial position.
STOCK RESTRICTIONS
During 1995, the Company entered into amended agreements with the holders
of all issued shares of common stock, 2,500,000 shares of Series A Preferred
Stock and 2,333,333 shares of Series B Preferred Stock, under which the
Company retains the right of first refusal to purchase any such shares
offered for sale. These agreements terminate upon the earlier of the closing
of a public offering of the Company's common stock involving aggregate
proceeds of at least $10,000,000 and a per share price of not less than
$6.00, such time as the holders of the Series A Preferred Stock hold fewer
than 800,000 shares of Series A Preferred Stock and/or common stock issued on
conversion thereof, or such time as the holders of the Series B Preferred
Stock hold fewer than 746,000 shares of Series B Preferred Stock and/or
common stock issued on conversion thereof.
STOCK PURCHASE RIGHT
In February 1993, the Company entered into an option agreement with a third
party giving the Company an option to enter into certain license agreements.
In connection with the option agreement, a right to purchase 180,000 shares
of the Company's common stock at a price of $0.002 per share was granted to
the third party. The right became exercisable immediately when the Company
entered into such license agreements in September 1993. The estimated fair
value of this right, $35,640, was expensed and recorded as additional paid-
in-capital. The right was exercised, and shares issued, in December 1993.
NEWLY AUTHORIZED COMMON AND PREFERRED STOCK
On May 29, 1996, the Company's Board of Directors increased, subject to
stockholder approval, the number of authorized shares of the Company's $0.001
par value common stock to 25,000,000 and authorized an additional 2,000,000
shares of the Company's $0.001 par value preferred stock. The newly
authorized 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. This preferred stock may have dividend, liquidation,
redemption, conversion, voting or other rights which may be more expansive
than the rights of the holders of the common stock.
F-11
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. STOCK PLANS
1993 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
During 1993, the Company adopted the 1993 Incentive and Non-Qualified Stock
Option Plan (the "1993 Plan"). The 1993 Plan provides for the granting of
incentive and non-qualified stock options to management, other key employees,
consultants and directors of the Company. The total number of shares of
common stock that may be issued pursuant to the exercise of options granted
under the 1993 Plan is 1,688,663. Incentive stock options may not be granted
at less than fair market value of the Company's common stock at the date of
grant and for a term not to exceed ten years. For holders of more than 10% of
the Company's total combined voting power of all classes of stock, incentive
stock options may not be granted at less than 110% of the fair market value
of the Company's common stock at the date of grant and for a term not to
exceed five years. The exercise price under each non-qualified stock option
shall be specified by the stock option committee, but shall in no case be
less than the par value of the common stock subject to the non-qualified
stock option.
A summary of plan activity is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Granted in 1993 and outstanding at December 31,
1993............................................. 1,016,162 $.002-2.00
Granted......................................... 578,125 .02-2.00
Exercised....................................... (30,833) .002- .02
Cancelled....................................... (530,625) .002
---------
Outstanding at December 31, 1994.................. 1,032,829 .002-2.00
Granted......................................... 396,500 .20-1.00
Exercised....................................... (132,330) .002- .20
Cancelled....................................... (12,500) .20
---------
Outstanding at December 31, 1995.................. 1,284,499 .002-2.00
Granted (unaudited)............................. 80,000 1.00-4.00
Exercised (unaudited)........................... (45,000) .20
Cancelled (unaudited)........................... -- --
---------
Outstanding at March 31, 1996 (unaudited)......... 1,319,499 $.002-4.00
=========
Exercisable at December 31, 1995.................. 365,741
=========
</TABLE>
At December 31, 1995, 1,525,500 shares of common stock are reserved for
issuance upon exercise of the options issued under the 1993 Plan.
On March 18 and 25, 1996, the Company granted stock options to purchase
8,750 and 56,250 shares of its common stock, respectively, at exercise prices
of $4.00 and $1.00 per share, respectively, to certain employees. The Company
has recorded deferred compensation of $428,750, representing the difference
between the estimated fair market value of the common stock on the date of
grant ($8.00) and the exercise price. Deferred compensation related to these
options is recorded as a reduction of stockholders' equity and will be
amortized ratably over the option vesting period of five years.
F-12
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. STOCK PLANS--(CONTINUED)
1996 EQUITY INCENTIVE PLAN
On May 29, 1996, the Board of Directors authorized, subject to stockholder
approval, the 1996 Equity Incentive Plan (the "Incentive Plan"). The
Incentive Plan provides for the issuance of up to 1,000,000 shares of the
Company's common stock to eligible employees, officers, directors,
consultants and advisors of the Company. Under the Incentive Plan, the Board
of Directors may award incentive and non-qualified stock options, stock
appreciation rights, performance shares and restricted and unrestricted
stock.
Incentive stock options may not be granted at less than fair market value
of the Company's common stock at the date of grant and for a term not to
exceed ten years. For holders of more than 10% of the Company's total
combined voting power of all classes of stock, incentive stock options may
not be granted at less than 110% of the fair market value of the Company's
common stock at the date of grant and for a term not to exceed five years.
The exercise price under each non-qualified stock option shall be specified
by the stock option committee, but shall in no case be less than the par
value of the common stock subject to the non-qualified stock option. Grants
of stock appreciation rights, performance shares, restricted stock and
unrestricted stock may be made at the discretion of the Board of Directors
with terms to be defined therein except that the exercise and transfer of
stock appreciation rights granted in tandem with stock options is limited by
the terms of the related options.
1996 DIRECTOR OPTION PLAN
On May 29, 1996, the Board of Directors authorized, subject to stockholder
approval, the issuance of up to 100,000 shares of the Company's common stock
pursuant to its 1996 Director Option Plan (the "Director Plan"). Under the
Director Plan, outside directors of the Company who are not otherwise
affiliated with the Company are entitled to receive options to purchase
10,000 shares of common stock upon their initial election to the Board of
Directors. In addition, three existing outside directors will be granted
options to purchase 10,000 shares of common stock upon completion of the
Company's initial public offering. All option grants made under the Director
Plan have exercise prices equal to the fair market value of the Company's
common stock on the date of grant, and will vest in three annual installments
on the anniversary date of the grant. Director options will become
immediately exercisable upon the occurrence of a change in control (as
defined in the Director Plan).
1996 EMPLOYEE STOCK PURCHASE PLAN
On May 29, 1996, the Board of Directors authorized, subject to stockholder
approval, the 1996 Employee Stock Purchase Plan (the "Purchase Plan"). The
Purchase Plan provides for the issuance of up to 100,000 shares of the
Company's common stock to eligible employees. Under the Purchase Plan, the
Company is authorized to make one or more offerings during which employees
may purchase shares of common stock through payroll deductions made over the
term of the offering. The term of individual offerings, which are set by the
Board of Directors, may be for periods of twelve months or less and may be
different for each offering. The per-share purchase price at the end of each
offering is equal to 85% of the fair market value of the common stock at the
beginning or end of the offering period (as defined by the Purchase Plan),
whichever is lower. The first offering period will commence upon completion
of the Company's initial public offering.
F-13
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. RESEARCH AND OPTION AGREEMENT
In April 1994, the Company entered into a research and option agreement with
a third party whereby the third party has agreed to fund $50,000 for certain
research and development activities. Under this agreement, which has multiple
phases to be perfomed by both the Company and the third party, the third party
has the option to obtain an exclusive or non-exclusive license to sell
products using technology developed by the Company, at which time the third
party would be obligated to pay royalties to the Company on sales of the
related products. Royalty rates would range from .375% to .75% of net sales of
the related products (depending upon whether the license is non-exclusive or
exclusive, respectively) with various minimum and maximum amounts. Amounts
received relating to this agreement have been included as revenue in the
statement of operations and the related costs have been included in research
and development expense. This agreement may be terminated by the third party
at any time.
8. INCOME TAXES
The income tax benefit consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------------
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
Income tax benefit:
Federal............................. $ 321,000 $ 646,000 $ 880,000
State............................... 62,000 112,000 162,000
--------- --------- -----------
383,000 758,000 1,042,000
Deferred tax asset valuation
allowance............................ (383,000) (758,000) (1,042,000)
--------- --------- -----------
$ -- $ -- $ --
========= ========= ===========
</TABLE>
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Net operating loss carryforwards............... $ 965,000 $ 1,932,000
Research and development tax credit
carryforwards................................. 121,000 203,000
Deferred start up and organizational expenses.. 56,000 40,000
Other.......................................... 16,000 25,000
----------- -----------
Gross deferred tax assets...................... 1,158,000 2,200,000
Deferred tax asset valuation allowance......... (1,158,000) (2,200,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The Company has generated taxable losses from operations since inception
and, accordingly, has no taxable income available to offset the carryback of
net operating losses. In addition, although management's operating plans
anticipate taxable income in future periods, such plans provide for taxable
losses over the near term and make significant assumptions which cannot be
reasonably assured including approval of the Company's products by the U.S.
Food and Drug Administration and market acceptance of the Company's products
by customers. Based upon the weight of all available evidence, the Company has
provided a full valuation allowance for its deferred tax assets since, in the
opinion of management, realization of these future benefits is not
sufficiently assured (defined as a likelihood of slightly more than 50
percent).
F-14
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES--(CONTINUED)
Income taxes computed using the federal statutory income tax rate differs
from the Company's effective tax rate primarily due to the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Statutory U.S. federal tax rate.................. (35.0)% (35.0)% (35.0)%
State taxes, net of federal tax benefit.......... (7.0) (7.5) (7.2)
Non-deductible expenses.......................... 0.8 2.2 0.8
Federal and state research and development
credits......................................... (2.1) (4.3) (2.0)
Other............................................ (0.1) (1.1) 1.6
Valuation allowance on deferred tax assets....... 43.4 45.7 41.8
----- ----- -----
-- -- --
===== ===== =====
</TABLE>
As of December 31, 1995, the Company has net operating loss carryforwards
and research and development credits which may be used to offset future
federal and state taxable income and tax liabilities as follows:
<TABLE>
<CAPTION>
RESEARCH AND
DEVELOPMENT TAX
CREDIT
YEAR OF NET OPERATING ----------------
EXPIRATION LOSS FEDERAL STATE
---------- ------------- -------- -------
<S> <C> <C> <C>
2007....................................... $ 13,000 $ -- $ --
2008....................................... 677,000 19,000 2,000
2009....................................... 1,705,000 69,000 45,000
2010....................................... 2,476,000 51,000 51,000
---------- -------- -------
$4,871,000 $139,000 $98,000
========== ======== =======
</TABLE>
An ownership change, as defined in the Internal Revenue Code, resulting from
the Company's issuance of additional stock may limit the amount of net
operating loss and tax credit carryforwards that can be utilized annually to
offset future taxable income and tax liabilities. The amount of the annual
limitation is determined based upon the Company's value immediately prior to
the ownership change. Subsequent significant changes in ownership could
further affect the limitation in future years.
9. SAVINGS PLAN
In January 1995, Cambridge Heart adopted a retirement savings plan for all
employees pursuant to Section 401 (k) of the Internal Revenue Code. Employees
become eligible to participate on the first day of the calendar quarter
following their hire date. Employees may contribute any whole percentage of
their salary, up to a maximum annual statutory limit. The Company is not
required to contribute to this plan. The Company made no contributions to this
plan in 1995.
F-15
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. COMMITMENTS
OPERATING LEASES
On June 1, 1995, the Company entered into a lease for its office space. The
term of this operating lease is five years and is cancelable by the Company
at the end of the fourth year by providing six months notice and payment of a
$22,000 penalty. Total rent expense under all operating leases was
approximately $4,300, $24,800, $68,100 and $97,200 for the years ended
December 31, 1993, 1994 and 1995, and for the period from inception (January
16, 1990) through December 31, 1995, respectively. The Company also has
various noncancelable operating leases for office equipment and furniture
which expire through 1999.
At December 31, 1995, future minimum rental payments under the
noncancelable leases are as follows:
<TABLE>
<S> <C>
1996.............................................................. $128,000
1997.............................................................. 135,000
1998.............................................................. 117,000
1999.............................................................. 66,000
--------
$446,000
========
</TABLE>
LICENSE MAINTENANCE FEES
Pursuant to certain license arrangements, the Company must pay license
maintenance fees ranging from $5,000 to $20,000 per year through 2008 to
maintain its license rights. The Company is also required to meet certain
development and sales milestones as specified in the agreements. Should the
Company fail to meet such milestones, the license arrangements may be
terminated at the sole option of the licensor. License maintenance fees paid
during 1995 amounted to $20,000. No license maintenance fees were paid during
1993 and 1994. The future minimum license maintenance fee commitments at
December 31, 1995 are approximately as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 20,000
1997.............................................................. 20,000
1998.............................................................. 20,000
1999.............................................................. 25,000
Thereafter........................................................ 405,000
--------
$490,000
========
</TABLE>
During the term of these license agreements, the Company is obligated to
pay a royalty (ranging from 1 1/2% to 2%) based on net sales of any products
developed from the licensed technologies. The license maintenance fees
described above are creditable against royalties otherwise payable for such
year.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with two employees which
expire on June 15, 1998 and September 1, 1998, respectively. These agreements
provide that if employment is terminated without cause, the employees will
receive a severance equal to six months and nine months of their respective
salaries.
F-16
<PAGE>
CAMBRIDGE HEART, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. RELATED PARTY TRANSACTIONS, INCLUDING ROYALTY OBLIGATIONS
CONSULTING FEES AND PREFERRED STOCK ISSUANCE COSTS
In February 1993, the Company entered into a consulting and financial
advisory agreement with the selling agent involved with the Company's Series
A Preferred Stock issuance (Note 5). The Chief Executive Officer of the
selling agent is Chairperson of the Company's Board of Directors. Total cash
fees paid under this agreement during 1994 and 1993 were approximately
$41,000 and $63,000, respectively. In addition, in conjunction with the
Series A Preferred Stock issuance in 1993, the Company paid the selling agent
approximately $648,000 in commissions and expenses and warrants to purchase
328,904 shares of common stock were issued to the selling agent (Note 5).
During 1995, the Company entered into an additional agreement with the
selling agent. Under this agreement, the Company obtained consulting and
financial advisory services in relation to the issuance of the Company's
Series B Preferred Stock issuance (Note 5). Total fees paid under this
agreement during 1995 amounted to $87,500.
LICENSE AGREEMENT/CONSULTING AND TECHNOLOGY AGREEMENT
In February 1993, the Company entered into a license agreement with a
member of the Company's Board of Directors. This individual is also Chairman
of the Company's Scientific Advisory Board and a faculty member at the
institution with which the Company has entered into certain other license
agreements. In exchange for exclusive patented technology licensing rights,
the Company is required to pay this individual a royalty based on 3% of net
sales of products developed from such technology. If the Company chooses to
sublicense this product to an unrelated party, the royalty will be based on
20% of the gross revenue received from the unrelated party for products
developed from such technology. Additionally, the Company is required to
spend a minimum of $200,000 in each two-year period for research and
development, clinical trials, marketing, sales and/or manufacturing of
products related to this technology. Should the Company fail to meet this
requirement, the license agreement may be terminated at the sole option of
the licensor.
Also in February 1993, the Company entered into a consulting and technology
agreement with this individual. This agreement, which expires in February
1998, requires the Company to pay monthly consulting fees of either $7,500 or
$12,500, as stipulated in the agreement. Total payments made during 1993,
1994 and 1995 were approximately $116,000, $142,000 and $100,000,
respectively, and are included in research and development expense. The
Company is also required to remit to this individual a royalty of 1% of net
sales of products developed from certain other technology licensed from the
institution described above. If the Company chooses to sublicense such
products to an unrelated party, the royalty will be based on 7% of the gross
revenue received from the unrelated party for products developed from such
technology. In connection with this consulting and technology agreement, a
warrant to purchase 109,634 shares of common stock was issued (Note 5) to
this individual.
Operations through December 31, 1995 and March 31, 1996 did not result in
the recognition of any material royalty expense in connection with these
agreements.
12. MAJOR CUSTOMERS AND EXPORT SALES
During 1995, the Company derived all product revenues from a distributor of
the Company's products in Japan. There was no product revenue prior to 1995.
F-17
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the U.S. Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the U.S.
Underwriters named below and each of such U.S. Underwriters, for whom Goldman,
Sachs & Co. and Bear, Stearns & Co. Inc. are acting as representatives, has
severally agreed to purchase from the Company and the Selling Stockholders,
the respective number of shares of Common Stock set forth opposite its name
below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co ...............................................
Bear, Stearns & Co. Inc. ..........................................
---------
Total............................................................ 2,602,525
=========
</TABLE>
Under the terms and conditions of the U.S. Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at
such price less a concession of $ per share. The U.S. Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain brokers and dealers. After the shares of Common Stock are
released for sale to the public, the offering price and other selling terms
may from time to time be varied by the representatives.
The Company has entered into an underwriting agreement (the "International
Underwriting Agreement") with the underwriters of the International Offering
(the "International Underwriters") providing for the concurrent offer and sale
of 600,000 shares of Common Stock in an International Offering outside the
United States. The offering price and aggregate underwriting discounts and
commissions per share for the Offerings are identical. The closing of the U.S.
Offering made hereby is a condition to the closing of the International
Offering, and vice versa. The representatives of the International
Underwriters are Goldman Sachs International and Bear, Stearns International
Limited.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between Syndicates") relating to the Offerings,
each of the U.S. Underwriters named herein has agreed or will agree that, as
part of the distribution of the shares offered hereby and subject to certain
exceptions, it will offer, sell or deliver the shares offered hereby and any
other shares of Common Stock, directly or indirectly, only in the United
States (including the States and the District of Columbia), its territories,
its possessions and other areas subject to its jurisdiction (the "United
States") and to U.S. persons, which term shall mean, for purposes of this
paragraph: (a) any individual who is a resident of the United States or (b)
any corporation, partnership or other entity organized in or under the laws of
the United States or any political subdivision thereof and whose office most
directly involved with the purchase is located in the United States. Each of
the International Underwriters has agreed or will agree pursuant to the
Agreement between Syndicates that, as part of the distribution of the shares
offered as a part of the International Offering, and subject to certain
exceptions, it will (i) not, directly or indirectly, offer, sell or deliver
shares of Common Stock (a) in the United States or to any U.S. persons or (b)
to any person whom it believes intends to reoffer, resell or deliver the
shares in the United States or to any U.S. persons, and (ii) cause any dealer
to whom it may sell such shares at any concession to agree to observe a
similar restriction.
U-1
<PAGE>
Pursuant to the Agreement Between Syndicates, sales may be made between the
U.S. Underwriters and the International Underwriters of such number of shares
of Common Stock as may be mutually agreed. The price of any shares so sold
shall be the initial public offering price, less an amount not greater than
the selling concession.
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of the Common Stock, including shares initially sold in the
International Offering, to persons located in the United States.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
390,375 additional shares of Common Stock solely to cover over-allotments, if
any. If the U.S. Underwriters exercise their over-allotment option, the U.S.
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
2,602,525 shares of Common Stock offered in the U.S. Offering. The Company has
granted the International Underwriters a similar option to purchase up to an
aggregate of 90,000 shares of Common Stock.
The Company has agreed during the period beginning from the date of this
Prospectus and continuing to and including the date 180 days after the date of
the Prospectus, not to offer, sell, contract to sell or otherwise dispose of
any securities of the Company (other than pursuant to employee stock option
plans existing, or on the conversion or exchange of convertible or
exchangeable securities outstanding, on the date of this Prospectus) which are
substantially similar to the shares of Common Stock or which are convertible
or exchangeable into securities which are substantially similar to the shares
of Common Stock, without the prior written consent of the representatives,
except for the shares of Common Stock offered in connection with the Offering.
The Company's executive officers and directors and certain other holders of
Common Stock who will hold in the aggregate 6,518,589 shares of Common Stock
following this Offering, have agreed not to offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of or agree to dispose of
any shares of Common Stock or substantially similar securities owned
beneficially by them during the period beginning from the date of this
Prospectus and continuing to and including the date 180 days after the date of
this Prospectus, without the prior written consent of the representatives of
the Underwriters. See "Shares Eligible for Future Sale".
In July 1996, Medtronic and the Company entered into a non-binding letter of
intent relating to the conduct of joint clinical studies to demonstrate the
utility of the prophylactic use of ICDs in patients identified through the use
of T-wave alternans measurement. Medtronic has expressed an intention to
purchase $3.5 million of Common Stock in this Offering. The collaboration
between the Company and Medtronic is contingent upon this investment. There
can be no assurance that Medtronic will make such an investment or that
Medtronic and the Company will collaborate on the joint clinical studies
described above.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Common Stock offered by them.
Prior to the Offerings, there has been no public market for the Common
Stock. The initial public offering price will be negotiated among the Company
and the representatives of the Underwriters. Among the factors to be
considered in determining the initial public offering price of the Common
Stock, in addition to prevailing market conditions, will be the Company's
historical performance, estimates of the business potential and earnings
prospects of the Company, an assessment of the Company's management and the
consideration of the above factors in relation to market valuation of
companies in related businesses.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "CAMH".
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities including liabilities under
the Securities Act of 1933.
U-2
<PAGE>
[Depiction of using proprietary electrodes]
[Depiction of clinical studies with research centers around the world]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCE IN WHICH SUCH OFFER OR SOLICITATION IS UN-
LAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization and Cash Position......................................... 17
Dilution................................................................. 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 23
Management............................................................... 39
Certain Transactions..................................................... 49
Principal and Selling Stockholders....................................... 51
Description of Capital Stock............................................. 53
Shares Eligible for Future Sale.......................................... 55
Legal Matters............................................................ 56
Experts.................................................................. 56
Additional Information................................................... 57
Index to Financial Statements............................................ F-1
Underwriting............................................................. U-1
</TABLE>
-------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY RE-
QUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,202,525 SHARES
CAMBRIDGE HEART, INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
----------------
[LOGO]
----------------
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts. All amounts shown are estimates except for the
Securities and Exchange Commission ("SEC") registration fee and the National
Association of Securities Dealers, Inc. ("NASD") filing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 15,500
NASD Filing Fee.................................................. 4,535
Nasdaq Listing Fee............................................... 40,000
Blue Sky Fees and Expenses....................................... 25,000
Transfer Agent and Registrar Fees................................ 10,000
Accounting Fees and Expenses..................................... 150,000
Legal Fees and Expenses.......................................... 200,000
Printing, Engraving and Mailing Expenses......................... 100,000
Miscellaneous.................................................... 79,965
--------
Total.......................................................... $625,000
========
</TABLE>
- --------
* To be completed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Nine of the Registrant's Restated Certificate of Incorporation (the
"Restated Certificate of Incorporation") provides that no director of the
Registrant shall be personally liable for any monetary damages for any breach
of fiduciary duty as a director, except to the extent that the Delaware
General Corporation Law prohibits the elimination or limitation of liability
of directors for breach of fiduciary duty.
Article Nine of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any
litigation or other legal proceeding (other than an action by or in the right
of the Registrant) brought against him by virtue of his position as a director
or officer of the Registrant 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
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant 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 Registrant, except that no indemnification shall be made with respect
to any matter as to which such person shall have been adjudged to be liable to
the Registrant, unless a court determines that, despite such adjudication but
in view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount
advanced if it is ultimately determined that he is not entitled to
indemnification for such expenses.
II-1
<PAGE>
Indemnification is required to be made unless the Registrant determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent
to the right of indemnification, the director or officer must give the
Registrant notice of the action for which indemnity is sought and the
Registrant has the right to participate in such action or assume the defense
thereof.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent
of the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred
in connection with an action or proceeding to which he is or is threatened to
be made a party by reason of such position, if such person shall have 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, in any criminal proceeding, if
such person had no reasonable cause to believe his conduct was unlawful;
provided that, in the case of actions brought by or in the right of the
corporation, no indemnification shall be made with respect to any matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the adjudicating court determines that such
indemnification is proper under the circumstances.
Under Section Eight of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act").
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of Common and Preferred Stock issued, and the number of options
granted, by the Registrant since May 1, 1993. Further included is the
consideration, if any, received by the Registrant for such shares and options,
and information relating to the section of the Securities Act of 1933 (the
"Securities Act"), or rule of the Securities and Exchange Commission under
which exemption from registration was claimed. All awards of options did not
involve any sale under the Securities Act and none of these securities was
registered under the Securities Act.
1. In September 1993, the Registrant sold 1,200,000 and 1,300,000 shares
of Series A Convertible Preferred Stock to Financial Strategic Portfolios,
Inc. - Health Sciences Portfolio and the Global Health Sciences Fund,
respectively, at $1.00 per share for aggregate consideration of $2,500,000.
2. In September 1993, October 1993 and December 1993, the Registrant sold
3,533,083, 372,500 and 72,500 shares of Series A Convertible Preferred
Stock, respectively, to certain individual investors at $1.00 per share,
for a total aggregate consideration of $3,978,083.
3. In September 1993, the Registrant converted $100,000 of notes payable
due to individual investors into 100,000 shares of Series A Convertible
Preferred Stock.
4. In September 1993, the Registrant issued warrants to purchase 328,904
shares of Common Stock to KBL Healthcare, Inc. in exchange for certain
investment banking services. The warrant is exercisable at $2.00 per share.
5. In December 1993, the Registrant issued a warrant to purchase 109,634
shares of Common Stock to Dr. Richard Cohen in exchange for certain
consulting services to the Company. The warrant is exercisable at $2.00 per
share.
6. In December 1993, the Registrant sold 180,000 shares of Common Stock
to the Massachusetts Institute of Technology pursuant to a certain Option
Agreement dated as of February 10, 1993 at $.002 per share for an aggregate
consideration of $360.
II-2
<PAGE>
7. In August 1994, the Registrant sold 22,500 shares of Common Stock to
Paul Albrecht pursuant to the exercise of options at $.002 per share for
aggregate consideration of $45.
8. In October 1994, the Registrant sold 8,333 shares of Common Stock to a
member of the Scientific Advisory Board pursuant to the exercise of options
at $.02 per share for an aggregate consideration of $167.
9. In March 1995, the Registrant sold 91,163 shares of Common Stock to
Jeffrey M. Arnold pursuant to the exercise of options at $.02 per share for
aggregate consideration of $1,823.
10. In March 1995, the Registrant sold 8,333 shares of Common Stock to
David F. Rollo pursuant to the exercise of options at $.02 per share for an
aggregate consideration of $167.
11. In April 1995, the Registrant sold 8,334 shares of Common Stock to a
member of the Scientific Advisory Board pursuant to the exercise of options
at $.02 per share for an aggregate consideration of $167.
12. In April 1995, the Registrant sold 2,333,333 shares of Series B
Convertible Preferred Stock to certain investment partnerships organized by
Morgan Stanley & Co. at $1.50 per share for aggregate consideration of
$3,500,000.
13. In June 1995, the Registrant sold 2,000 shares of Common Stock to an
employee pursuant to the exercise of options at $.20 per share for
aggregate consideration of $400.
14. In June 1995, the Registrant sold 22,500 shares of Common Stock to
Paul Albrecht pursuant to the exercise of options at $.002 per share for
aggregate consideration of $45.
15. In March 1996, the Registrant sold 45,000 shares of Common Stock to
Paul Albrecht pursuant to the exercise of options at $.20 per share for
aggregate consideration of $9,000.
16. From May 15, 1993 through June 30, 1996, the Registrant granted
options to purchase an aggregate of 967,000 shares of Common Stock to
officers, employees and consultants of the Registrant pursuant to the
Registrant's Amended and Restated 1993 incentive and Non-Qualified Stock
Option Plan. Exercise prices range from $0.002 to $10.00 per share,
resulting in an aggregate consideration of approximately $987,350.
The shares of capital stock and securities issued in the above transactions
were offered and sold in reliance upon the exemption from registration under
Section 4(2) of the Securities Act or Regulation D or Rule 701 promulgated
under the Securities Act, relative to sales by an issuer not involving a
public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1* Form of U.S. Underwriting Agreement.
1.2* Form of International Underwriting Agreement.
3.1 Certificate of Incorporation, as amended, of the Registrant.
3.2 Form of Restated Certificate of Incorporation of the Registrant to be
filed upon the closing of the public offering.
3.3 By-Laws of the Registrant, as amended.
4.1* Specimen Certificate for shares of Common Stock, $.001 par value, of
the Registrant.
5.1* Opinion of Hale and Dorr with respect to the validity of the
securities being offered.
10.1 1993 Incentive and Non-Qualified Stock Option Plan, as amended.
10.2 1996 Equity Incentive Plan.
10.3 1996 Employee Stock Purchase Plan.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.4 1996 Director Option Plan.
10.5 Consulting and Technology Agreement between the Registrant and Dr.
Richard J. Cohen, dated February 8, 1993.
10.6 Employment Agreement between the Registrant and Jeffrey M. Arnold,
dated September 1, 1993.
10.7 Employment Agreement between the Registrant and Paul Albrecht, Ph.D.,
dated April 27, 1993.
10.8# License Agreement By and Between the Registrant and Dr. Richard J.
Cohen, dated February 8, 1993.
10.9 Lease By and Between the Registrant and R.W. Connelly, dated June 1,
1995.
10.10+ Exclusive distribution agreement by and between the Registrant and
Kontron Instruments Ltd., dated December 28, 1995.
10.11+ Exclusive Distributorship Agreement by and between the Registrant and
Fukuda Denshi Co., Ltd.
10.12 License Agreement by and between the Registrant and the Massachusetts
Institute of Technology, dated September 28, 1993, relating to the
technology of "Assessing Myocardial Electrical Stability".
10.13 License Agreement by and between the Registrants and the Massachusetts
Institute of Technology, dated September 28, 1993, relating to the
technology of "Cardiac Electrical Imaging".
10.14 License Agreement by and between the Registrant and the Massachusetts
Institute of Technology, dated September 28, 1993, relating to the
technology of "Pacing Technology For Prevention of Cardiac
Dysrhythmias".
10.15# License Agreement by and between the Registrant and the Massachusetts
Institute of Technology, dated September 28, 1993, relating to the
technology of "Cardiovascular System Identification", as amended on
July 9, 1996.
10.16 Investors' Rights Agreement by and among the Company, Financial
Strategic Portfolios, Inc.--Health Sciences Portfolio and the Global
Health Sciences Fund, dated September 29, 1993.
10.17 Investors' Rights Agreement by and among the Company and Morgan
Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture Capital
Fund II, C.V. and Morgan Stanley Venture Investors, L.P., dated April
19, 1995.
10.18 Warrant to Purchase Shares of common Stock of the Company in favor of
Richard J. Cohen, dated September 29, 1993.
10.19 Form of additional warrant to purchase shares of Common Stock of the
Company.
10.20 Form of Registration Rights Agreement by and between the Company and
various Founders, each dated March 29, 1993.
11 Computation of Unaudited Pro Forma Net Loss Per Share.
23.1 Consent of Hale and Dorr (included in Exhibit 5).
23.2# Consent of Price Waterhouse LLP.
24 Powers of Attorney (included on page II-6).
27 Financial Data Schedule
99.1# Consent of Laurence J. Blumberg
</TABLE>
- --------
* To be filed by amendment.
# Filed herewith.
+ Confidential treatment requested as to certain portions.
All other exhibits have been previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
All applicable information is readily determinable from the notes to the
Company's financial statements.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Restated Certificate of
Incorporation and Amended and Restated By-Laws of the Registrant and the laws
of the State of Delaware, 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 Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of 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 Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
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, 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.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT NO. 2 TO ITS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWN OF BEDFORD,
COMMONWEALTH OF MASSACHUSETTS, ON THIS 10TH DAY OF JULY, 1996.
CAMBRIDGE HEART, INC.
/S/ Jeffrey M. Arnold*
By: _________________________________
JEFFREY M. ARNOLDPRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Cambridge Heart, Inc., hereby
severally constitute and appoint Jeffrey M. Arnold, Thomas V. Hennessey, Jr.,
John A. Burgess and Steven D. Singer, and each of them singly, our true and
lawful attorneys with full power to them, and each of them singly, to sign for
us and in our names in the capacities indicated below, the Registration
Statement on Form S-1 filed herewith and any and all pre-effective and post-
effective amendments to said Registration Statement and any subsequent
Registration Statement for the same offering which may be filed under Rule
462(b), and generally to do all such things in our names and on our behalf in
our capacities as officers and directors to enable Cambridge Heart, Inc. to
comply with the provisions of the Securities Act, as amended, and all
requirements of the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorneys, or any
of them, to said Registration Statement and any and all amendments thereto.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/S/ Jeffrey M. Arnold* President, Chief
- ------------------------------------- Executive Officer July 10, 1996
JEFFREY M. ARNOLD and Director
(Principal
Executive Officer)
/S/ Thomas V. Hennessey, Jr. Chief Financial
- ------------------------------------- Officer, Vice July 10, 1996
THOMAS V. HENNESSEY, JR. President of
Operations and
Treasurer
(Principal
Financial and
Accounting Officer)
II-6
<PAGE>
SIGNATURE TITLE DATE
/S/ Marlene Krauss* Chairperson,
- ------------------------------------- Secretary and July 10, 1996
MARLENE KRAUSS Director
/S/ Zachary C. Berk* Director
- ------------------------------------- July 10, 1996
ZACHARY C. BERK
/S/ Richard J. Cohen* Director
- ------------------------------------- July 10, 1996
RICHARD J. COHEN
/S/ M. Fazle Husain* Director
- ------------------------------------- July 10, 1996
M. FAZLE HUSAIN
/S/ David F. Muller* Director
- ------------------------------------- July 10, 1996
DAVID F. MULLER
/S/ David F. Rollo* Director
- ------------------------------------- July 10, 1996
DAVID F. ROLLO
/S/ Rolf S. Stutz* Director
- ------------------------------------- July 10, 1996
ROLF S. STUTZ
*By: _/S/ Thomas V. Hennessey, Jr.
- ------------------------------------- July 10, 1996
THOMAS V. HENNESSEY, JR.
Attorney-in-fact
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1* Form of U.S. Underwriting Agreement.
1.2* Form of International Underwriting Agreement.
3.1 Certificate of Incorporation, as amended, of the Registrant.
3.2 Form of Restated Certificate of Incorporation of the Registrant
to be filed upon the closing of the public offering.
3.3 By-Laws of the Registrant, as amended.
4.1* Specimen Certificate for shares of Common Stock, $.001 par
value, of the Registrant.
5.1* Opinion of Hale and Dorr with respect to the validity of the
securities being offered.
10.1 1993 Incentive and Non-Qualified Stock Option Plan, as amended.
10.2 1996 Equity Incentive Plan.
10.3 1996 Employee Stock Purchase Plan.
10.4 1996 Director Stock Option Plan.
10.5 Consulting and Technology Agreement between the Registrant and
Dr. Richard J. Cohen, dated February 8, 1993.
10.6 Employment Agreement between the Registrant and Jeffrey M.
Arnold, dated September 1, 1993.
10.7 Employment Agreement between the Registrant and Paul Albrecht,
Ph.D., dated April 27, 1993.
10.8# License Agreement By and Between the Registrant and Dr. Richard
J. Cohen, dated February 8, 1993.
10.9 Lease By and Between the Registrant and R.W. Connelly, dated
June 1, 1995.
10.10+ Exclusive distribution agreement by and between the Registrant
and Kontron Instruments Ltd., dated December 28, 1995.
10.11+ Exclusive Distributorship Agreement by and between the
Registrant and Fukuda Denshi Co., Ltd.
10.12 License Agreement by and between the Registrant and the
Massachusetts Institute of Technology, dated September 28,
1993, relating to the technology of "Assessing Myocardial
Electrical Stability".
10.13 License Agreement by and between the Registrants and the
Massachusetts Institute of Technology, dated September 28,
1993, relating to the technology of "Cardiac Electrical
Imaging".
10.14 License Agreement by and between the Registrant and the
Massachusetts Institute of Technology, dated September 28,
1993, relating to the technology of "Pacing Technology For
Prevention of Cardiac Dysrhythmias".
10.15# License Agreement by and between the Registrant and the
Massachusetts Institute of Technology, dated September 28,
1993, relating to the technology of "Cardiovascular System
Identification", as amended on July 9, 1996.
10.16 Investors' Rights Agreement by and among the Company, Financial
Strategic Portfolios, Inc.--Health Sciences Portfolio and the
Global Health Sciences Fund, dated September 29, 1993.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.17 Investors' Rights Agreement by and among the Company and Morgan
Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture
Capital Fund II, C.V. and Morgan Stanley Venture Investors,
L.P., dated April 19, 1995.
10.18 Warrant to Purchase Shares of common Stock of the Company in
favor of Richard J. Cohen, dated September 29, 1993.
10.19 Form of additional warrant to purchase shares of Common Stock
of the Company.
10.20 Form of Registration Rights Agreement by and between the
Company and various Founders, each dated March 29, 1993.
11 Computation of Unaudited Pro Forma Net Loss Per Share.
23.1 Consent of Hale and Dorr (included in Exhibit 5).
23.2# Consent of Price Waterhouse LLP.
24 Powers of Attorney (included on page II-6).
27 Financial Data Schedule.
99.1# Consent of Laurence J. Blumberg.
</TABLE>
- --------
* To be filed by amendment.
# Filed herewith.
+ Confidential treatment requested as to certain portions.
All other exhibits have been previously filed.
<PAGE>
EXHIBIT 10.8
LICENSE AGREEMENT
CONTINUOUS CARDIAC OUTPUT MONITORING TECHNOLOGY
RICHARD JONATHAN COHEN
AND
CAMBRIDGE HEART, INC.
<PAGE>
TABLE OF CONTENTS
PAGE
PREAMBLE
ARTICLES
1 DEFINITIONS
2 GRANT
3 DUE DILIGENCE
4 ROYALTIES
5 REPORTS AND RECORDS
6 PATENT PROSECUTION
7 INFRINGEMENT
8 PRODUCT LIABILITY
9 EXPORT CONTROLS
10 NON-USE OF NAMES
11 ASSIGNMENT
12 DISPUTE RESOLUTION
13 TERMINATION
14 PAYMENTS, NOTICES AND OTHER COMMUNICATIONS
15 MISCELLANEOUS PROVISIONS
-2-
<PAGE>
This License Agreement is made and entered into this 8th day
of February, 1993 (the "Effective Date") by and between RICHARD
JONATHAN COHEN, a natural person residing at 133 Collins Road,
Waban, Massachusetts 02168 (hereinafter referred to as "COHEN"),
and CAMBRIDGE HEART, INC., a corporation duly organized under the
laws of Delaware and having its principal office at 645 Madison
Avenue, 14th Floor, New York, NY 10022 (hereinafter referred to as
"LICENSEE").
WITNESSETH
WHEREAS, COHEN has invented certain TECHNOLOGY (as defined
below),
WHEREAS, COHEN desires to have the TECHNOLOGY commercialized
and is willing to grant a license thereunder,
WHEREAS, LICENSEE desires to obtain a license for the
TECHNOLOGY upon the terms and conditions hereinafter set forth,
WHEREAS, LICENSEE and COHEN wish to develop IMPROVEMENTS (as
defined below) to the TECHNOLOGY, and
WHEREAS, LICENSEE has represented to COHEN, to induce COHEN
to enter into this Agreement, that LICENSEE shall commit itself to
a thorough, vigorous and diligent program of exploiting the
TECHNOLOGY and IMPROVEMENTS so that commercialization shall result
therefrom.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein, the parties hereto agree as
follows:
ARTICLE 1 - DEFINITIONS
For the purposes of this Agreement, the following words and
phrases shall have the following meanings:
1.1 "LICENSEE" shall include a related company of Cambridge
Heart, Inc. the voting stock of which is directly or indirectly at
least fifty percent (50%) owned or controlled by Cambridge Heart,
Inc.
1.2 "TECHNOLOGY" shall mean all of the following
intellectual property:
-3-
<PAGE>
(a) all inventions, whether claimed or not, and all
other information contained in the United States
patent application on continuous cardiac output
monitoring to be applied for by COHEN;
(b) United States and foreign patents issued from the
application of (a) above and from divisionals and
continuations of these applications;
(c) any reissues of United States patents described in
(a) or (b); and
(d) Nonpatented material including any unissued
portions of (a), mathematical formulae, drawings,
trade secrets, know-how, and show-how related to
continuous cardiac output monitoring based on
processing physiologic wave forms.
1.3 A "PRODUCT" shall mean any product including, but not
limited to, instrumentation, devices, software, and supplies:
(a) covered in whole or in part by an issued, unexpired
patent claim or a pending patent claim, or a
copyright (whether or not registered), contained in
the TECHNOLOGY or IMPROVEMENTS in the country in
which any PRODUCT is made, used or sold; and/or
(b) manufactured by using a process which is covered in
whole or in part by an issued, unexpired patent
claim or pending patent claim, or a copyright
(whether or not registered), contained in the
TECHNOLOGY or IMPROVEMENTS in the country in which
any PROCESS is used or in which such product or
part thereof is used or sold; and/or
(c) which incorporates, is derived from or is
manufactured by using, any "Cohen Proprietary
Information" (as defined below) disclosed in
writing to LICENSEE by COHEN at any time prior to
one year following the Effective Date. For
purposes of this Agreement, "Cohen Proprietary
Information" shall mean proprietary mathematical
formulae, drawings, trade secrets, know-how or
show-how related to continuous cardiac output
monitoring based on processing of physiologic wave
forms which have been conceived of or reduced to
practice by Cohen; provided, however, that Cohen
Proprietary Information shall not be construed to
include any information or material which, at the
time of its disclosure to LICENSEE by COHEN:
(i) is generally available to the public; and/or
(ii) corresponds in substance to information made
available or furnished to LICENSEE by any
third party having a lawful and unrestricted
right to do so; and/or
-4-
<PAGE>
(iii) corresponds to information forwarded by Cohen
to any third party on a non-confidential
basis.
1.4 A "PROCESS" shall mean any process:
(a) which is covered in whole or in part by an issued,
unexpired patent or a pending patent claim, or a
copyright (whether or not registered), contained in
the TECHNOLOGY or IMPROVEMENTS in the country in
which any such process is used; and/or
(b) which incorporates, or was derived from any Cohen
Proprietary Information disclosed in writing to
LICENSEE by COHEN within one year of the Effective
Date.
1.5 "NET SALES" shall mean collected billings for PRODUCTS
and PROCESSES produced hereunder less the sum of the following:
(a) discounts allowed in amounts customary in the
trade;
(b) sales, tariffs, duties and/or use taxes directly
imposed and with reference to particular sales;
(c) outbound transportation prepaid or allowed; and
(d) amounts allowed or credited on returns.
No deductions shall be made for commissions paid to
individuals whether they be with independent sales agencies or
regularly employed by LICENSEE and on its payroll, or for cost of
collections. PRODUCTS shall be considered "Sold" when paid for.
1.6 "TERRITORY" shall mean worldwide.
1.7 "FIELD OF USE" shall mean all.
1.8 "SUBLICENSEE" shall mean a third party sublicensed by
LICENSEE to make, have made, use, lease and sell the
PRODUCT(S) and PROCESS(ES).
1.9 "IMPROVEMENTS" shall mean (i) any and all modifications,
refinements, and enhancements to the TECHNOLOGY conceived of or
reduced to practice by COHEN under the terms of a consulting or
employment contract with LICENSEE and/or (ii) any and all
modifications, refinements and enhancements to
-5-
<PAGE>
the TECHNOLOGY conceived of or reduced to practice by LICENSEE
during any period which COHEN is a consultant to or employee of
LICENSEE. Such IMPROVEMENTS include, but are not limited to,
(a) United States and foreign patent applications
(b) United States and foreign patents issued from the
applications of (a) above and from divisionals and
continuations of these applications
(c) COPYRIGHTABLE and TANGIBLE property including
computer code, circuit diagrams, etc.
(d) Copyrights resulting from material in (c) above
(e) Other materials including unissued sections of (a),
mathematical formulae, drawings, trade secrets,
know-how and show-how, etc.
1.10 "ASSIGNEE" shall mean a third party to whom LICENSEE
assigns this Agreement.
ARTICLE 2 - GRANT
2.1 COHEN hereby grants to LICENSEE the exclusive right and
exclusive license to make, have made, use, lease and sell the
PRODUCTS and to practice the PROCESSES in the TERRITORY for the
FIELD OF USE unless this Agreement shall be terminated according
to the terms hereof.
2.2 COHEN hereby agrees that he shall not grant any other
license to the TECHNOLOGY, including without limitation any
licenses to make, have made, use, lease and sell PRODUCTS or to
utilize PROCESSES in the TERRITORY for the FIELD OF USE unless
this Agreement shall be terminated according to the terms hereof.
2.3 COHEN reserves the right to practice under the
TECHNOLOGY and IMPROVEMENTS for noncommercial research purposes.
2.4 LICENSEE shall have the right to enter into sublicensing
agreements for the rights, privileges and licenses granted
hereunder; provided, however, that LICENSEE shall not sublicense
any of its rights to the TECHNOLOGY or
-6-
<PAGE>
IMPROVEMENTS other than at arms length with unrelated companies
in which LICENSEE holds no equity position, or rights to acquire
equity, in arrangements in which LICENSEE receives only cash and
does not issue any equity, or rights to acquire equity, without
the prior written consent of COHEN. In connection with obtaining
COHEN's consent to any other form of sublicensing arrangement,
LICENSEE shall enter into a written agreement with COHEN specifying
COHEN's rights to receive royalties and/or other consideration as
the result of such sublicensing arrangement. The parties hereto
hereby agree to negotiate in good faith with respect to COHEN's
rights to receive royalties and/or other consideration. Upon any
termination of this Agreement, SUBLICENSEES' rights shall also
terminate, subject to Paragraph 13.6 hereof.
2.5 LICENSEE agrees that any sublicenses granted by it shall
provide that the obligations to COHEN under Articles 2, 7, 8, 9,
10, 12, 13, 14 and 15 of this Agreement shall be binding upon the
SUBLICENSEE as if it were a party to this Agreement. LICENSEE
further agrees to attach copies of these Articles and Article 1 to
sublicense agreements. In addition, if LICENSEE grants
sublicenses for the TECHNOLOGY and IMPROVEMENTS to SUBLICENSEES to
make, use and/or sell PRODUCTS or PROCESSES, such sublicenses
shall include obligations of the SUBLICENSEES to account for and
report all information needed by LICENSEE to comply with the
reporting requirements of Article 5 hereof.
2.6 LICENSEE agrees to forward to COHEN a copy of any and
all sublicense agreements promptly upon execution by the parties.
2.7 The license granted hereunder shall not be construed to
confer any rights upon LICENSEE by implication, estoppel or
otherwise as to any technology not specifically set forth in 1.2
and 1.9.
-7-
<PAGE>
ARTICLE 3 - DUE DILIGENCE
3.1 LICENSEE either directly or through its sublicensees
shall use its reasonable best efforts to bring one or more
PRODUCTS or PROCESSES to market through an ongoing, thorough,
vigorous and diligent program for exploitation of the TECHNOLOGY
and IMPROVEMENTS and to continue vigorous, ongoing, active,
diligent marketing efforts of the PRODUCTS or PROCESSES throughout
the life of this Agreement. Such efforts shall include, but shall
not be limited to, conducting clinical trials and evaluations
necessary to obtain premarket FDA approval.
3.2 In addition, to the obligations set forth in 3.1
LICENSEE shall adhere to the following milestones:
(a) LICENSEE shall deliver to COHEN on or before three
(3) months after the Effective Date a business plan
showing the amount of money, number and kind of
personnel and time budgeted and planned for each
phase of development of the PRODUCTS and PROCESSES
and shall provide similar reports to COHEN on or
before December 31 of each year.
(b) LICENSEE shall raise a minimum of Three Million
Dollars ($3,000,000) in investment capital on or
before the May 31, 1993.
(c) LICENSEE and its SUBLICENSEES shall jointly spend a
minimum of $200,000 in each two (2) calendar year
period during the term of this Agreement in direct
expenses (exclusive of general overhead and
administrative expenses) for research and
development, clinical trials, marketing, sales
and/or manufacturing of PRODUCTS or PROCESSES which
utilize the TECHNOLOGY or IMPROVEMENTS.
3.3 Unless extended by mutual consent of the parties,
LICENSEE's failure to perform in accordance with Paragraphs 3.1
and 3.2 above shall be grounds for COHEN to terminate this
Agreement upon written notice to LICENSEE specifying the grounds
for such termination. Any such termination based upon
Paragraph 3.1, Paragraph 3.2(a) or Paragraph 3.2(c) hereof shall
become effective ninety (90) days after the date of the notice of
termination, unless LICENSEE shall have
-8-
<PAGE>
cured any such failure of performance prior to the expiration of
such ninety (90) day period, or unless COHEN shall have previously
withdrawn in writing his notice of termination. Any such
termination based upon Paragraph 3.2(b) hereof shall be effective
immediately.
ARTICLE 4 - ROYALTIES
4.1 For the rights, privileges and license granted
hereunder, LICENSEE shall pay royalties to COHEN in the manner
hereinafter provided:
Running Royalties in an amount equal to Three Percent (3%) of
LICENSEE's NET SALES. If LICENSEE sublicenses, or grants any
right to sublicense, the TECHNOLOGY or IMPROVEMENTS at arms length
with an unrelated company in which LICENSEE holds no equity
position or rights to acquire equity to manufacture, sell and
market PRODUCTS and/or PROCESSES in an arrangement in which
LICENSEE receives only cash compensation and does not issue any
equity, or rights to acquire equity, then the Royalties due COHEN
from LICENSEE shall be Twenty Percent (20%) of gross revenue to
LICENSEE from the SUBLICENSEE for the sublicensing of the
Technology or Improvements. In any other form of sublicensing
arrangement, the Royalties and/or other consideration due COHEN
shall be determined by mutual agreement of COHEN and LICENSEE
pursuant to Paragraph 2.4 hereof. In the event of any assignment
of LICENSEE's rights hereunder, the Royalties and/or other
consideration due COHEN shall be determined by written agreement
of COHEN and LICENSEE pursuant to Paragraph 11.2 hereof.
Notwithstanding the foregoing, Royalties in consideration of
payments by third parties to LICENSEE for the granting of any
rights to sublicense the Technology or Improvements shall be due
and payable to COHEN only if the granting of such rights results
in the third party entering into a definitive
-9-
<PAGE>
sublicense agreement with respect to the Technology or Improvements
to which such rights were granted.
4.2 No multiple royalties shall be payable because any
PRODUCT or PROCESS, its manufacture, use, lease and/or sale are or
shall be covered by more than one license, consulting or other
agreement between LICENSEE and COHEN. If a PRODUCT or PROCESS is
covered by more than one agreement between LICENSEE and COHEN then
the largest royalty due under any single agreement shall be
applicable.
4.3 All Royalties due hereunder shall be paid in full,
without deduction of taxes or other fees which may be imposed upon
LICENSEE or SUBLICENSEES by any government; the payment of any
such taxes or other fees shall be the responsibility of LICENSEE
or SUBLICENSEES. Notwithstanding the foregoing, LICENSEE shall
not be responsible for the payment of any taxes which are based on
COHEN's royalty income under this Agreement, the payment of any
such taxes shall be the responsibility of COHEN.
4.4 Payment of royalties shall continue for as long as
PRODUCTS and/or PROCESSES are sold, leased, and/or sublicensed by
CD.
4.5 Royalty payments shall be paid in United States dollars
in Waban, Massachusetts, or at such other place as COHEN may
reasonably designate consistent with the laws and regulations
controlling any foreign country. Payments shall be made within
sixty days after the end of each fiscal quarter of LICENSEE. If
any currency conversion shall be required in connection with the
payment of royalties hereunder, such conversion shall be made by
using the exchange rate prevailing at the Chase Manhattan Bank
(N.A.) on the last business day of the calendar quarterly
reporting period to which such royalty payments relate.
-10-
<PAGE>
4.6 In the event that LICENSEE and COHEN disagree as to the
revenue base for the computation of Royalties due COHEN, LICENSEE
and COHEN shall negotiate in good faith to resolve such
disagreement.
ARTICLE 5 - REPORTS AND RECORDS
5.1 LICENSEE shall keep full, true and accurate books of
account containing all particulars that may be necessary for the
purpose of showing the amounts payable to COHEN hereunder. Said
accurate books of account shall be kept at LICENSEE's principal
place of business or the principal place of business of the
appropriate division of LICENSEE to which this Agreement relates.
Said books and the supporting data shall be open at all reasonable
times for three (3) years following the end of the calendar year
to which they pertain, to the inspection of COHEN or his agents
for the purpose of verifying LICENSEE's royalty statement or
compliance in other respects with this Agreement. COHEN shall pay
the cost of any inspection, unless such inspection leads to the
discovery of a greater than ten percent (10%) discrepancy in
reporting, in which case LICENSEE agrees to pay half the cost of
such inspection.
5.2 LICENSEE, within sixty (60) days after the end of each
fiscal quarter of LICENSEE, shall deliver to COHEN true and
accurate reports certified as correct by LICENSEE's chief
financial officer, giving such particulars of the business
conducted by LICENSEE and its sublicensees during the preceding
fiscal quarter under this Agreement as shall be pertinent to a
royalty accounting hereunder. These shall include at least the
following:
(a) number of PRODUCTS manufactured and sold by
LICENSEE and all sublicensees;
(b) total billings for all PRODUCTS sold by LICENSEE
and all sublicenses;
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<PAGE>
(c) accounting for all PROCESSES used or sold by
LICENSEE and all sublicenses;
(d) all payments made by SUBLICENSEEs to LICENSEE and
names and addresses of all SUBLICENSEEs;
(e) deductions applicable as provided in Paragraph 1.5
hereof; and
(f) total royalties due.
5.3 With each such report submitted, LICENSEE shall pay to
COHEN the royalties due and payable under this Agreement. If no
royalties shall be due, LICENSEE shall so report.
5.4 On or before the ninetieth (90) day following the close
of LICENSEE's fiscal year, LICENSEE shall provide COHEN with
LICENSEE's certified financial statements for the preceding fiscal
year including, at a minimum, a Balance Sheet, an Operating
Statement certified to by the LICENSEE's independent certified
public accountants.
5.5 The royalty payments set forth in this Agreement and
amounts due under Article 6 shall, if overdue, bear interest until
payment at a per annum rate two percent (2%) above the prime rate
in effect at the Chase Manhattan Bank (N.A.) on the due date. The
payment of such interest shall not foreclose COHEN from exercising
any other rights he may have as a consequence of the lateness of
any payment.
ARTICLE 6 - PATENT PROSECUTION
6.1 (a) COHEN shall (unless otherwise agreed to in writing
by COHEN and LICENSEE) apply for, seek prompt issuance of, and
maintain during the term of this Agreement, TECHNOLOGY patents and
copyrights in the United States and in such foreign countries as
shall be mutually designated by LICENSEE and COHEN. The
prosecution, filing and maintenance of all TECHNOLOGY patents and
applications shall be the primary responsibility of COHEN;
provided, however,
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<PAGE>
LICENSEE shall have reasonable opportunities to advise COHEN and
shall cooperate with COHEN in such prosecution, filing and
maintenance.
(b) In the event that COHEN and LICENSEE do not
mutually agree that a patent or copyright application should be
filed in a foreign country, COHEN may proceed, at his own expense,
to file such patent or copyright application in such foreign
country; provided, that COHEN shall deliver a written notice (a
"Filing Notice") to LICENSEE promptly upon the filing of any such
patent or copyright application. Any such Filing Notice shall be
accompanied by a copy of the relevant patent or copyright
application. Upon receipt of any such Filing Notice, LICENSEE
shall have thirty (30) days to deliver a notice (an "Assumption
Notice") to COHEN, stating that LICENSEE agrees to pay all fees
and costs relating to the filing and prosecution of such patent or
copyright application pursuant to Paragraph 6.3 hereof. In the
event that LICENSEE does not deliver an Assumption Notice within
such thirty-day period, the foreign patent or copyright
application described in the Filing Notice, and any patents or
copyrights which issue as a result thereof, shall be excluded from
this Agreement and COHEN shall be free to dispose of same as he
chooses without limitation.
6.2 LICENSEE shall apply for, seek prompt issuance of, and
maintain during the term of this Agreement appropriate
IMPROVEMENTS patents and copyrights in the United States and
appropriate foreign countries. The prosecution, filing and
maintenance of all IMPROVEMENTS patents and applications shall be
the primary responsibility of LICENSEE; provided COHEN shall have
reasonable opportunities to advise LICENSEE and shall reasonably
cooperate with LICENSEE in such prosecution, filing and
maintenance.
6.3 Except as provided in Paragraph 6.1(b) hereof, payment
of all fees and costs relating to the filing, prosecution, and
maintenance of all TECHNOLOGY
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<PAGE>
and IMPROVEMENTS patents and copyrights shall be the responsibility
of LICENSEE, whether such fees and costs were incurred before or
after the Effective Date of this Agreement. LICENSEE shall have
the right to approve the attorney selected by COHEN for protection
of TECHNOLOGY patents and copyrights. LICENSEE hereby approves
Samuel Pasternack, Esq. COHEN shall have the right to approve the
attorney selected by LICENSEE for prosecution of IMPROVEMENTS
patents and copyrights.
ARTICLE 7 - INFRINGEMENT
7.1 Each party hereto shall inform the other party hereto
promptly in writing of any alleged infringement of the TECHNOLOGY
or IMPROVEMENTS by a third party and of any available evidence
thereof.
7.2 During the term of this Agreement, LICENSEE shall have
the right, but shall not be obligated, to prosecute at its own
expense all infringements of the TECHNOLOGY and IMPROVEMENTS. No
settlement, consent judgment or other voluntary final disposition
of the suit may be entered into without the consent of COHEN,
which consent shall not be unreasonably withheld. Any recovery of
damages made by LICENSEE shall be applied first in satisfaction of
any unreimbursed out-of-pocket expenses and legal fees of LICENSEE
relating to such suit. Twenty Percent (20%) of the balance
remaining from such recovery shall be paid to COHEN and the
remainder retained by LICENSEE.
7.3 If within six (6) months after having been notified of
any alleged infringement, LICENSEE shall have been unsuccessful in
persuading the alleged infringer to desist and shall not have
brought and shall not be diligently prosecuting an infringement
action, or if LICENSEE shall notify COHEN at any time prior
thereto of its intention not to bring suit against any alleged
infringer, then, and in those events only, COHEN shall have the
right, but shall not be obligated to prosecute at his own expense
any infringement of the
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<PAGE>
TECHNOLOGY and IMPROVEMENTS, and COHEN may, for such purposes,
use the name of LICENSEE as a party plaintiff. The total cost
of any such infringement action commenced or defended solely by
COHEN shall be borne by COHEN, and any recovery of damages shall
be retained by COHEN.
7.4 In any infringement suit as either party may institute
to enforce the TECHNOLOGY and IMPROVEMENTS pursuant to this
Agreement, the other party hereto shall, at the request and
expense of the party initiating such suit, cooperate in all
respects, and, to the extent possible, testify, and in the case of
LICENSEE have its employees and consultants testify, when
requested and make available relevant records, papers,
information, samples, specimens, and the like.
7.5 LICENSEE shall have the sole right in accordance with
the terms and conditions herein to sublicense any alleged
infringer for future use of the TECHNOLOGY and IMPROVEMENTS. Any
upfront fees as part of such a sublicense shall be shared Twenty
Percent (20%) to COHEN and the balance to LICENSEE; other
royalties shall be treated per Article 4.
ARTICLE 8 - PRODUCT LIABILITY
8.1 LICENSEE shall at all times during the term of this
Agreement and thereafter, indemnify, defend and hold COHEN, his
estate and heirs, harmless against all claims and expenses,
including legal expenses and reasonable attorneys' fees, arising
out of the death of or injury to any person or persons or out of
any damage to property and against any other claim, proceeding,
demand, expense and liability of any kind whatsoever resulting
from the production, manufacture, sale, use, lease, consumption or
advertisement of the PRODUCT(S) and/or PROCESS(ES) or arising from
any obligation of LICENSEE hereunder.
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<PAGE>
8.2 Before delivery of a PRODUCT, LICENSEE shall obtain and
carry in full force and effect liability insurance which shall
protect LICENSEE and COHEN in regard to events covered by
Paragraph 8.1 above. Such insurance shall be written by a
reputable insurance company authorized to do business in the
Commonwealth of Massachusetts, shall list COHEN as an additional
named insured thereunder and shall require thirty (30) days'
written notice to be given to COHEN prior to any cancellation or
material change thereof. The limits of such occurrence shall not
be less than One Million Dollars ($1,000,000) per occurrence with
an aggregate of Three Million Dollars ($3,000,000) for personal
injury or death, and One Million Dollars ($1,000,000) per
occurrence with an aggregate Three Million Dollars ($3,000,000)
for property damage. LICENSEE shall provide COHEN with
Certificates of Insurance evidencing the same.
8.3 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS
AGREEMENT, COHEN MAKES NO REPRESENTATIONS AND EXTENDS NO
WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT
NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, AND VALIDITY OF PATENT CLAIMS, ISSUED OR
PENDING. NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS A
REPRESENTATION MADE OR WARRANTY GIVEN BY COHEN THAT THE PRACTICE
BY LICENSEE OF THE LICENSE GRANTED HEREUNDER SHALL NOT INFRINGE
THE TECHNOLOGY OF ANY THIRD PARTY.
ARTICLE 9 - EXPORT CONTROLS
It is understood that COHEN and LICENSEE are subject to
United States laws and regulations controlling the export of
technical data, computer software, laboratory prototypes and other
commodities (including the Arms Export Control Act, as amended and
the Export Administration Act of 1979), and that their respective
obligations hereunder are contingent on compliance with applicable
United States export laws and regulations. The transfer of
certain technical data and commodities may require a license from
the cognizant agency of the
-16-
<PAGE>
United States Government and/or written assurances by LICENSEE
that LICENSEE shall not export data or commodities to certain
foreign countries without prior approval of such agency. COHEN
neither represents that a license shall not be required nor that,
if required, it shall be issued.
ARTICLE 10 - NON-USE OF NAMES
LICENSEE shall not use the name or trademarks of COHEN, nor
any adaptation thereof, in any advertising, promotional or sales
literature without prior written consent obtained from COHEN, in
each case, except that LICENSEE may (i) state that COHEN has
granted an exclusive, worldwide license to the TECHNOLOGY and
IMPROVEMENTS, (ii) disclose the terms of this Agreement in any
financing memorandum prepared for the purpose of raising capital
for LICENSEE and (iii) comply with disclosure requirements of all
applicable laws relating to its business, including United States
and state securities laws.
ARTICLE 11 - ASSIGNMENT
11.1 LICENSEE may assign this Agreement in its entirety to
any party to whom it sells or transfers substantially all of its
assets. In any such assignment ASSIGNEE shall assume all
obligations of LICENSEE. LICENSEE agrees to forward promptly to
COHEN a copy of any agreement to assign this Agreement pursuant to
this Section 11.1.
11.2 Except as set forth in Section 11.1 hereof, LICENSEE
shall not assign any of its rights to the TECHNOLOGY or
IMPROVEMENTS without the written consent of COHEN. In connection
with obtaining COHEN's consent to any assignment, LICENSEE shall
enter into a written agreement with COHEN specifying COHEN's
rights to receive royalties and/or other consideration as the
result of such assignment. The parties hereto hereby agree to
negotiate in good faith with respect to COHEN's right to receive
any such royalty and/or other consideration.
-17-
<PAGE>
11.3 LICENSEE agrees that any assignment of any of its
rights to the TECHNOLOGY or IMPROVEMENTS shall provide that the
obligations to COHEN under Articles 3, 5, 6, 7, 8, 9, 10, 11, 12,
13, 14 and 15 shall be binding on assignee(s) as if assignee(s)
were a party to this Agreement. LICENSEE further agrees to attach
copies of these Articles and Article 1 to assignment agreements.
LICENSEE agrees to forward promptly to COHEN a copy of any and all
assignment agreements for the TECHNOLOGY and IMPROVEMENTS.
11.4 Without limitation of the foregoing, no assignment
shall relieve the LICENSEE of any duty or liability which has
matured prior to the date of the Assignment. Without limitation
of the foregoing, the LICENSEE shall remain liable under
Paragraph 8.1 hereof for products manufactured, leased, and/or
sold by LICENSEE and/or LICENSEE's SUBLICENSEES, and shall remain
bound by Paragraph 8.2 and 15.7 hereof.
11.5 COHEN may assign this Agreement but such Assignment
shall not relieve COHEN of those obligations to LICENSEE which are
personal to COHEN, in the reasonable judgment of LICENSEE.
ARTICLE 12 - DISPUTE RESOLUTION
12.1 For any and all claims, disputes or controversies
arising under, out of, or in connection with this Agreement,
including any dispute related to patent validity or infringement,
which the parties shall be unable to resolve within sixty (60)
days, the party raising such dispute shall promptly advise the
other party of such claim, dispute or controversy in a writing
which describes in reasonable detail the nature of such dispute.
By not later than five (5) business days after the recipient has
received such notice of dispute, each party shall have selected
for itself a representative who shall have the authority to bind
such party, and shall additionally have advised the other party in
writing of the name and title of such representative. By not
later than
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<PAGE>
ten (10) business days after the date of such notice of dispute,
such representatives shall schedule a date for a mediation with
the Cambridge Dispute Settlement Center or Endispute Inc. in
Cambridge, Massachusetts. If the representatives of the parties
have not been able to resolve the dispute within fifteen (15)
business days after such mediation hearing, the parties shall
have the right to pursue any other remedies legally available to
resolve such dispute in either the Courts of the Commonwealth of
Massachusetts or in the United States District Court for the
District of Massachusetts, to whose jurisdiction for such purposes
COHEN and LICENSEE each hereby irrevocably consents and submits.
12.2 Notwithstanding the foregoing, nothing in this Article
shall be construed to waive any rights or timely performance of
any obligations existing under this Agreement.
ARTICLE 13 - TERMINATION
13.1 If LICENSEE shall cease to carry on its business, this
Agreement shall terminate upon notice by COHEN.
13.2 Should LICENSEE fail to make any payment whatsoever due
and payable to COHEN hereunder, COHEN shall have the right to
terminate this Agreement effective on thirty (30) days' notice,
unless LICENSEE shall make all such payments to COHEN within said
(30) day period. Upon the expiration of the thirty (30) day
period if LICENSEE shall not have made all such payments to COHEN,
the rights, privileges and license granted to LICENSEE hereunder
shall automatically terminate unless COHEN shall have previously
withdrawn in writing his notice of termination.
13.3 In addition to the rights of COHEN set forth in
Paragraph 3.3 hereof, upon any material breach or default of this
Agreement by LICENSEE, other than those occurrences set out in
Paragraphs 13.1 and 13.2 hereinabove, which
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<PAGE>
shall always take precedence in that order over any material
breach or default referred to in this Paragraph 13.3, COHEN
shall have the right to terminate this Agreement and the rights,
privileges and license granted hereunder effective on ninety
(90) days' notice to LICENSEE. Such termination shall become
automatically effective unless LICENSEE shall have cured any
such material breach or default prior to the expiration of the
ninety (90) day period, or unless COHEN shall have previously
withdrawn in writing his notice of termination.
13.4 LICENSEE shall have the right to terminate this
Agreement at any time on ninety (90) days' notice to COHEN, and
upon payment of all amounts due COHEN through the effective date
of the termination.
13.5 Upon termination of this Agreement for any reason,
nothing herein shall be construed to release either party from any
obligation that matured prior to the effective date of such
termination. LICENSEE and any sublicensee thereof may, however,
after the effective date of such termination, sell all PRODUCTS,
and complete PRODUCTS in the process of manufacture at the time of
such termination and sell the same, provided that LICENSEE shall
pay to COHEN the Royalties thereon as required by Article 4 of
this Agreement and shall submit the reports required by Article 5
hereof on the sales of PRODUCTS.
13.6 Upon termination of this Agreement for any reason, any
SUBLICENSEE not then in default shall have the right to seek a
license for the TECHNOLOGY from COHEN. COHEN agrees to grant such
licenses in good faith under terms and conditions similar to those
in the sublicense.
13.7 Upon termination of this Agreement for any reason,
LICENSEE shall lose all rights under and license to the
TECHNOLOGY, and shall cease to make, have made, use, lease and
sell all PRODUCTS and PROCESSES which utilize the TECHNOLOGY
except as provided for in Paragraph 13.5 hereof. Termination of
this
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<PAGE>
Agreement shall not relieve LICENSEE of its obligations to
continue to pay royalties to COHEN according to Article 4 and
submit reports according to Article 5 on sales of any PRODUCTS and
PROCESSES which utilize the TECHNOLOGY and IMPROVEMENTS. All
LICENSEE's obligations to COHEN with reference to Sublicensing and
Assignment of IMPROVEMENTS (specifically Paragraphs 2.5 and 2.6
hereof, and Article 11) shall remain in force. Termination of
this Agreement shall also not relieve the parties from the
requirements of Paragraph 15.7 hereof and shall not release
LICENSEE from its obligations under Paragraphs 8.1 and 8.2 hereof
and Article 10.
ARTICLE 14 - PAYMENTS, NOTICES AND OTHER COMMUNICATIONS
Any payment, notice or other communication pursuant to this
Agreement shall be sufficiently made or given on the date of
mailing if sent to such party by certified first class mail,
postage prepaid, addressed to it at its address below or as it
shall designate by written notice given to the other party:
In the case of COHEN:
Richard Jonathan Cohen, M.D., Ph.D.
133 Collins Road
Waban, Massachusetts 02168
In the case of LICENSEE:
Chief Executive Officer
Cambridge Heart, Inc.
645 Madison Avenue
14th Floor
New York, NY 10022
ARTICLE 15 - MISCELLANEOUS PROVISIONS
15.1 This Agreement shall be construed, governed,
interpreted and applied in accordance with the laws of the
Commonwealth of Massachusetts, U.S.A., except that questions
affecting the construction and effect of any patent shall be
determined by the law of the country in which the patent was
granted.
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<PAGE>
15.2 The parties hereto acknowledge that this Agreement sets
forth the entire Agreement and understanding of the parties hereto
as to the subject matter hereof, and shall not be subject to any
change or modification except by the execution of a written
instrument subscribed to by the parties hereto.
15.3 The provisions of this Agreement are severable, and in
the event that any provisions of this Agreement shall be
determined to be invalid or unenforceable under any controlling
body of the law, such invalidity or unenforceability shall not in
any way affect the validity or enforceability of the remaining
provisions hereof.
15.4 LICENSEE agrees to mark the PRODUCTS sold in the United
States with all applicable United States patent numbers. All
PRODUCTS shipped to or sold in other countries shall be marked in
such a manner as to conform with the patent laws and practice of
the country of manufacture or sale.
15.5 The failure of either party to assert a right hereunder
or to insist upon compliance with any term or condition of this
Agreement shall not constitute a waiver of that right or excuse a
similar subsequent failure to perform any such term or condition
by the other party.
15.6 LICENSEE recognizes that COHEN is a university
professor currently employed by the Massachusetts Institute of
Technology ("MIT") conducting research in the fields of the
TECHNOLOGY, and that COHEN is obligated to assist MIT in
protecting inventions and copyrightable materials developed by him
or in his laboratory at MIT, and to assist MIT in transferring
such inventions and copyrightable materials to third parties. In
the event that it is unclear whether a particular invention or
copyrightable material in the nature of an improvement to the
TECHNOLOGY is developed by COHEN in the context of his consulting
or employment activity at LICENSEE or in the context of his
activities as an employee of MIT or any other university, hospital
or similar
-22-
<PAGE>
non-profit institution (a "Not-for-Profit") at which COHEN may
be employed during the term of this Agreement, LICENSEE will
approach such Not-for-Profit in good faith to negotiate a
reasonable resolution. In his capacity as a faculty member with
MIT or an employee of any other Not-for-Profit, COHEN shall be
permitted, without limitation or restriction, to continue to
teach, conduct research, write grant applications, administer
grant funds, assist in protecting and transferring inventions and
copyrightable materials developed at MIT or such other
Not-for-Profit, deliver lectures, and publish papers. In
performing his obligations hereunder, COHEN shall be permitted to
conduct his activities in such manner as may be necessary for
COHEN to fully comply with MIT's "Policies and Procedures: A
Guide for Faculty and Staff" (appended).
15.7 LICENSEE shall not disclose secret information (except
in discharge of a legal duty to do so) contained in the TECHNOLOGY
and COHEN shall not release secret information (except in
discharge of a legal duty to do so) contained in the IMPROVEMENTS
or regarding LICENSEE, in each case, without the express written
permission of the other party. This obligation shall persist
after the termination of this Agreement according to the
provisions of Article 13.
15.8 This Agreement shall inure to the benefit of, and be
binding upon, COHEN, LICENSEE, LICENSEE's successors and assigns,
and COHEN's successors, assigns and heirs.
-23-
<PAGE>
15.9 COHEN hereby represents and warrants to LICENSEE that
the execution, delivery and performance of this Agreement by COHEN
does not, and will not, violate any commitments or undertakings to
which COHEN may be bound.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement the day and year set forth below.
Agreed to for:
RICHARD J. COHEN CAMBRIDGE HEART, INC.
By: /s/ Richard J. Cohen By: /s/ Marlene Krauss
----------------------------- ---------------------------
Date: 2/8/93 Name: Marlene Krauss
--------------------------- -------------------------
Title: Acting CEO
------------------------
Date: 2/22/93
-------------------------
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<PAGE>
APPENDIX
POLICIES and PROCEDURES, A Guide for Faculty
and Staff Members; Massachusetts Institute of
Technology March 1990
-25-
<PAGE>
EXHIBIT 10.15
ADDENDUM CSI
"Cardiovascular System Identification"
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
LICENSE AGREEMENT
(EXCLUSIVE)
Date: September 28, 1993
<PAGE>
(i)
Vers 11/1/91 LP/:to CardioDynamics lic agt.CSI. 9/28
Patent/Ex Date: September 28, 1993
TABLE OF CONTENTS
PAGE
----
PREAMBLE........................................................1
--------
ARTICLES
--------
1 - DEFINITIONS.................................................1
2 - GRANT.......................................................3
3 - DUE DILIGENCE...............................................5
4 - ROYALTIES...................................................6
5 - REPORTS AND RECORDS.........................................7
6 - PATENT PROSECUTION..........................................8
7 - INFRINGEMENT................................................8
8 - PRODUCT LIABILITY...........................................10
9 - EXPORT CONTROLS.............................................11
10 - NON-USE OF NAMES...........................................11
11 - ASSIGNMENT.................................................11
12 - DISPUTE RESOLUTION.........................................11
13 - TERMINATION................................................12
14 - PAYMENTS, NOTICES..........................................13
15 - MOST FAVORED LICENSEE......................................13
16 - MISCELLANEOUS PROVISIONS...................................14
APPENDIX CSI-A..................................................15
APPENDIX CSI-B..................................................16
APPENDIX CSI-C..................................................17
<PAGE>
-1-
This Agreement is made and entered into this day of , 199 , (the
"Effective Date") by and between MASSACHUSETTS INSTITUTE OF TECHNOLOGY, a
corporation duly organized and existing under the laws of the Commonwealth of
Massachusetts and having its principal office at 77 Massachusetts Avenue,
Cambridge, Massachusetts 02139, U.S.A. (hereinafter referred to as "M.I.T."),
and CAMBRIDGE HEART, INC., a corporation duly organized under the laws of
Delaware and having its principal office at 645 Madison Avenue, 14th Floor, New
York, NY 10022 (hereinafter referred to as "LICENSEE").
WITNESSETH
----------
WHEREAS, M.I.T. hereby represents that it is the owner of certain PATENT
RIGHTS and IMPROVEMENTS (as both terms are later defined herein) relating to
M.I.T. Case No.4227, U.S. Patent 4,777,960, "Method and Apparatus for the
Assessment of Autonomic Response by Broad-Band Excitation" by Ronald Berger,
Jerome P. Saul, Ming Hui Chen, and Richard J. Cohen; M.I.T. Case No.4738, U.S.
Patent 4,930,517, "Method and Apparatus for Physiologic System Identification"
by Richard J. Cohen, Marvin Appel, and Ronald Berger; and M.I.T. Case No.4820,
U.S. Patent 4,979,110, "Characterizing the Statistical Properties of a
Biological Signal" by Richard J. Cohen and Paul Albrecht; and has the right to
grant licenses under said PATENT RIGHTS, subject only to a royalty-free,
nonexclusive license heretofore granted to the United States Government;
WHEREAS, M.I.T. desires to have the PATENT RIGHTS utilized in the public
interest and is willing to grant a license thereunder;
WHEREAS, LICENSEE has represented to M.I.T., to induce M.I.T. to enter into
this Agreement, that LICENSEE shall commit itself to a thorough, vigorous and
diligent program of exploiting the PATENT RIGHTS so that public utilization
shall result therefrom; and
WHEREAS, LICENSEE desires to obtain a license under the PATENT RIGHTS upon
the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the parties hereto agree as follows:
ARTICLE I - DEFINITIONS
-----------------------
For the purposes of this Agreement, the following words and phrases shall
have the following meanings:
1.1 "LICENSEE" shall include a related company of CAMBRIDGE HEART, INC.,
the voting stock of which is directly or indirectly at least fifty percent (50%)
owned or controlled by
CAMBRIDGE HEART, INC.
1.2 "PATENT RIGHTS" shall mean all of the following M.I.T. intellectual
property:
<PAGE>
-2-
(a) the United States and foreign patents and/or patent applications
listed in Appendices CS I-A and CS I-B;
(b) United States and foreign patents issued from the applications of (a)
above and from divisionals and continuations of these applications;
(c) claims of U.S. and foreign continuation-in-part applications, and of
the resulting patents, which are directed to subject matter
specifically described in the disclosure of (a) above;
(d) claims of all foreign patent applications, and of the resulting
patents, which are directed to subject matter specifically described
in the United States patents and/or patent applications described in
(a), (b) or (c) above; and
(e) any reissues of patents described in (a), (b), (c) or (d) above;
(f) COPYRIGHTABLE MATERIAL and TANGIBLE PROPERTY listed in Appendix CSI-C,
including:
i) Computer Code
ii) Drawings and Circuit Diagrams
1.3 A "LICENSED PRODUCT" shall mean any product or part thereof which:
(a) is covered in whole or in part by an issued, unexpired claim or a
pending claim contained in IMPROVEMENTS or the PATENT RIGHTS in the
country in which any LICENSED PRODUCT is made, used or sold; and/or
(b) is manufactured by using a process which is covered in whole or in
part by an issued, unexpired claim or a pending claim contained in
IMPROVEMENTS or the PATENT RIGHTS in the country in which any LICENSED
PROCESS is used or in which such product or part thereof is used or
sold.
1.4 A "LICENSED PROCESS" shall mean any process which is covered in whole
or in part by an issued, unexpired claim or a pending claim contained in
IMPROVEMENTS or the PATENT RIGHTS.
1.5 "NET SALES" shall mean LICENSEE's (and its sublicensees') billings for
LICENSED PRODUCTS and LICENSED PROCESSES produced hereunder less the sum of the
following:
(a) discounts allowed in amounts customary in the trade;
(b) sales, tariff duties and/or use taxes directly imposed and with
reference to particular sales;
(c) outbound transportation prepaid or allowed; and
(d) amounts allowed or credited on returns.
<PAGE>
-3-
No deductions shall be made for commissions paid to individuals whether
they be with independent sales agencies or regularly employed by LICENSEE and on
its payroll, or for cost of collections. LICENSED PRODUCTS shall be considered
"sold" when billed out or invoiced.
1.6 "TERRITORY" shall be worldwide except for those countries in which
LICENSEE was asked to pay the cost of filing, prosecuting and maintaining the
PATENT RIGHTS pursuant to Article 6.2, and elected not to pay those costs.
1.7 "FIELD OF USE" shall mean all.
1.8 "PRODUCT AREAS" shall mean: Cardiovascular System Identification.
1.9 "SUBLICENSEE" shall mean a third party sublicensed by LICENSEE to
make, have made, use, lease and sell the LICENSED PRODUCT(S) and LICENSED
PROCESS(ES).
1.10 "IMPROVEMENTS" shall mean any and all modifications, refinements,
etc. dominated by the PATENT RIGHTS claims and conceived or reduced to practice
over the next three (3) years by Richard Cohen and his subordinates at M.I.T;
provided, however, that any rights to such IMPROVEMENTS granted herein are
subject to M.I.T. contractual commitments to third party sponsors of research
under which IMPROVEMENTS are made.
1.11 LICENSE AGREEMENTS shall mean "Assessing Myocardial Electrical
Stability", "Cardiac Electrical Imaging", "Cardiovascular System
Identification", and "Pacing Technology for Prevention of Cardiac Dysrhythmias."
1.12 "EFFECTIVE DATE" shall mean the day on which all four LICENSE
AGREEMENTS were executed.
ARTICLE 2 - GRANT
-----------------
2.1 M.I.T. hereby grants to LICENSEE the right and license to make, have
made, use, lease and sell the LICENSED PRODUCTS and to practice the LICENSED
PROCESSES in the TERRITORY for the FIELD OF USE to the end of the term for which
the PATENT RIGHTS are granted unless this Agreement shall be sooner terminated
according to the terms hereof.
2.2 LICENSEE agrees that LICENSED PRODUCTS leased or sold in the United
States shall be manufactured substantially in the United States, as required by
35 U.S.C.204.
2.3 In order to establish a period of exclusivity for LICENSEE, M.I.T.
hereby agrees that it shall not grant any other license to make, have made, use,
lease and sell LICENSED PRODUCTS or to utilize LICENSED PROCESSES in the
TERRITORY for the FIELD OF USE during the period of time commencing with the
EFFECTIVE DATE of this Agreement and terminating with the first to occur of:
(a) the expiration of twelve (12) years after the first commercial sale of
a LICENSED PRODUCT; or
<PAGE>
-4-
(b) the expiration of fifteen (15) years after the EFFECTIVE DATE of this
Agreement; provided, however, that if an application for premarket
approval has been submitted to the FDA for a LICENSED PRODUCT prior to
the expiration of that fifteen (15) year period, then the time spent
by that application in the FDA shall be added to the fifteen (15) year
period.
2.4 At the end of the exclusive period, the license granted hereunder
shall become nonexclusive and shall extend to the end of the term or terms for
which any PATENT RIGHTS are issued, unless sooner terminated as hereinafter
provided. The period of exclusivity may be extended upon the written consent of
M.I.T., which consent, subject to LICENSEE's diligent and successful
commercialization of the PATENT RIGHTS, shall not unreasonably be withheld.
2.5 M.I.T. reserves the right to practice under the PATENT RIGHTS and to
use and distribute to third parties for noncommercial research purposes.
2.6 LICENSEE shall have the right to enter into sublicensing agreements
for the rights, privileges and licenses granted hereunder only during the
exclusive period of this Agreement. Such sublicenses may extend past the
expiration date of the exclusive period of this Agreement, but any exclusivity
of such sublicenses shall expire upon the expiration of LICENSEE's exclusivity.
Upon any termination of this Agreement, sublicensees' rights shall also
terminate, subject to Paragraph 13.6 hereof.
2.7 LICENSEE agrees that any sublicenses granted by it shall provide that
the obligations to M.I.T. of Articles 2, 5, 7, 8, 9, 10, 12, 13, and 15 of this
Agreement shall be binding upon the sublicensee as if it were a party to this
Agreement. LICENSEE further agrees to attach copies of these Articles to
sublicense agreements.
2.8 LICENSEE agrees to forward to M.I.T. a copy of any and all sublicense
agreements promptly upon execution by the parties.
2.9 LICENSEE shall not receive from sublicensees anything of value in
lieu of cash payments in consideration for any sublicense under this Agreement,
without the express prior written permission of M.I.T. In the event LICENSEE and
M.I.T. agree on a cash equivalent value for the transaction and appropriate
royalty payments to M.I.T., M.I.T. shall provide its written consent.
2.10 The license granted hereunder shall not be construed to confer any
rights upon LICENSEE by implication, estoppel or otherwise as to any technology
not specifically set forth in Appendices CSI-A, CSI-B, and CSI-C hereof.
ARTICLE 3 - DUE DILIGENCE
-------------------------
3.1 LICENSEE either directly or through its SUBLICENSEES shall use its
best efforts to bring one or more LICENSED PRODUCTS or LICENSED PROCESSES to
market through an ongoing, thorough, vigorous and diligent program for
exploitation of the PATENT RIGHTS and
<PAGE>
-5-
to continue vigorous, ongoing, active, diligent marketing efforts for one or
more LICENSED PRODUCTS or LICENSED PROCESSES throughout the life of this
Agreement. Such efforts shall include, but shall not be limited to, conducting
clinical trials and evaluations necessary to obtain premarket FDA approval.
3.2 In addition, LICENSEE shall adhere to the following milestones:
(a) LICENSEE shall deliver to M.I.T. on or before three (3) month after
the EFFECTIVE DATE a business plan showing the amount of money, number
and kind of personnel and time budgeted and planned for each phase of
development of the LICENSED PRODUCTS and LICENSED PROCESSES in the
PRODUCT AREA and shall provide similar reports to M.I.T. on or before
December 31 of each year.
(b) LICENSEE shall raise and hold a minimum of Two Million Dollars
($2,000,000) aggregate in investment capital on or before the
EFFECTIVE DATE.
(c) LICENSEE shall have raised a total of Three Million Dollars
($3,000,000) cumulative in investment capital on or before one year
after the EFFECTIVE
DATE.
(d) LICENSEE and/or SUBLICENSEE shall have developed a working commercial
prototype of a LICENSED PRODUCT and, if needed for commercial sale,
shall have filed an application for premarket FDA approval before six
(6) years after the EFFECTIVE DATE of this License Agreement.
3.3 LICENSEE and/or SUBLICENSEE shall make commercial sales of LICENSED
PROCESSES at least according to the following schedule:
<TABLE>
<S> <C>
1997 $50,000;
1998 $100,000;
1999 $250,000;
2000 and each year thereafter $500,000.
</TABLE>
3.4 LICENSEE's failure to perform in accordance with Paragraphs 3.1, 3.2
and 3.3 above shall be grounds for M.I.T. to terminate this Agreement pursuant
to Paragraph 13.3 hereof.
3.5 If LICENSEE has diligently been pursuing the FDA approval required to
sell LICENSED PRODUCTS or products utilizing LICENSED PROCESSES on the
commercial market, and can demonstrate such diligence to M.I.T. by means of
written documents, then LICENSEE may request a reasonable revision to the sales
milestones in section 3.3, which revision shall not unreasonably be withheld.
ARTICLE 4 - ROYALTIES
---------------------
4.1 For the rights, privileges and license granted hereunder, LICENSEE
shall pay royalties to M.I.T. in the manner hereinafter provided to the end of
the term of the PATENT RIGHTS or until this Agreement shall be terminated:
<PAGE>
-6-
(a) License Issue Fee equal to the non-reimbursed sum spent by M.I.T.
prior to the OPTION PERIOD to file, prosecute, and maintain the PATENT
RIGHTS listed in Appendices CSI-A and CSI-B plus Nine Thousand Three
Hundred Seventy-Five Dollars ($9,375), such Issue Fee payable
according to the following schedule:
(i) One-third (1/3) of the non-reimbursed sum plus Six Thousand Two
Hundred Fifty Dollars ($6,250) is due upon the execution of this
Agreement;
(ii) One-third (1/3) of the non-reimbursed sum plus Three Thousand
One Hundred Twenty-Five Dollars ($3,125) is due one (1) year
after the EFFECTIVE DATE of this Agreement;
(iii) One-third (1/3) of the non-reimbursed sum is due two (2) years
after the EFFECTIVE DATE of this Agreement;
(b) For LICENSED PRODUCTS and LICENSED PROCESSES which do not contain a
substantial technical contribution, improvement, or change developed
by LICENSEE, Running Royalties in an amount equal to Two Percent (2%)
of the NET SALES of the LICENSED PRODUCTS leased or sold by/or for
LICENSEE and/or its SUBLICENSEE(S).
(c) For LICENSED PRODUCTS and LICENSED PROCESSES containing a substantial
technical contribution, improvement, or change developed by LICENSEE,
Running Royalties in an amount equal to One and One-Half Percent
(1.5%) of the NET SALES of the LICENSED PRODUCTS leased or sold by
SUBLICENSEE(S), or Twelve Percent (12%) of gross revenue received by
LICENSEE from SUBLICENSEE(S), whichever of the two above referenced
means of calculating sublicensing revenue yields a smaller number.
(d) License Maintenance Fees of Five Thousand Dollars ($5,000) per year
payable on January 1, 1995, January 1, 1996, January 1, 1997, January
1, 1998, and January 1, 1999; provided, however, that the License
Maintenance Fee and sublicense royalties subsequently due under
subparagraph 4.1(d) for each said year, if any, shall be creditable
against Running Royalties for said year.
(e) License Maintenance Fees of Ten Thousand Dollars ($10,000) per year
payable on January 1, 2000 and on January 1 of each subsequent year
thereafter during the exclusive period of this Agreement; provided,
however, that the License Maintenance Fee and sublicense royalties
subsequently due under subparagraph 4.1(d) for each said year, if any,
shall be creditable against Running Royalties for said year. No
License Maintenance Fees are due during the non-exclusive period of
this License Agreement.
4.2 All payments due hereunder shall be paid in full, without deduction of
taxes or other fees which may be imposed by any government and which shall be
paid by LICENSEE. If Royalties were paid on billings that were subsequently
uncollected, such overpaid Royalties will be deducted from those due in
subsequent periods.
<PAGE>
-7-
4.3 No multiple royalties shall be payable because any LICENSED PRODUCT,
its manufacture, use, lease or sale are or shall be covered by more than one
PATENT RIGHTS patent application or PATENT RIGHTS patent licensed under this
Agreement. If a single product is covered by more than one LICENSE AGREEMENT,
then the total royalty paid to M.I.T. on such product shall not exceed the
maximum royalty applicable to any single LICENSE AGREEMENT.
4.4 Royalty payments shall be paid in United States dollars in Cambridge,
Massachusetts, or at such other place as M.I.T. may reasonably designate
consistent with the laws and regulations controlling in any foreign country. If
any currency conversion shall be required in connection with the payment of
royalties hereunder, such conversion shall be made by using the exchange rate
prevailing at the Chase Manhattan Bank (N.A.) on the last business day of the
calendar quarterly reporting period to which such royalty payments relate.
ARTICLE 5 - REPORTS AND RECORDS
-------------------------------
5.1 LICENSEE shall keep full, true and accurate books of account
containing all particulars that may be necessary for the purpose of showing the
amounts payable to M.I.T. hereunder. Said books of account shall be kept at
LICENSEE's principal place of business or the principal place of business of the
appropriate division of LICENSEE to which this Agreement relates. Said books and
the supporting data shall be open at all reasonable times for three (3) years
following the end of the calendar year to which they pertain, to the inspection
of M.I.T. or its agents for the purpose of verifying LICENSEE's royalty
statement or compliance in other respects with this Agreement. Should such
inspection lead to the discovery of a greater than ten percent (10%) discrepancy
in reporting, LICENSEE agrees to pay half the cost of such inspection.
5.2 LICENSEE, within sixty (60) days after December 31, of each year,
shall deliver to M.I.T. true and accurate reports, giving such particulars of
the business conducted by LICENSEE and its sublicensees during the preceding
year under this Agreement as shall be pertinent to a royalty accounting
hereunder. These shall include at least the following:
(a) number of LICENSED PRODUCTS manufactured and sold by LICENSEE and all
sublicensees;
(b) total billings for LICENSED PRODUCTS sold by LICENSEE and all
sublicensees;
(c) accounting for all LICENSED PROCESSES used or sold by LICENSEE and all
sublicensees;
(d) deductions applicable as provided in Paragraph 1.5;
(e) total royalties due; and
(f) names and addresses of all sublicenses of LICENSEE.
<PAGE>
-8-
5.3 With each such report submitted, LICENSEE shall pay to M.I.T. the
royalties due and payable under this Agreement. If no royalties shall be due,
LICENSEE shall so report.
5.4 On or before the ninetieth (90th) day following the close of
LICENSEE's fiscal year, LICENSEE shall provide M.I.T. with LICENSEE's certified
financial statements for the preceding fiscal year including, at a minimum, a
Balance Sheet and an Operating Statement.
5.5 The royalty payments set forth in this Agreement and amounts due under
Article 6 shall, if overdue, bear interest until payment at a per annum rate two
percent (2%) above the prime rate in effect at the Chase Manhattan Bank (N. A.)
on the due date. The payment of such interest shall not foreclose M.I.T. from
exercising any other rights it may have as a consequence of the lateness of any
payment.
ARTICLE 6 - PATENT PROSECUTION
------------------------------
6.1 M.I.T. shall apply for, seek prompt issuance of, and maintain during
the term of this Agreement the PATENT RIGHTS in the United States and in the
foreign countries listed in Appendix CSI-B hereto. Appendix CS I-B may be
amended by verbal agreement of both parties, such agreement to be confirmed in
writing within ten (10) days. The prosecution, filing and maintenance of all
PATENT RIGHTS patents and applications shall be the primary responsibility of
M.I.T.; provided, however, LICENSEE shall have reasonable opportunities to
advise M.I.T. and shall cooperate with M.I.T. in such prosecution, filing and
maintenance of all patents and applications included within the PATENT RIGHTS.
6.2 Payment of all fees and costs relating to the filing, prosecution, and
maintenance of the PATENT RIGHTS shall be the responsibility of LICENSEE,
whether such fees and costs were incurred before or after the date of this
Agreement. LICENSEE shall have the right to approve the attorney selected by
M.I.T. LICENSEE may elect to discontinue all or a portion of the prosecution of
the PATENT RIGHTS, provided that LICENSEE gives M.I.T. reasonable notice, so
that M.I.T. may, at its own expense, elect to preserve those rights.
ARTICLE 7 - INFRINGEMENT
------------------------
7.1 Each party shall inform the other party promptly in writing of any
alleged infringement of the PATENT RIGHTS by a third party and of any available
evidence thereof.
7.2 During the term of exclusivity of this Agreement, LICENSEE shall have
the right, but shall not be obligated, to prosecute at its own expense all
infringements of the PATENT RIGHTS and, in furtherance of such right, M.I.T.
hereby agrees that LICENSEE may include M.I.T. as a party plaintiff in any such
suit, without expense to M.I.T.. The total cost of any such infringement action
commenced or defended solely by LICENSEE shall be borne by LICENSEE and LICENSEE
shall keep any recovery or damages for past infringement derived therefrom.
<PAGE>
-9-
7.3 If within six (6) months after having been notified of any alleged
infringement, LICENSEE shall have been unsuccessful in persuading the alleged
infringer to desist and shall not have brought and shall not be diligently
prosecuting an infringement action, or if LICENSEE shall notify M.I.T. at any
time prior thereto of its intention not to bring suit against any alleged
infringer then, and in those events only, M.I.T. shall have the right, but shall
not be obligated, to prosecute at its own expense any infringement of the PATENT
RIGHTS and M.I.T. may, for such purposes, use the name of LICENSEE as party
plaintiff. No settlement, consent judgment or other voluntary final disposition
of the suit may be entered into without the consent of M.I.T. and LICENSEE,
which consent shall not unreasonably be withheld.
7.4 In the event that LICENSEE shall undertake the enforcement and/or
defense of the PATENT RIGHTS by litigation, LICENSEE may withhold up to fifty
percent (50%) of the payments otherwise thereafter due M.I.T. under Article 4
hereunder and apply the same toward reimbursement of up to half of LICENSEE's
expenses, including reasonable attorneys' fees, in connection therewith. Any
recovery of damages by LICENSEE for each such suit shall be applied first in
satisfaction of any unreimbursed expenses and legal fees of LICENSEE relating to
such suit, and next toward reimbursement of M.I.T. for any payments under
Article 4 past due or withheld and applied pursuant to this Article 7. The
balance remaining from any such recovery shall be divided so that the fraction
of the recovery due M.I.T. is calculated by creating a fraction, the numerator
of which is the amount of royalties withheld, and the denominator of which is
the cost of litigation paid by LICENSEE, but in no event shall such sum be less
than Twelve Percent (12%) of the net recovery.
7.5 In the event that a declaratory judgment action alleging invalidity or
noninfringement of any of the PATENT RIGHTS shall be brought against LICENSEE,
M.I.T., at its option, shall have the right, within thirty (30) days after
commencement of such action, to intervene and take over the sole defense of the
action at its own expense.
7.6 In any infringement suit as either party may institute to enforce the
PATENT RIGHTS pursuant to this Agreement, the other party hereto shall, at the
request and expense of the party initiating such suit, cooperate in all respects
and, to the extent possible, have its employees testify when requested and make
available relevant records, papers, information, samples, specimens, and the
like.
7.7 LICENSEE, during the exclusive period of this Agreement, shall have
the sole right in accordance with the terms and conditions herein to sublicense
any alleged infringer for future use of the PATENT RIGHTS. Any upfront fees as
part of such a sublicense shall be distributed according to Article 7.4; other
royalties shall be treated per Article 4.
<PAGE>
-10-
ARTICLE 8 - PRODUCT LIABILITY
-----------------------------
8.1 LICENSEE shall at all times during the term of this Agreement and
thereafter, indemnify, defend and hold M.I.T., its trustees, officers, employees
and affiliates, harmless against all claims and expenses, including legal
expenses and reasonable attorneys' fees, arising out of the death of or injury
to any person or persons or out of any damage to property and against any other
claim, proceeding, demand, expense and liability of any kind whatsoever
resulting from the production, manufacture, sale, use, lease, consumption or
advertisement of the LICENSED PRODUCT(s) and/or LICENSED PROCESS(es) or arising
from any obligation of LICENSEE hereunder.
8.2 Before delivery of a LICENSED PRODUCT, LICENSEE shall obtain and carry
in full force and effect liability insurance which shall protect LICENSEE and
M.I.T. in regard to events covered by Paragraph 8.1 above. Such insurance shall
be written by a reputable insurance company authorized to do business in the
Commonwealth of Massachusetts, shall list M.I.T. as an additional named insured
thereunder and shall require thirty (30) days written notice to be given to
M.I.T. prior to any cancellation or material change thereof. The limits of such
occurrence shall not be less than One Million Dollars ($1,000,000) per
occurrence with an aggregate of Three Million Dollars ($3,000,000) for personal
injury or death, and One Million Dollars ($1,000,000) per occurrence with an
aggregate of Three Million Dollars ($3,000,000) for property damage. LICENSEE
shall provide M.I.T. with Certificates of Insurance evidencing the same.
8.3 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, M.I.T.
MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS
OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS
FOR A PARTICULAR PURPOSE, AND VALIDITY OF PATENT RIGHTS CLAIMS, ISSUED OR
PENDING. NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS A REPRESENTATION MADE
OR WARRANTY GIVEN BY M.I.T. THAT THE PRACTICE BY LICENSEE OF THE LICENSE GRANTED
HEREUNDER SHALL NOT INFRINGE THE PATENT RIGHTS OF ANY THIRD PARTY.
8.4 M.I.T. hereby represents and warrants, to the best of its knowledge
and belief, to LICENSEE that the execution, delivery and performance of this
Agreement by M.I.T. does not, and will not, violate any commitments or
undertakings to which M.I.T. may be bound.
ARTICLE 9 - EXPORT CONTROLS
---------------------------
It is understood that M.I.T. is subject to United States laws and
regulations controlling the export of technical data, computer software,
laboratory prototypes and other commodities
<PAGE>
-11-
(including the Arms Export Control Act, as amended and the Export Administration
Act of 1979), and that its obligations hereunder are contingent on compliance
with applicable United States export laws and regulations. The transfer of
certain technical data and commodities may require a license from the cognizant
agency of the United States Government and/or written assurances by LICENSEE
that LICENSEE shall not export data or commodities to certain foreign countries
without prior approval of such agency. M.I.T. neither represents that a license
shall not be required nor that, if required, it shall be issued.
ARTICLE 10 - NON-USE OF NAMES
-----------------------------
LICENSEE shall not use the names or trademarks of the Massachusetts
Institute of Technology, nor any adaptation thereof, nor the names of any of its
employees, in any advertising, promotional or sales literature without prior
written consent obtained from M.I.T., or said employee, in each case, except
that LICENSEE may state that it is licensed by M.I.T. under one or more of the
patents and/or applications comprising the PATENT RIGHTS. Such statements may
appear in the Private Placement Memoranda to be circulated by KBL Healthcare,
Inc., or in filings in compliance with securities laws. LICENSEE shall not use
the names or trademarks of the Massachusetts Institute of Technology, nor any
adaptation thereof, nor the names of any of its employees to imply that M.I.T.
endorses the LICENSED PRODUCTS sold by LICENSEE.
ARTICLE 11 - ASSIGNMENT
-----------------------
11.1 M.I.T. and LICENSEE agree that one of the main purposes of this
Agreement is for LICENSEE to add substantial technical value to the PATENT
RIGHTS.
11.2 LICENSEE may assign this agreement with M.I.T.'s written consent,
which consent shall not unreasonably be withheld, provided that LICENSEE has
fulfilled all the diligence milestones in Article 3, up to and including section
3.2 development of a working commercial prototype in the PRODUCT AREA.
Otherwise, LICENSEE shall have no right to assign, and any attempt to assign
shall be null and void.
ARTICLE 12 - DISPUTE RESOLUTION
-------------------------------
12.1 For any and all claims, disputes or controversies arising out of, or
in connection with this Agreement, including any dispute relating to patent
validity or infringement, which the parties shall be unable to resolve within
sixty (60) days, the party raising such dispute shall promptly advise the other
party of such claim, dispute or controversy in a writing which describes in
reasonable detail the nature of such dispute. By not later than five (5)
business days after the recipient has received such notice of dispute, each
party shall have selected for itself a representative who shall have the
authority to bind such party, and shall additionally have advised
<PAGE>
-12-
the other party in writing of the name and title of such representative. By not
later than ten (10) business days after the date of such notice of dispute, such
representatives shall schedule a date for a mediation hearing with the Cambridge
Dispute Settlement Center or Endispute Inc. in Cambridge, Massachusetts. If the
representatives of the parties have not been able to resolve the dispute within
fifteen (15) business days after such mediation hearing, the parties shall have
the right to pursue any other remedies legally available to resolve such dispute
in either the Courts of the Commonwealth of Massachusetts or in the United
States District Court for the District of Massachusetts, to whose jurisdiction
for such purposes M.I.T. and LICENSEE each hereby irrevocably consents and
submits.
12.2 M.I.T. is aware that Richard Cohen is a consultant to LICENSEE and is
conducting research in the field of the patent rights and that Richard Cohen is
obligated to assist LICENSEE in protecting inventions developed by him at
LICENSEE's laboratory. In the event that it is unclear whether a particular
invention in the nature of an improvement is developed by Richard Cohen in the
context of his consulting activity with LICENSEE or in the context of his
activities as a University Professor at M.I.T., M.I.T. will approach LICENSEE in
good faith to negotiate a reasonable resolution.
12.3 Notwithstanding the foregoing, nothing in this Article shall be
construed to waive any rights or timely performance of any obligations existing
under this Agreement.
ARTICLE 13 - TERMINATION
------------------------
13.1 If LICENSEE shall cease to carry on its business, this Agreement
shall terminate upon notice by M.I.T.
13.2 Should LICENSEE fail to make any payment whatsoever due and payable
to M.I.T. hereunder, M.I.T. shall have the right to terminate this Agreement
effective on thirty (30) days' notice, unless LICENSEE shall make all such
payments to M.I.T. within said thirty (30) day period. Upon the expiration of
the thirty (30) day period, if LICENSEE shall not have made all such payments to
M.I.T., the rights, privileges and license granted hereunder shall automatically
terminate.
13.3 Upon any material breach or default of this Agreement by LICENSEE,
other than those occurrences set out in Paragraphs 13.1 and 13.2 hereinabove,
which shall always take precedence in that order over any material breach or
default referred to in this Paragraph 13.3, M.I.T. shall have the right to
terminate this Agreement and the rights, privileges and license granted
hereunder effective on ninety (90) days' notice to LICENSEE. Such termination
shall become automatically effective unless LICENSEE shall have cured any such
material breach or default prior to the expiration of the ninety (90) day
period.
<PAGE>
-13-
13.4 LICENSEE shall have the right to terminate this Agreement at any time
on six (6) months' notice to M.I.T., and upon payment of all amounts due M.I.T.
through the effective date of the termination.
13.5 Upon termination of this Agreement for any reason, nothing herein
shall be construed to release either party from any obligation that matured
prior to the effective date of such termination. LICENSEE and any sublicensee
thereof may, however, after the effective date of such termination, sell all
LICENSED PRODUCTS, and complete LICENSED PRODUCTS in the process of manufacture
at the time of such termination and sell the same, provided that LICENSEE shall
pay to M.I.T. the Running Royalties thereon as required by Article 4 of this
Agreement and shall submit the reports required by Article 5 hereof on the sales
of LICENSED PRODUCTS.
13.6 Upon termination of this Agreement for any reason, any sublicensee
not then in default shall have the right to seek a license from M.I.T. M.I.T.
agrees to negotiate such licenses in good faith under reasonable terms and
conditions.
ARTICLE 14 - PAYMENTS, NOTICES
------------------------------
AND OTHER COMMUNICATIONS
------------------------
Any payment, notice or other communication pursuant to this Agreement shall
be sufficiently made or given on the date of mailing if sent to such party by
certified first class mall, postage prepaid, addressed to it at its address
below or as it shall designate by written notice given to the other party:
In the case of M.I.T.:
Director
Technology Licensing Office
Massachusetts Institute of Technology
Room E32-300
Cambridge, Massachusetts 02139
In the case of LICENSEE:
President
Cambridge Heart, Inc.
645 Madison Avenue, 14th Floor
New York, NY 10022
ARTICLE 15 - MOST FAVORED LICENSEE
----------------------------------
If, during the non-exclusive period of this Agreement, M.I.T. grants a
license to another party under more favorable terms as a whole than those in
this Agreement, LICENSEE may, at no extra cost, elect a license under the more
favorable terms as a whole. M.I.T. shall notify and provide a copy to LICENSEE
within thirty (30) days of granting any license to a third party: provided,
however, that M.I.T. shall not have to identify said third party to LICENSEE.
<PAGE>
-14-
ARTICLE 16 - MISCELLANEOUS PROVISIONS
-------------------------------------
16.1 This Agreement shall be construed, governed, interpreted and applied
in accordance with the laws of the Commonwealth of Massachusetts, U.S.A., except
that questions affecting the construction and effect of any patent shall be
determined by the law of the country in which the patent was granted.
16.2 The parties hereto acknowledge that this Agreement sets forth the
entire Agreement and understanding of the parties hereto as to the subject
matter hereof, and shall not be subject to any change or modification except by
the execution of a written instrument subscribed to by the parties hereto.
16.3 The provisions of this Agreement are severable, and in the event that
any provisions of this Agreement shall be determined to be invalid or
unenforceable under any controlling body of the law, such invalidity or
unenforceability shall not in any way affect the validity or enforceability of
the remaining provisions hereof.
16.4 LICENSEE agrees to mark the LICENSED PRODUCTS sold in the United
States with all applicable United States patent numbers. All LICENSED PRODUCTS
shipped to or sold in other countries shall be marked in such a manner as to
conform with the patent laws and practice of the country of manufacture or sale.
16.5 The failure of either party to assert a right hereunder or to insist
upon compliance with any term or condition of this Agreement shall not
constitute a waiver of that right or excuse a similar subsequent failure to
perform any such term or condition by the other party.
IN WITNESS WHEREOF, the parties have duly executed this Agreement the
day and year set forth below.
MASSACHUSETTS INSTITUTE OF CAMBRIDGE HEART, INC.
TECHNOLOGY
By: /s/ Lita L. Nelsen By: /s/ Marlene Krauss
------------------------------------------ ----------------------------
Name: LITA L. NELSEN Name: MARLENE KRAUSS
--------------------------------------- --------------------------
Title: DIRECTOR, TECHNOLOGY LICENSING OFFICE Title: Chair
-------------------------------------- -------------------------
Date: Sept 28, 1993 Date: 9/29/93
--------------------------------------- --------------------------
<PAGE>
-15-
APPENDIX CSI-A
--------------
UNITED STATES PATENT RIGHTS
M.I.T. Case No. 4227
U.S. Patent 4,777,960
"Method and Apparatus for the Assessment of Autonomic Response
by Broad-Band Excitation"
By Ronald Berger, Jerome P. Saul, Ming Hui Chen, and Richard J. Cohen
M.I.T. Case No. 4738
U.S. Patent 4,930,517
"Method and Apparatus for Physiologic System Identification"
By Richard J. Cohen, Marvin Appel, and Ronald Berger
M.I.T. Case No. 4820
U.S. Patent 4,979,110
"Characterizing the Statistical Properties of a Biological Signal"
By Richard J. Cohen and Paul Albrecht
<PAGE>
-16-
APPENDIX CSI-B
--------------
Foreign countries in which PATENT RIGHTS shall be filed, prosecuted and
maintained in accordance with Article 6:
M.I.T. Case No. 4227
Japan: Allowed
EPC: Pending In
France
Germany
United Kingdom
M.I.T. Case No. 4738
PCT: Pending In
Canada
EPO
Japan
M.I.T. Case No. 4820
Canada: Pending In
EPC: Regional Phase
Japan National Phase
<PAGE>
-17-
APPENDIX CSI-C
--------------
COPYRIGHTABLE MATERIAL AND TANGIBLE PROPERTY
Cardiovascular System Identification Code.92
X-100 Software Amplifier/Filter Circuit Diagrams
<PAGE>
FIRST AMENDMENT
This First Amendment pertains to the License Agreement effective September
28, 1993 between the Massachusetts Institute of Technology and Cambridge Heart,
Inc. referred to as "Cardiovascular System Identification" for M.I.T. Case No.
4227, U.S. Patent 4,777,960, "Method and Apparatus for the Assessment of
Autonomic Response by Broad-Band Excitation" by Ronald Berger, Jerome P. Saul,
Ming Hui Chen, and Richard J. Cohen; M.I.T. Case No. 4738, U.S. Patent
4,930,517, "Method and Apparatus for Physiologic System Identification" by
Richard J. Cohen, Marvin Appel, and Ronald Berger; and M.I.T. Case No. 4820,
U.S. Patent 4,979,110, "Characterizing the Statistical Properties of a
Biological Signal" by Richard J. Cohen and Paul Albrecht.
The parties hereby agree to change paragraph 3.3 to read in its entirety as
follows:
3.3 LICENSEE and/or SUBLICENSEE shall make commercial sales of
LICENSED PROCESSES at least according to the following schedule:
1998 $50,000;
1999 $250,000;
2000 and each year thereafter $500,000.
Agreed to for:
MASSACHUSETTS INSTITUTE CAMBRIDGE HEART, INC.
OF TECHNOLOGY
By /s/ Rita Nelson By /s/ Jeffrey M. Arnold
------------------------- -------------------------
Name Rita Nelson Name Jeffrey M. Arnold
----------------------- -----------------------
Title Technology Licensing Officer Title President & CEO
----------------------------- ----------------------
Date July 9, 1996 Date July 9, 1996
----------------------- -----------------------
<PAGE>
EXHIBIT 23.2
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 March 24, 1996, except
as to the first paragraph of Note 5 which is as of July 8, 1996, relating to
the financial statements of Cambridge Heart, Inc., 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
July 9, 1996
<PAGE>
EXHIBIT 99.1
July 9, 1996
Cambridge Heart, Inc.
1 Oak Park Drive
Bedford, MA 01730
Gentlemen:
I hereby consent to the use of my name as a director in the section
entitled "Management - Executive Officers and Directors" of the Prospectus which
is part of the Registration Statement on Form S-1 for the registration of shares
of Common Stock of Cambridge Heart, Inc. and any pre-effective or post-effective
amendents thereto.
Sincerely,
/s/ Laurence J. Blumberg
------------------------
Laurence J. Blumberg, M.D.
