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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 2
TO
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
(MARK ONE) THE SECURITIES EXCHANGE ACT OF 1934
[X]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-20991
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CAMBRIDGE HEART, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-3679946
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1 OAK PARK DRIVE, BEDFORD, MA 01730
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
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(781) 271-1200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
Title of class
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No____________
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [ ]
The aggregate market value of voting Common Stock held by non-affiliates of
the registrant was $63,879,255 based on the last reported sale price of the
Common Stock on the Nasdaq National Market on March 13, 1998.
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of the latest practicable date: 10,625,833 shares
of $.001 par value Common Stock as of March 13, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
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10-K
DOCUMENT DESCRIPTION PART
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<S> <C>
Portions of the Registrant's Proxy Statement for the Annual Meeting
of Shareholders to be held May 21, 1998 Part III
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PART I
ITEM 1. BUSINESS
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, the leading cause of death in the United States
and many other developed countries. 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 electrophysiology ("EP") testing, the most accurate invasive
test. According to the American Heart Association, in the United States in
1995 approximately half of cardiac deaths, or about 250,000, were sudden,
generally the result of ventricular arrhythmias, which cause the heart to beat
in an abnormal and ineffective manner.
COMPANY OVERVIEW
The Company 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 invasive 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--estimated to be 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.
. Procedure Cost Advantages--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's principal products are the CH 2000 System and Hi-Resolution
elcectrodes. Both products have received 510(k) clearance from the FDA for
sale in the United States. 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
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applicability or prognostic value 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.
Internationally, the CH 2000 System has received the CE mark for sale in
Europe and is approved for sale by the Ministry of Health in Japan.
The Company is also conducting research into the detection of ischemic heart
disease using its cardiac electrical imaging technology ("CEI"). 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 is conducting research to
determine the extent to which this technology provides for enhanced detection
and localization of coronary artery disease during a standard exercise stress
test and intends to pursue research to determine the extent to which this
technology provides faster and more accurate diagnosis of acute myocardial
infarction in patients who arrive at hospital emergency rooms with acute chest
pain.
PRINCIPAL PRODUCTS AND APPLICATIONS
The CH 2000 System
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. This 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-Resolution electrodes and proprietary signal
processing algorithms to minimize noise levels resulting from patient
movement.
The Company's CH 2000 System is a fully-featured diagnostic system which
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-Resolution 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:
. Expandable, Pentium-based computer architecture that simplifies operation,
facilitates serviceability and provides a clear software and hardware
upgrade path.
. Exclusive pre-test impedance lead check and optimizing signal processing
that identifies problematic leads and minimizes noisy ECG waveforms to
ensure a good test before it starts.
. Patented diagnostic screen displays that provide the ability to view all
12 leads simultaneously throughout a test and make immediate on-screen
interpretations.
. Unique ST segment displays that superimpose waveforms for all 12 leads
over median beats for clear identification of dangerous ST depression or
elevation.
. Comprehensive Review capability of every test, insuring the physician will
never miss a critical arrhythmia or lose an important record and thereby
freeing them to focus on the patient.
T-wave Alternans and Ventricular Arrhythmias: Clinical Studies
The association between ventricular arrhythmia and extremely low levels of
T-wave alternans not detectable by visual inspection of the ECG was unknown
until the early 1980s. Research conducted in Dr. Richard Cohen's laboratory at
the Massachusetts Institute of Technology ("MIT") indicated that analysis of
microvolt (one-
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millionth of a volt) levels of T-wave alternans was predictive of
vulnerability to ventricular arrhythmias responsible for sudden cardiac death.
Dr. Cohen, a founder, director of, and consultant to, the Company, and his
associates at MIT 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.
The Company has sponsored and continues to sponsor a number of clinical
studies to confirm and expand upon this original landmark study. One such
study published in November 1997 in the American Journal of Cardiology
demonstrated a high correlation between T-wave alternans measured during
exercise with the Company's CH 2000 System and the results of invasive EP
testing in 27 patients.
Another more significant study was presented on November 12, 1997, at the
70th Scientific Session of the American Heart Association by Professor Stefan
Hohnloser of J.W. Goethe University, Frankfurt, Germany. In this study, 65
patients receiving an implantable cardioverter-defibrillator underwent an
invasive EP study and non-invasive risk stratification, including the
measurement of T-wave alternans utilizing the Company's CH 2000 System.
Professor Hohnloser reported that, on the basis of this study, the measurement
and analysis of T-wave alternans was found to be more accurate than invasive
EP study in predicting recurrences of ventricular tachycardia and ventricular
fibrillation, the abnormal heart rhythms associated with cardiac arrest and
sudden cardiac death.
The Company is sponsoring a study that it intends to use for submission to
the FDA in the first half of 1998 to obtain an expansion of the Company's
labeling claim. In the study, which is being conducted at 9 centers in the
United States, the measurement of T-wave alternans is being compared with
signal average ECG (an older non-invasive test for determining risk of
arrhythmia) as a predictor of the results of invasive EP study. In addition,
the use of T-wave alternans, signal average ECG and EP studies are all being
compared as predictors of actual patient events (sudden death and cardiac
arrest). A total of 250 patients will be recruited into this study and follow
up data will be collected on 100 patients. This study, originally expected to
be completed in 1997, was revised and expanded in 1997 to overcome unexpected
patterns of patient enrollment and to make other improvements in the study
design. This revision and expansion forced a delay in the expected completion
date to April or May 1998.
As of the date hereof, over 200 patients have been recruited into the study.
The Company has engaged a contract research organization to monitor sites and
analyze the data. The Company expects the study to be completed on schedule in
May 1998 with submission to the FDA of a pre-market notification ("510(k)
notification") for expanded labeling in June 1998.
There can be no assurance that the results of these studies will confirm
earlier studies, or that regulatory clearance will be received.
MARKETING AND SALES
The Company is targeting the market for cardiac stress systems with its CH
2000 System. In 1997, approximately 3,000 cardiac stress systems were sold in
the United States, and the Company believes that the total installed base of
cardiac stress systems in the United States is approximately 23,000 units.
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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 studies and positive clinical experience with the
CH 2000 System, together with the publication of these results in medical
journals. The Company believes that the trend toward management of health care
costs in the United States will lead to increased awareness of and emphasis on
early detection and prevention of heart disease, and as a result, will
increase demand for cost-effective diagnostic tests. 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 in their medical practices. The Company has trained and
expects to continue to train well-respected clinicians in the use of the CH
2000 System in order to increase the use and possible acceptance of its CH
2000 System. The Company is introducing its technology by targeting leading
cardiology medical centers and providing training and educational activities
for physicians and their professional staff. The Company has funded studies to
further demonstrate the efficiency of its technologies. The Company intends to
continue to encourage the presentation of the results of these studies at
major national and international medical symposia and the publication of
clinical and scientific reports of such results in major peer-reviewed
publications. The Company has supported and expects to continue to support
educational seminars regarding the benefits of the CH 2000 System and will
continue to participate in industry trade shows and academic conferences.
The Company markets its products and services customers in the United States
through a combination of in-house marketing, direct sales and clinical
education support staff and a growing number of manufacturers representatives.
During the fourth quarter of 1997, the Company initiated an aggressive
recruitment program to increase the number of manufacturers representatives
with expertise in selling cardiac diagnostic equipment. There are now over 40
manufacturers representatives representing the Company in the United States as
compared to 11 at the end of 1996. The Company will train the new
representatives in the installation, operating features and maintenance of the
CH 2000 System during the first quarter of 1998. The Company compensates its
manufacturers representatives with a sales commission. The Company intends to
continue to expand its use of manufacturers representatives in 1998. The
Company maintains a small but experienced in-house Service Department to
answer customer questions and provide guidance, advice and troubleshooting
regarding use of the CH 2000 System.
The Company markets its products internationally through independent
distributors. The Company has entered into distribution agreements with
distributors for the sale of the CH 2000 System in Europe, the Middle East,
Japan and Australia. During the years ended December 31, 1995, 1996 and 1997,
sales by international distributors comprised approximately 100%, 78% and 62%,
respectively, of the Company's revenue. The Company's international
independent distributors provide comprehensive marketing and sales services
including seeking out potential purchasers of the CH 2000 System, consummating
sales and providing ongoing educational and support services to purchasers of
the CH 2000 System.
The commercial success of the Company's products will depend upon their
acceptance by the medical community and third party payors as clinically
useful and cost-effective. The measurement of T-wave alternans to predict
vulnerability to ventricular arrhythmias responsible for sudden cardiac death
is a relatively new technology. Market acceptance will depend on several
factors, including the establishment of clinical utility of this technology,
the receipt of additional necessary regulatory clearances, the availability of
third-party reimbursement and extensive physician education. An adverse
outcome in research into the clinical usefulness of T-wave alternans analysis
technology could limit the market acceptance of the Company's products. There
can be no assurance that the Company's products will gain market acceptance.
Failure to achieve market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operation.
MANUFACTURING
The Company performs final assembly, including hardware and software
components, and testing of its products, at its corporate headquarters in
Bedford, Massachusetts. The Company believes its facility will be adequate to
meet its needs through 1999. The Company is required to meet and adhere to all
applicable requirements of U.S. and international regulatory agencies,
including the FDA's GMP standards. The Company's manufacturing facilities are
subject to periodic inspection by both U.S. and international regulatory
agencies.
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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-Resolution electrodes.
A number of components are currently supplied by sole source vendors, although
the Company believes that it could locate additional sources of these
components in a timely fashion, if necessary.
RESEARCH AND DEVELOPMENT
A substantial portion of the Company's research and development investment
is focused on its efforts in the areas of clinical research and the continuing
development of improvements to its CH 2000 System and Hi-Resolution
electrodes. The Company's clinical research is focused on gathering
substantial clinical data demonstrating the efficacy of the T-wave alternans
technology.
During 1998, the Company intends to initiate development of a product that
will be an "add-on" to conventional stress test systems in the market today.
The product will allow an existing stress test system to perform T-wave
alternans tests when utilizing the Company's proprietary Hi-Res electrodes.
The Company believes that this product will provide it with increased access
to the total installed base of stress test systems in the market today and
increase the utilization of the Company's disposable, higher margin
electrodes. The "add-on" product is expected to have a lower cost of
manufacture and is expected to carry a selling price below the current price
of a conventional stress test system.
The Company is also 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 is conducting research to determine the extent to
which this technology provides for enhanced detection and localization of
coronary artery disease during a standard exercise stress test and intends to
pursue research to determine the extent to which this technology provides
faster and more accurate diagnosis of acute myocardial infarction in patients
who arrive at hospital emergency rooms with acute chest pain.
The Company's research and development expenses were $1,709,000 in 1995,
$2,433,000 in 1996 and $3,587,000 in 1997. The Company expects research and
development expenses to increase in the future as it develops additional
products and funds clinical trials on its products. As of December 31, 1997
the Company had 15 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. In November 1996, the Company was issued a U.S.
patent covering the use of exercise or physiological stress in the measurement
of T-wave alternans 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-Resolution electrodes for use in the
measurement of T-wave alternans, two of which were granted in the United
States in the first quarter of 1998. Additional U.S. patents are pending and
the failure to obtain such patents or corresponding foreign 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
fourteen issued or allowed patents and six patents pending in the United
States, with seventeen corresponding foreign patents issued or pending with
respect to its technology.
The Company and 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
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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.
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 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.
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 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 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 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
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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. 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
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.
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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.
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
9
<PAGE>
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 and the Hi-Res electrodes have received 510(k) clearance
from the FDA for sale in the United States. 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
1998, with clearance possible by the end of 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 CH 2000 System has received the CE mark for sale in
Europe and is approved for sale by the Ministry of Health in Japan.
EMPLOYEES
As of December 31, 1997, the Company had 36 full-time employees, of whom
five hold Ph.D. degrees and six others hold other advanced degrees. None of
the Company's employees are represented by a collective bargaining agreement,
nor has the Company experienced work stoppages. The Company believes that its
relations with its employees are good.
REIMBURSEMENT
Suppliers of medical devices 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
performing T-wave alternans testing 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 intends to initiate efforts
toward obtaining approval for reimbursement to physicians for performing a T-
wave alternans test during 1998. There can be no assurance that these efforts
will be successful.
10
<PAGE>
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.
ITEM 2. PROPERTIES
The Company's facilities consist of approximately 14,500 square feet of
office, research and manufacturing space located at 1 Oak Park Drive, Bedford,
Massachusetts. The Company has a lease for a total of 22,000 square feet, of
which it currently subleases 7,500 square feet. The Company's lease expires in
November 1999 with an option to extend the lease for one additional year. The
Company believes that suitable additional space will be available to it, when
needed, on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended December 31, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth (i) the names, ages and positions of the
current executive officers of the Company; (ii) the position(s) presently held
by each person named; and (iii) the principal occupations held by each person
named for at least the past five years.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeffrey M. Arnold........ 48 President, Chief Executive Officer and Director
Robert B. Palardy........ 49 Vice President, Finance and Administration and
Chief Financial Officer
Eric Dufford............. 39 Vice President, Sales and Marketing and Secretary
</TABLE>
Jeffrey M. Arnold. Mr. Arnold has been President and Chief Executive Officer
of the Company since September 1993. Mr. Arnold was appointed Chairman of the
Board of Directors in August 1997. From 1990 to January 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 January 1992 until September 1993, Mr. Arnold was
an independent management consultant providing interim executive management to
high technology companies. Mr. Arnold received a B.S. in Electrical
Engineering from MIT.
Robert B. Palardy. Mr. Palardy became Vice President, Finance and
Administration and Chief Financial Officer of the Company in November 1997.
From 1990 to February 1997, Mr. Palardy was Vice President, Finance and
Information Services of Smith & Nephew Endoscopy, a company involved in the
development, manufacture and sale of medical devices for arthroscopy. From
February 1997 through October 1997, Mr. Palardy was an independent financial
consultant. Mr. Palardy is a Certified Public Accountant and holds a B.S.
degree in Accounting from LaSalle University.
Eric Dufford. Mr. Dufford became Vice President, Sales and Marketing and
Secretary of the Company in August 1997. From January 1990 to May 1994, Mr.
Dufford was Director of International Sales for St. Jude Medical, Inc. From
May 1994 to August 1997, Mr. Dufford was Division President of Quest Medical
Inc.'s Cardiovascular Systems Division. Mr. Dufford earned a B.A. in
International Business/Marketing from the University of Colorado and an MBA
from Emory University.
11
<PAGE>
In addition to the above listed executive officers, Kenneth Collins served
as Vice President, Clinical, Regulatory and Quality Affairs of the Company
from July 1997 until his resignation in February 1998.
Executive officers of the Company are elected by and serve at the discretion
of the Board of Directors. There are no family relationships among any
executive officers or directors of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION AND HOLDERS
Shares of the Company's Common Stock have been traded on the Nasdaq National
Market under the symbol "CAMH" since August 2, 1996. Prior to August 2, 1996,
the Shares were not publicly traded. The Common Stock is not traded on any
market, foreign or domestic, other than the Nasdaq National Market. The
following table sets forth, for the periods indicated, the high and low sales
prices of the Common Stock as reported on the Nasdaq National Market during
the two most recent fiscal years.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
----------------- --------------
PERIOD HIGH LOW HIGH LOW
------ ------ ------- ------- ------
<S> <C> <C> <C> <C>
First Quarter........................... $ 15.50 $9.875
Second Quarter.......................... $11.625 $ 6.50
Third Quarter........................... $12.00(1) $ 7.156(1) $ 8.375 $ 6.75
Fourth Quarter.......................... $12.75 $10.375 $ 10.50 $7.375
</TABLE>
- --------
(1) For the period from August 2, 1996 through September 30, 1996.
The depositary for the Common Stock is American Stock Transfer and Trust
Company (the "Depositary"), 40 Wall Street, New York, New York 10005. On March
13, 1998, the closing price of the Company's Common Stock on the Nasdaq
National Market was $9.00. On March 13, 1998, the Company had approximately
110 holders of Common Stock of record. This number does not include
shareholders for whom shares are held in a "nominee" or "street" name.
USE OF PROCEEDS
The Company's Securities Act Registration Statement on Form S-1 (SEC File
No. 333-04879) became effective on August 2, 1996. To date, the Company has
used approximately $601,000 of the offering proceeds for the purchase and
installation of machinery and equipment and approximately $7,700,000 of the
offering proceeds for working capital.
DIVIDENDS
The Company has never declared or paid cash dividends on its Common Stock
and 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, restrictions
imposed by financing arrangements, if any, legal and regulatory restrictions
on the payment of dividends, current and anticipated cash needs and other
factors the Board of Directors deem relevant.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ -- $ 25 $ 68 $ 867 $ 1,448
Cost of goods sold...... -- -- 141 884 1,386
--------- --------- --------- --------- ----------
Gross profit (loss)..... -- 25 (73) (17) 62
--------- --------- --------- --------- ----------
Costs and expenses:
Research and
development.......... 589 1,124 1,709 2,433 3,587
Selling, general and
administrative....... 321 724 961 2,092 3,392
--------- --------- --------- --------- ----------
Total costs and
expenses........... 910 1,848 2,670 4,525 6,979
--------- --------- --------- --------- ----------
Loss from operations.... (910) (1,823) (2,743) (4,542) (6,917)
Interest income, net.... 27 164 246 507 869
--------- --------- --------- --------- ----------
Net loss............ $ (883) $ (1,659) $ (2,497) $ (4,035) $ (6,048)
========= ========= ========= ========= ==========
Net loss per share--
basic and diluted...... $ (0.34) $ (0.73) $ (0.89) $ (0.66) $ (0.58)
========= ========= ========= ========= ==========
Weighted average shares
outstanding--basic and
diluted(1)(2).......... 2,609,530 2,280,863 2,814,069 6,073,865 10,451,560
========= ========= ========= ========= ==========
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and marketable
securities............. $ 5,029 $ 3,329 $ 3,948 $ 18,589 $ 12,756
Working capital......... 4,865 3,081 3,849 19,146 13,456
Total assets............ 5,060 3,421 4,277 20,229 14,748
Total liabilities....... 166 266 266 500 527
Accumulated deficit..... (925) (2,584) (5,081) (9,116) (15,163)
Stockholders' equity.... 4,813 3,155 4,011 19,730 14,221
</TABLE>
- --------
(1) Excludes 208,333, 729,169 and 312,500 restricted shares of stock for the
years ended December 31, 1993, 1994 and 1995, respectively, which were subject
to repurchase by the Company for minimal consideration if certain specified
employment conditions were not met. These restrictions lapsed on September 29,
1995.
(2) All potential Common Stock (including restricted stock, options, warrants
and convertible preferred stock) has been excluded from the calculation of
diluted earnings per share as it is anti-dilutive for all periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is engaged in the research, development and commercialization of
products for the non-invasive diagnosis of cardiac disease. The Company has
experienced substantial net losses since its inception in 1993 and expects net
losses to continue for the foreseeable future. The Company believes that its
research and development expenses will continue to increase 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, the effectiveness of its distribution strategies, competition and the
availability of third party insurer reimbursement for T-wave alternans
testing. The Company has incurred cumulative net losses since inception
through December 31, 1997 of approximately $15,163,000.
13
<PAGE>
RESULTS OF OPERATIONS
Fiscal 1996 Compared to Fiscal 1997
Revenues were $866,942 in the fiscal year ended December 31, 1996 ("Fiscal
1996") and $1,448,319 for the fiscal year ended December 31, 1997 ("Fiscal
1997"), an increase of $581,377 or 67%. Sales of the Company's CH 2000 System
and accessories accounted for 94% of total revenues in Fiscal 1997 compared to
95% in Fiscal 1996. The remainder of the current year's revenues were from the
sale of the Company's proprietary, disposable Hi-Resolution electrodes.
Revenues from products sold to the Company's independent distributors
outside the United States were $900,958 in Fiscal 1997, an increase of
$228,937, or 34%, over fiscal year 1996. Sales to international distributors
accounted for 62% of the Company's total revenues in Fiscal 1997 compared to
78% in Fiscal 1996. Sales to United States customers were $547,361 in Fiscal
1997 compared to $169,921 in Fiscal 1996, an increase of 322%. The increase in
U.S. revenues reflects the impact of the expansion of the number of trained
sales representatives during Fiscal 1997. The Company now employs five direct
sales representatives in the U.S. as compared to two at the end of Fiscal
1996. In addition, the Company has over 40 independent manufacturers' sales
representatives under contract at the end of Fiscal 1997 compared to 11 at the
end of Fiscal 1996. It is the Company's intention to continue to increase the
number of independent manufacturers' representatives included in its U.S.
distribution organization during 1998.
Cost of goods sold was $884,229, 105% of product sales, in Fiscal 1996 and
$1,386,627, 96% of product sales, in Fiscal 1997. The improved ratio of costs
to product sales during Fiscal 1997 primarily reflects the impact of increased
volumes on the allocation of fixed manufacturing overheads.The Company
anticipates that this factor in addition to the impact of programs targeted at
reducing the cost of direct materials will continue to favorably effect the
overall gross margins.
Research and development costs were $2,432,284 in Fiscal 1996 compared to
$3,586,965 in Fiscal 1997, an increase of $1,154,681 or 47%. This increase
reflects the expansion in the Company's clinical trial activities to support
the filing of a 510(k) with the FDA in 1998 for expanded product labeling
claims for its T-wave alternans technology. The Company intends to continue to
increase its funding in support of third party clinical trials to further the
adoption of T-wave alternans testing and in-house research in support of its
T-wave alternans and CEI technologies. Fiscal 1997 results include a charge of
$100,000 to recognize current year costs associated with non-qualified stock
options issued under the 1996 Equity Incentive Plan to scientific advisors.
Selling, general and administrative expenses were $2,092,132 in Fiscal 1996
compared to $3,391,664 in Fiscal 1997. The increase is primarily the result of
the costs associated with the expansion of the Company's U.S. field sales
organization during Fiscal 1997 and increases in the cost of marketing efforts
targeted at the rapid adoption of T-wave alternans testing by clinical
cardiologists and other medical professionals. Additionally, during Fiscal
1997, the Company experienced several changes in management personnel. As a
result, the Company recorded $230,500 of termination costs associated with
these changes.
Interest income for Fiscal 1996 was $506,824 compared to $869,318 for Fiscal
1997. The increase reflects a full year of interest earned on the investment
of the remaining proceeds associated with the Company's initial public
offering of common stock in August 1996.
Fiscal 1995 Compared to Fiscal 1996
The Company had $68,047 of revenues in the fiscal year ended December 31,
1995 ("Fiscal 1995") and $866,942 in fiscal year 1996. The Fiscal 1996
revenues reflect the first full year of international product sales and the
receipt of clearance from the FDA to sell the Company's products in the United
States. Fiscal 1995 revenues were limited to the sale of initial CH 2000
Systems as demonstration units to international independent distributors.
During Fiscal 1996, approximately 78% of total revenues were to international
independent distributors.
14
<PAGE>
Cost of goods sold was $141,312, or 208% of product sales in Fiscal 1995 and
$884,229, or 105% in Fiscal 1996. The ratios of cost to product sales during
both Fiscal 1995 and Fiscal 1996 reflect the fixed overhead costs incurred by
the Company as it established manufacturing operations to support
commercialization of its initial product sales.
Research and development expenses were $1,708,815 in Fiscal 1995 and
$2,432,284 in Fiscal 1996, an increase of 42%. The Company continued to
selectively increase its staffing during Fiscal 1996, as well as the amount of
funding in support of clinical trials. At the end of Fiscal 1996, the Company
employed 15 people in its research and development organization.
Selling, general and administrative expenses were $960,824 in Fiscal 1995
and $2,092,132 in Fiscal 1996. During Fiscal 1996, the Company initiated its
efforts to establish a distribution organization in support of U.S. sales
goals. Additionally, the Company selectively expanded its administrative
support infrastructure as U.S. distribution and manufacturing operations were
begun.
Interest income was $245,946 in Fiscal 1995 and $506,824 in Fiscal 1996.
This increase reflects the interest earned on the investment of proceeds from
the Company's initial public offering of its common stock in August 1996.
Inflation and Income Taxes
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, 1997.
The Company has not recorded a provision for income taxes for the years
1995, 1996, and 1997 because it incurred net losses in each of such years. At
December 31, 1997, the Company had net operating loss carryforwards of
$16,100,000 as well as $457,000 and $213,000 of federal and state tax credit
carryforwards, respectively, available to offset future taxable income and
income tax liabilities, respectively. These carryforwards generally expire in
the years 2007 through 2012 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
($7,001,000 at December 31, 1997) 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 fifty
percent).
LIQUIDITY AND CAPITAL RESOURCES
The Company initially financed operations primarily from the sale of
convertible preferred stock. Through June 30, 1996, the Company had raised
$9,065,000 (net of stock issuance costs) from the sales of equity securities.
On August 2, 1996, the Company raised approximately $19,650,000 (net of stock
issuance costs) from the sale of 2,437,750 shares of common stock in the
Company's initial public offering. In conjunction with the initial public
offering, 4,455,708 shares of preferred stock were converted to shares of
common stock.
As of December 31, 1997, the Company had cash, cash equivalents and
marketable securities of $12,756,341. The proceeds of the equity offerings
have been used primarily to fund operating losses of $15,163,304 reflecting
expenditures to support research, new product development and clinical trials
activities, to support a marketing and sales organization, and to support an
administrative infrastructure and the investment of approximately $938,000 in
property and equipment through December 31, 1997.
15
<PAGE>
During Fiscal 1997, the Company increased its level of operations, with
corresponding increases in most balance sheet accounts. Cash, cash equivalents
and marketable securities decreased by $5,832,242 from December 31, 1996 to
December 31, 1997, consistent with the Company's net loss for Fiscal 1997.
Accounts receivable, net, increased by $88,934 during the year, reflecting
increased sales activity and the broadening of the Company's customer base.
Although write-offs to date have not been material, the expansion of the
customer base to include additional distributors and individual health care
institutions has also led to the establishment of a reserve for doubtful
accounts at December 31, 1997. Inventory levels have increased from $251,788
to $416,224 during the year, primarily reflecting increasing levels of
commercial production. Fixed asset additions during the year primarily
represent increased sales demonstration and clinical research units as the
Company has expanded activities in both of these areas.
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 of $3,000,000 over the next two years.
Under the terms of various license, consulting and technology agreements,
the Company is required to pay royalties on sales of its products. 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 $450,000 of such minimum license maintenance fees subsequent to
December 31, 1997. 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, including the
amounts raised in the initial public offering, will be adequate to satisfy its
capital requirements until at least the middle of 1999. Thereafter, the
Company may require additional funds to support its operating requirements or
for other purposes and may seek to raise such additional funds through public
or private equity financing or from other sources. There can be no assurance
that additional financing will be available at all or that, if available, such
financing would be obtainable on acceptable terms to the Company.
RECENTLY ENACTED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two Statements
of Financial Accounting Standards ("SFAS").
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") requires
that all components of comprehensive income and total comprehensive income be
reported on one of the following: (1) the statement of operations, (2) the
statement of stockholders' equity, or (3) a separate statement of
comprehensive income. Comprehensive income is comprised of net income and all
changes to stockholders' equity, except those due to investments by owners
(changes in paid-in capital) and distributions to owners (dividends). This
statement is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. The implementation of SFAS No. 130 will have
no material impact on the Company's Consolidated Financial Statements.
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information" ("SFAS No.130") requires public companies to report certain
information about their operating segments in their annual financial
statements and quarterly reports issued to shareholders. It also requires
public companies to report certain information about their products and
services, the geographic areas in which they operate, and their major
customers. This statement is effective for fiscal years beginning after
December 15, 1997. Earlier application is encouraged. Implementation of SFAS
No. 131 will have no material effect on the Company's financial position or
results of operations. The Company is assessing the financial statement
footnote disclosure impact of SFAS No. 131.
16
<PAGE>
YEAR 2000 ISSUES
The Company has determined that its products are Year 2000 compliant. The
Company has completed an initial assessment of Year 2000 issues with respect
to its business systems and has begun to take actions to ensure their
compliance. Management continues to support the compliance efforts through
allocation of the resources necessary to complete the project. Based on the
completed initial assessment, management does not expect the costs of bringing
the Company's systems into compliance with Year 2000 to have a material
adverse effect on the Company's financial position, results of operations or
liquidity. The Company does not believe that it is subject to significant
business risks related to its customers' and suppliers' Year 2000 efforts.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K (the "Annual Report") contains forward-
looking statements. For this purpose, any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects," "intends" and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below and elsewhere in
this Annual Report.
The Company is engaged primarily in the commercialization, manufacture,
research and development of its products for the non-invasive diagnosis of
cardiac disease. The Company has incurred substantial and increasing net
losses through December 31, 1997. There can be no assurance that the Company
will ever generate substantial revenues or achieve profitability.
The Company believes that its future success substantially depends upon
successful commercialization and market acceptance of its T-wave alternans
technology. The analysis of T-wave alternans to diagnose ventricular
arrhythmia is a new diagnostic approach that is currently investigational. The
Company anticipates that it will submit 510(k) application for clearance from
the FDA for a labeling claim covering the applicability or prognostic use of
its T-wave alternans technology during 1998. There can be no assurance as to
when or if the FDA will approve the Company's submission. Market acceptance
will depend upon the Company's ability to obtain regulatory clearance or
approval for claims covering the applicability or prognostic use of T-wave
alternans measurement, as well as its ability to demonstrate the diagnostic
advantages and cost-effectiveness of the technology. There can be no assurance
that regulatory approval for such claims will ever be received or that the
Company will be able to successfully commercialize or achieve market
acceptance of the T-wave alternans technology or that the Company's
competitors will not develop competing technologies that are superior to those
of the Company.
The Company has sponsored and is continuing to sponsor clinical studies
relating to its T-wave alternans technology and Hi-Res electrodes to establish
the prognostic value of such technology. While these 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 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. Marketing clearance or approval for new medical devices from the
FDA can be costly and time consuming, and
17
<PAGE>
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 product or expand permitted uses of existing
products.
A significant portion of the Company's revenue is dependent upon sales of
its products outside the United States. Foreign regulatory bodies have
established varying regulations, duties and tax requirements. Specifically,
the European Union 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 EC approval for its future products. 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.
The medical device market is characterized by intense competition 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.
Competition from competitors' medical devices that 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 ECG's, Holter monitors, ultrasound tests and systems
of 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.
The Company currently markets its products in the United States through a
small direct sales force and independent manufacturers' representatives. There
can be no assurance that the Company will be able to continue to recruit and
retain skilled sales management, direct sales persons or independent
manufacturers' representatives. The Company markets 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 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.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
18
<PAGE>
CAMBRIDGE HEART, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................................ 20
Balance Sheet at December 31, 1996 and 1997.............................. 21
Statement of Operations for the three years ended December 31, 1997...... 22
Statement of Changes in Stockholders' Equity for the three years ended
December 31, 1997....................................................... 23
Statement of Cash Flows for the three years ended December 31, 1997...... 24
Notes to Financial Statements............................................ 25
</TABLE>
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders ofCambridge Heart, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Cambridge Heart,
Inc. at December 31, 1996 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997,
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.
As discussed in Note 2, the Company has restated the reported amount of net
loss per share for the year ended December 31, 1995.
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1998, except as to the last
paragraph of Note 2 which isas of April 1, 1998
20
<PAGE>
CAMBRIDGE HEART, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $18,588,583 $ 5,665,736
Marketable securities.............................. -- 7,090,605
Accounts receivable, net of allowance for doubtful
accounts of $20,800 at December 31, 1997.......... 420,984 509,918
Inventory.......................................... 251,788 416,224
Prepaid expenses and other current assets.......... 384,423 301,127
----------- -----------
Total current assets............................. 19,645,778 13,983,610
Fixed assets, net.................................... 423,158 574,660
Other assets......................................... 160,523 190,167
----------- -----------
$20,229,459 $14,748,437
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 202,377 $ 170,531
Accrued expenses................................... 283,333 346,770
License fees payable............................... 14,011 9,836
----------- -----------
Total current liabilities........................ 499,721 527,137
----------- -----------
Commitments (Notes 9 and 10)
Stockholders' equity:
Preferred Stock, $0.001 par value.................. -- --
Common Stock, $0.001 par value; 25,000,000 shares
authorized; 10,214,783 and 10,606,041 shares
issued and outstanding at December 31, 1996 and
1997, respectively................................ 10,215 10,606
Additional paid-in capital......................... 29,216,646 29,405,685
Accumulated deficit................................ (9,115,685) (15,163,304)
----------- -----------
20,111,176 14,252,987
Less: deferred compensation.......................... (381,438) (31,687)
----------- -----------
19,729,738 14,221,300
----------- -----------
$20,229,459 $14,748,437
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
CAMBRIDGE HEART, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue................................ $ 68,047 $ 866,942 $ 1,448,319
Cost of goods sold..................... 141,312 884,229 1,386,627
----------- ----------- -----------
(73,265) (17,287) 61,692
Costs and expenses:
Research and development............. 1,708,815 2,432,284 3,586,965
Selling, general and administrative.. 960,824 2,092,132 3,391,664
----------- ----------- -----------
Loss from operations............... (2,742,904) (4,541,703) (6,916,937)
Interest income........................ 245,946 506,824 869,318
----------- ----------- -----------
Net loss............................... $(2,496,958) $(4,034,879) $(6,047,619)
=========== =========== ===========
Net loss per share--basic and diluted
(1995 restated)....................... $ (0.89) $ (0.66) $ (0.58)
=========== =========== ===========
Weighted average shares outstanding--
basic and diluted..................... 2,814,069 6,073,865 10,451,560
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
CAMBRIDGE HEART
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES B SERIES A
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------- ------------------- ------------------- ADDITIONAL
NUMBER OF PAR NUMBER OF PAR NUMBER OF PAR PAID-IN ACCUMULATED DEFERRED
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL DEFICIT COMPENSATION
---------- ------- ---------- ------- ---------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
10)............. 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 in
initial public
offering........ 2,437,750 2,438 19,651,447
Conversion of
preferred stock
into common
stock........... (2,333,333) (2,333) (6,578,083) (6,578) 4,455,708 4,456 4,455
Issuance of
common stock
through exercise
of stock options
and warrants.... 158,162 158 32,323
Deferred
compensation
related to
common stock
options
granted......... 448,750 (448,750)
Amortization of
deferred
compensation.... 67,312
Net loss........ (4,034,879)
---------- ------- ---------- ------- ---------- -------- ----------- ------------ ---------
Balance at
December 31,
1996............ -- -- -- -- 10,214,783 10,215 29,216,646 (9,115,685) (381,438)
Issuance of
common stock
through exercise
of stock
options,
warrants and
employee stock
purchase plan... 391,258 391 280,914
Compensation
related to
cashless
exercise of
certain common
stock options... 91,875
Compensation
related to non-
employee stock
options
granted......... 100,000
Amortization of
deferred
compensation.... 66,001
Reversal of
deferred
compensation
related to
common stock
options
forfeited....... (283,750) 283,750
Net loss........ (6,047,619)
---------- ------- ---------- ------- ---------- -------- ----------- ------------ ---------
Balance at
December 31,
1997............ -- $ -- -- $ -- 10,606,041 $ 10,606 $29,405,685 $(15,163,304) $ (31,687)
========== ======= ========== ======= ========== ======== =========== ============ =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
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
10)............. 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 in
initial public
offering........ 19,653,885
Conversion of
preferred stock
into common
stock........... --
Issuance of
common stock
through exercise
of stock options
and warrants.... 32,481
Deferred
compensation
related to
common stock
options
granted......... --
Amortization of
deferred
compensation.... 67,312
Net loss........ (4,034,879)
-------------
Balance at
December 31,
1996............ 19,729,738
Issuance of
common stock
through exercise
of stock
options,
warrants and
employee stock
purchase plan... 281,305
Compensation
related to
cashless
exercise of
certain common
stock options... 91,875
Compensation
related to non-
employee stock
options
granted......... 100,000
Amortization of
deferred
compensation.... 66,001
Reversal of
deferred
compensation
related to
common stock
options
forfeited....... --
Net loss........ (6,047,619)
-------------
Balance at
December 31,
1997............ $14,221,300
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
CAMBRIDGE HEART, INC.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $(2,496,958) $(4,034,879) $ (6,047,619)
Adjustments to reconcile net loss to
net cash used for operating
activities:
Depreciation and amortization........ 30,392 104,319 226,074
Loss on disposal of fixed assets..... -- 12,178 20,241
Compensation expense on stock
options............................. -- 67,312 257,876
Changes in assets and liabilities:
Increase in accounts receivable..... -- (420,984) (88,934)
Increase in inventory............... (118,865) (132,923) (164,436)
(Increase) decrease in prepaid
expenses and other current assets.. (30,160) (336,053) 83,296
(Increase) decrease in other
assets............................. -- (166,514) 40,964
Increase in accounts payable and
accrued expenses................... 71,876 250,501 31,591
Decrease in license fees payable.... (71,680) (17,201) (4,175)
----------- ----------- ------------
Net cash used for operating
activities........................ (2,615,395) (4,674,244) (5,645,122)
----------- ----------- ------------
Cash flows from investing activities:
Purchases of fixed assets............. (119,064) (371,686) (357,698)
Capitalization of software development
costs................................ -- -- (110,727)
Purchases of marketable securities,
net.................................. -- -- (7,090,605)
----------- ----------- ------------
Net cash used for investing
activities........................ (119,064) (371,686) (7,559,030)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common
stock, net of issuance costs......... 2,603 19,686,366 281,305
Proceeds from issuance of Series B
preferred stock, net of issuance
costs................................ 3,350,513 -- --
----------- ----------- ------------
Net cash provided by financing
activities........................ 3,353,116 19,686,366 281,305
----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents...................... 618,657 14,640,436 (12,922,847)
Cash and cash equivalents, beginning of
year.................................. 3,329,490 3,948,147 18,588,583
----------- ----------- ------------
Cash and cash equivalents, end of
year.................................. $ 3,948,147 $18,588,583 $ 5,665,736
=========== =========== ============
</TABLE>
See supplemental disclosure of non-cash financing activity in Note 5.
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
CAMBRIDGE HEART, INC.
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 sells its products primarily to hospitals, research
institutions and cardiovascular specialists.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed by the Company are as follows:
Cash Equivalents and Marketable Securities
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, securities of
state government agencies and short-term commercial paper of companies with
strong credit ratings and in diversified industries. The securities of state
government agencies are redeemable at their face value, and bear interest at
variable rates which are adjusted on a frequent basis. Accordingly, these
investments are subject to minimal credit and market risk. The money market
accounts and short-term commercial paper, totaling $10.5 million and $7.1
million at December 31, 1996 and 1997, respectively, are classified as held to
maturity, and mature within one year. The securities of state government
agencies, totaling $8.0 million and $5.7 million at December 31, 1996 and
1997, respectively, are classified as available for sale. All of these
investments have been recorded at amortized cost, which approximates fair
market value. No realized or unrealized gains or losses have been recognized.
Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash and cash equivalents, marketable securities, accounts receivable,
accounts payable, accrued expenses and license fees payable, approximate their
fair values at December 31, 1996 and 1997.
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
method.
Fixed Assets
Fixed assets 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 was recognized pursuant to the agreement as the work was
performed.
Research and Development and Capitalized Software Development Costs
Research, engineering and product development costs, except for certain
software development costs, are expensed as incurred. Capitalization of
software development costs begins upon the establishment of technological
feasibility of both the software and related hardware as defined by Statement
of Financial
25
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Accounting Standards No. 86 ("SFAS 86"), "Accounting for the Cost of Computer
Software to be Sold, Leased, or Otherwise Marketed," and ceases upon the
general release of the products to the public. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs requires considerable judgment by
management with respect to certain external factors, including, but not
limited to, technological feasibility, anticipated future gross revenues,
estimated economic life and changes in software and hardware technologies.
The Company amortizes software development costs on a straight-line basis
over the estimated economic life of the product.
Costs capitalized at December 31, 1997, which are included in other assets
in the accompanying balance sheet, totaled $85,000 ($0 at December 31, 1996),
net of $26,000 of accumulated amortization.
Licensing Fees and Patent Costs
The Company has entered into licensing agreements which give the Company the
exclusive rights to certain patents and technologies and the right to market
and distribute any products developed, subject to certain covenants. Payments
made under these licensing agreements and costs associated with patent
applications have generally been expensed as incurred, because recovery of
these costs is uncertain. However, certain costs associated with patent
applications for products and processes which have received regulatory
approval and are available for commercial sale have been capitalized and are
being amortized over their estimated economic life of 5 years. Amounts
capitalized at December 31, 1997 totaled $58,000 ($54,000 at December 31,
1996), net of $20,000 of accumulated amortization ($6,000 at December 31,
1996), which are included in other assets in the accompanying balance sheet.
Stock-Based Compensation
The Company accounts for employee awards under its stock plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations. The Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), for disclosure purposes only (Note 6).
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, 1996 and 1997, and the reported
amounts of revenues and expenses during the three years in the period ended
December 31, 1997. Actual results could differ from these estimates.
Reclassifications
Certain reclassifications were made to the 1995 and 1996 financial
statements to conform to the 1997 presentation.
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share," which establishes new standards for computing and presenting
earnings per share. The new standard replaces the presentation of primary
earnings per share prescribed by Accounting Principles Board Opinion No. 15
("APB 15"), "Earnings per Share," with a presentation of basic earnings per
share and also requires dual presentation of basic and diluted earnings per
share on the face of the statement of operations for all entities with complex
capital structures. Basic earnings per share excludes dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Shares which are subject
to repurchase
26
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
by the Company for minimal consideration if certain specified conditions are
not met are excluded from the number of common shares outstanding for purposes
of computing basic earnings per share. Diluted earnings per share includes
dilutive potential common stock (such as stock subject to repurchase, options,
warrants and convertible preferred stock) and is computed similarly to fully-
diluted earnings per share pursuant to APB 15. The Company adopted SFAS 128
and Securities and Exchange Commission Staff Accounting Bulletin No. 98, which
provides new guidance with respect to earnings per share computations in the
periods preceding a company's initial public offering, in the fourth quarter
of fiscal 1997 and has restated all prior periods in its financial statements.
Consistent with SFAS 128, basic loss per share amounts are based on the
weighted average number of shares of common stock outstanding during the
period. Diluted loss per share amounts are based on the weighted average
number of shares of common stock and potential common stock outstanding during
the period. The Company has excluded potential common stock from the
calculation of diluted weighted average share amounts for 1995, 1996 and 1997,
as its inclusion would have been anti-dilutive.
The Company had previously included shares subject to repurchase in its
computation of basic net loss per share for the year ended December 31, 1995,
and had previously reported a net loss of $0.80 per share, based on a weighted
average number of common shares outstanding of 3,126,569. The basic net loss
per share for the year ended December 31, 1995 has been restated to $0.89 per
share in the accompanying financial statements to exclude these shares.
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
ESTIMATED
USEFUL
LIVES
(YEARS) 1996 1997
--------- -------- --------
<S> <C> <C> <C>
Computer equipment.............................. 3-5 $206,756 $271,661
Manufacturing equipment......................... 5 55,965 87,183
Office furniture................................ 7 64,923 69,781
Sales display and clinical equipment............ 3 220,252 406,810
-------- --------
547,896 835,435
Less-accumulated depreciation............................. 124,738 260,775
-------- --------
$423,158 $574,660
======== ========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Accrued bonus............................................. $140,000 $ 84,167
Accrued clinical trial costs.............................. -- 61,650
Accrued professional fees................................. 69,016 44,579
Accrued vacation.......................................... 22,470 28,604
Employee stock purchase plan withholdings................. 26,779 17,313
Accrued other............................................. 25,068 110,457
-------- --------
$283,333 $346,770
======== ========
</TABLE>
27
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. STOCKHOLDERS' EQUITY
Public Offering of Common Stock
On August 2, 1996, the Company completed its initial public offering for the
sale of 2,437,750 shares of common stock. The Company received approximately
$19,654,000 from the sale of the shares, net of underwriting discounts and
expenses associated with the offering.
Preferred Stock
The Company had authorized 10,400,000 shares of preferred stock, of which
6,900,000 shares had been designated as Series A convertible preferred stock
("Series A Preferred Stock") and 2,500,000 shares had been designated as
Series B convertible preferred stock ("Series B Preferred Stock"). The
remaining authorized shares have not been designated. In conjunction with the
Company's initial public offering in August 1996, all shares of Series A
Preferred Stock and Series B Preferred Stock were converted into 3,289,041 and
1,166,667 shares of common stock, respectively, and these classes of stock
were eliminated.
On May 29, 1996, the Company's Board of Directors authorized an additional
2,000,000 shares of the Company's $0.001 par value preferred stock, bringing
the total amount of authorized preferred stock to 3,000,000. The 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.
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 10). 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 market value of the common stock at the date of exercise. During 1996
and 1997, warrants to purchase 2,000 and 191,208 shares of common stock,
respectively, were exercised, resulting in the issuance of 1,912 and 168,086
shares of common stock, respectively.
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 10). These warrants were issued with an exercise price of $2.00
per share, contain a cashless exercise provision similar to that for the
warrants detailed above, and expire on September 24, 1998.
In conjunction with certain license agreements entered into during 1996
(Note 9), the Company issued warrants to purchase 25,000 shares of common
stock to an unrelated party. The warrants were issued with an exercise price
of $11.00 per share, are exercisable beginning in December 1999 and expire in
March 2000. However, the warrants terminate if the related license agreements
are terminated prior to exercise. 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 date of exercise.
The value of the above warrants was estimated by management and determined
not to be material to the Company's results of operations and financial
position.
At December 31, 1997, the Company has reserved 270,330 shares of common
stock for issuance upon the exercise of these warrants.
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
28
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
1996 Equity Incentive Plan
During 1996, the Board of Directors authorized 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.
Terms of the Incentive Plan are similar to those of the 1993 Plan. 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
During 1996, the Board of Directors authorized 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. 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).
Transactions under the Company's stock option plans during the years ended
December 31, 1995, 1996 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,032,829 $0.31 1,284,499 $0.47 1,354,249 $1.54
Granted................. 396,500 0.74 244,500 7.04 514,700 7.85
Exercised............... (132,330) 0.02 (156,250) 0.16 (218,549) 0.42
Canceled................ (12,500) 0.20 (18,500) 0.72 (277,650) 3.83
--------- --------- ---------
Outstanding at end of
year................... 1,284,499 $0.47 1,354,249 $1.54 1,372,750 $3.57
========= ===== ========= ===== ========= =====
Exercisable at end of
year................... 365,741 $0.34 593,964 $0.41 539,034 $0.49
========= ===== ========= ===== ========= =====
Weighted average fair
value of options
granted during the
year................... $0.26 $6.17 $5.29
===== ===== =====
</TABLE>
29
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
All options granted during 1995 and 1997 have exercise prices equal to the
fair market value of the common stock at the date of grant. The weighted
average exercise price and weighted average fair value of options granted
during 1996 at exercise prices less than the market price of the common stock
at the date of grant were $1.59 and $6.97, respectively. The weighted average
exercise price and weighted average fair value of options granted during 1996
at exercise prices equal to the market price of the common stock at the date
of grant were $9.22 and $5.85, respectively. No options were granted during
1996 with exercise prices that exceeded the market price of the common stock
at the date of grant.
During 1996, the Company repriced approximately 107,000 options granted to
employees prior to the Company's initial public offering at an exercise price
of $10.00 per share to an exercise price of $8.13 per share, the fair market
value of the Company's common stock at the time of the repricing. On May 20,
1997, the Company repriced 52,000 options with original exercise prices
ranging from $11.00 to $12.00 per share to $7.75 per share, the fair market
value of the Company's common stock at the time of the repricing.
The following table summarizes information about stock options outstanding
under the Company's stock option plans at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
REMAINING WEIGHTED EXERCISE
CONTRACTUAL AVERAGE NUMBER OF PRICE OF
NUMBER LIFE, IN EXERCISE OPTIONS OPTIONS
RANGE OF EXERCISE PRICES OUTSTANDING YEARS PRICE EXERCISABLE EXERCISABLE
------------------------ ----------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$.002-$.020............. 72,070 5.40 $0.01 64,070 $0.01
$.20-$.50............... 600,517 6.26 0.30 442,498 0.25
$1.00-$2.00............. 131,663 8.80 1.69 15,800 1.00
$4.00-$8.38............. 484,000 9.38 7.71 16,666 8.11
$8.88-$10.25............ 84,500 9.83 8.98 -- --
--------- -------
1,372,750 7.78 $3.57 539,034 $0.49
========= ==== ===== ======= =====
</TABLE>
At December 31, 1997, 2,254,638 shares of common stock are reserved for
issuance upon exercise of the options issued under the Company's stock option
plans and there are 877,950 options available for future grant. Outstanding
options generally vest on a pro rata basis over a period of two to five years.
During 1996, the Company granted stock options to purchase 13,750 and 56,250
shares of its common stock at exercise prices of $4.00 and $1.00 per share,
respectively, to certain employees. The Company recorded deferred compensation
of $448,750, 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 is being amortized ratably over the option vesting
period of five years. Compensation cost associated with these options was
$67,312 and $66,001 during 1996 and 1997, respectively. During 1997, the
forfeiture of options granted to certain of these employees resulted in the
reversal of previously recorded deferred compensation totaling $283,750.
During 1997, the Company also recorded additional compensation expense
totaling $191,875 related to the Company's stock option plans, $100,000 of
which related to 60,000 options granted to non-employee consultants for
services rendered and $91,875 of which related to the cashless exercise of
15,000 options by an employee.
1996 Employee Stock Purchase Plan
During 1996, the Board of Directors authorized 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
30
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 Company
issued 8,560 shares of common stock at an average price of $8.02 during 1997.
No shares were issued during 1996. At December 31, 1997, the Company had
91,440 shares of common stock reserved for issuance under the Purchase Plan.
Fair Value Disclosures
As discussed in Note 2, the Company has elected to adopt SFAS 123 through
disclosure only. Had compensation cost for the Company's option plans and
employee stock purchase plan been determined based on the fair value of the
options at the grant dates, as prescribed in SFAS 123, for options granted in
1995, 1996 and 1997, the Company's net loss and net loss per share would have
been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net loss:
As reported.............................. $2,496,958 $4,034,879 $6,047,619
Pro forma................................ $2,505,931 $4,161,030 $6,511,042
Net loss per share:
As reported--basic and diluted........... $ 0.89 $ 0.66 $ 0.58
Pro forma--basic and diluted............. $ 0.89 $ 0.69 $ 0.62
</TABLE>
The fair value of each option grant under SFAS 123 was estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1995, 1996 and 1997, respectively: (i) dividend
yield of 0% for all periods; (ii) expected volatility of 0%, 0%-50%; and 60%;
(iii) risk free interest rates of 6.1%-7.8%, 5.8%-6.8% and 6.1%-6.9%; and (iv)
expected option terms of 7 years for 1995 and 1996 and 4 to 7 years for 1997.
SFAS 123 requires that volatility be considered in the calculation of the fair
value of an option grant only for grants made when an entity has publicly
traded securities or has filed a registration statement to do so. Accordingly,
a volatility of 0% was utilized for options granted by the Company prior to
the initial filing of its Registration Statement on Form S-1.
The above pro forma disclosures reflect options granted during 1995, 1996
and 1997 only. Because additional option grants are expected to be made each
year and options vest over several years, the above pro forma disclosures are
not necessarily representative of the pro forma effects on reported net income
(loss) for future years.
31
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
The income tax benefit consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income tax benefit:
Federal................. $ 880,000 $1,393,000 $2,146,000
State................... 162,000 249,000 402,000
---------- ---------- ----------
1,042,000 1,642,000 2,548,000
Deferred tax asset
valuation allowance...... (1,042,000) (1,642,000) (2,548,000)
---------- ---------- ----------
$ -- $ -- $ --
========== ========== ==========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Net operating loss carryforwards.................... $3,776,000 $6,435,000
Research and development tax credit carryforwards... 275,000 598,000
Deferred start up and organization expenses......... 25,000 9,000
Other............................................... 9,000 11,000
---------- ----------
Gross deferred tax assets......................... 4,085,000 7,053,000
Fixed assets........................................ (26,000) (29,000)
Patent costs........................................ (22,000) (23,000)
---------- ----------
Net deferred tax assets........................... 4,037,000 7,001,000
Deferred tax asset valuation allowance............ (4,037,000) (7,001,000)
---------- ----------
$ -- $ --
========== ==========
</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 and labeling
claims 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).
Approximately $610,000 of the deferred tax asset attributable to net
operating loss carryforwards was generated by the exercise of certain non-
qualified stock options. Any future utilization of this amount will be
credited directly to additional paid-in-capital, and not the income tax
provision.
32
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(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,
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Statutory U.S. federal
tax rate............... (35.0)% (35.0)% (35.0)%
State taxes, net of
federal tax benefit.... (7.2) (6.2) (6.7)
Non-deductible
expenses............... .8 1.3 1.6
Federal research and
development credits.... (2.0) (1.6) (2.6)
Other................... 1.6 .8 0.6
Valuation allowance on
deferred tax assets.... 41.8 40.7 42.1
------- ------- -------
-- % -- % -- %
======= ======= =======
</TABLE>
As of December 31, 1997, the Company has $16,100,000 of net operating loss
carryforwards and $457,000 and $213,000 of federal and state research and
development credits, respectively, which may be used to offset future federal
and state taxable income and tax liabilities, respectively. The credits and
carryforwards expire in various years ranging from 2007 to 2012.
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. The Company has determined that ownership changes have
occurred at the time of the Series A Preferred Stock issuance in 1993 and the
Series B Preferred Stock issuance in 1995, but has not yet determined the
amount of the annual limitations. However, management does not believe that
such limitations would materially impact the Company's ability to ultimately
utilize its carryforwards, provided sufficient taxable income is generated in
future years, although the limitations may impact the timing of such
utilization. Subsequent significant changes in ownership could further affect
the limitations in future years.
8. 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, 1996 or 1997.
9. COMMITMENTS
Operating Leases
The Company has various noncancelable operating leases for office space,
equipment and furniture which expire through 1999. Certain of these leases
provide the Company with various renewal options. Total rent expense under all
operating leases was approximately $68,100, $98,700 and $159,700 for the years
ended December 31, 1995, 1996 and 1997, respectively.
33
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997, future minimum rental payments under the noncancelable
leases are as follows, net of rental payments to be received under a
noncancelable sublease:
<TABLE>
<S> <C>
1998................................................................ $165,500
1999................................................................ 132,600
--------
$298,100
========
</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, 1996 and 1997 amounted to $20,000 in each year. The future
minimum license maintenance fee commitments at December 31, 1997 are
approximately as follows:
<TABLE>
<S> <C>
1998................................................................ $ 20,000
1999................................................................ 25,000
2000................................................................ 45,000
2001................................................................ 45,000
Thereafter.......................................................... 315,000
--------
$450,000
========
</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.
In December 1996, the Company entered into two exclusive license agreements
with an unrelated third party. One license agreement requires payment of an
annual fee of $30,000 for ten years in order to maintain the license rights.
The other license agreement requires payment of a perpetual annual license
maintenance fee of $30,000. In order to maintain the exclusivity of this
second license agreement, the Company must meet certain development milestones
within three years (five years if the Company agrees to increase the annual
license maintenance fee to $50,000). During the term of this license
agreement, the Company is also obligated to pay a royalty (ranging from 2% to
3 1/2%) based on net sales of any products developed from the licensed
technology. The annual maintenance fees for this license are creditable
against royalties otherwise payable for such year.
If the Company chooses to sublicense the technologies covered by these two
license agreements to an unrelated party, the Company must also pay a royalty
equal to 33% of the gross revenue received from the unrelated party for
products developed from such technologies.
These two license agreements are terminable by the Company without cause.
In connection with these license agreements, a warrant to purchase 25,000
shares of common stock was issued to the third party (Note 5).
34
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Employment Agreement
The Company has entered into an employment agreement with an employee which
expires on September 1, 1998. This agreement provides that if employment is
terminated without cause, the employee will receive a severance payment equal
to nine months of his salary (approximately $112,500).
10. RELATED PARTY TRANSACTIONS, INCLUDING ROYALTY OBLIGATIONS
Consulting Fees and Preferred Stock Issuance Costs
During 1995, the Company entered into a consulting and financial advisory
agreement with the selling agent involved with the Company's Series B
Preferred Stock issuance (Note 5). The Chief Executive Officer of the selling
agent was the Chairperson of the Company's Board of Directors at that time.
Total cash fees paid under this agreement during 1995 were approximately
$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. Because the Company has chosen not to invest in this technology as
required by the license agreement, the license agreement may be canceled at
the sole option of the licensor at any time.
Also in February 1993, the Company entered into a consulting and technology
agreement with this individual. This agreement, which has been extended to
June 1998, requires the Company to pay monthly consulting fees of either
$9,400 or $12,500, as stipulated in the agreement. Total payments made during
1995, 1996 and 1997 were approximately $100,000, $106,000 and $112,600,
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 to this
individual (Note 5).
Operations through December 31, 1997 did not result in the recognition of
any material royalty expense in connection with these agreements.
11. MAJOR CUSTOMERS, EXPORT SALES AND CONCENTRATION OF CREDIT RISK
During 1995, the Company derived all product revenues from one distributor
of the Company's products. During 1996, the Company derived 34% and 42% of its
product revenues from two distributors of the Company's products in Japan and
Europe, respectively. These same two distributors accounted for 39% and 40% of
the Company's accounts receivable at December 31, 1996. During 1997, the
Company derived 47% and 11% of product revenues from the same two customers,
respectively, and one of these customers comprised 40% of the accounts
receivable balance at December 31, 1997. Company policy does not require
collateral on accounts receivable balances.
35
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption "EXECUTIVE
OFFICERS OF THE REGISTRANT" in Part I hereof, and the remainder is contained
in the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held on May 21, 1998 (the "1998 Proxy Statement") under the caption "Election
of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance"
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is contained in the 1998 Proxy Statement under the
captions "Compensation of Directors," "Executive Compensation," and "Severance
and Other Agreements," and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is contained in the 1998 Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management" and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is contained in the Company's Proxy Statement
under the caption "Transactions with Directors," and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements
The Company's financial statements listed in the Index to Financial
Statements in Item 8 hereof are filed as part of this Annual Report on Form
10-K.
(a)2. Financial Statement Schedules
All applicable information is readily determinable from the notes to the
Company's financial statements.
(a)3. Listing of Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
##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.
##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.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
##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.
#10.21 Amended and Restated Lease By and Between the Registrant and R.W.
Connelly, dated October 22, 1997.
#10.22 Sublease By and Between Registrant and Pinpoint Corporation, dated
January 30, 1998.
#10.23 Agreement to Extend the Consulting and Technology Agreement
between the Registrant and Dr. Richard J. Cohen, dated January 23,
1998.
#11.1 Computation of Net Loss Per Share.
#23.1 Consent of Price Waterhouse LLP.
#27 Financial Data Schedule.
#27.1 Restated Financial Data Schedule for the 9 months ended September
30, 1997.
#27.2 Restated Financial Data Schedule for the 6 months ended June 30,
1997.
#27.3 Restated Financial Data Schedule for the 3 months ended March 31,
1997
#27.4 Restated Financial Data Schedule for the 12 months ended December
31, 1996.
#27.5 Restated Financial Data Schedule for the 9 months ended September
30, 1996.
#27.6 Restated Financial Data Schedule for the 6 months ended June 30,
1996.
#27.7 Restated Financial Data Schedule for the 12 months ended December
31, 1995.
</TABLE>
- --------
# Filed herewith.
## Incorporated by reference from the Company's Registration Statement in Form
S-1 dated August 2, 1996.
* Confidential treatment has been granted as to certain portions.
(b) No Current Reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.
37
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
CAMBRIDGE HEART, INC.
Date: April 1, 1998 /s/ Robert B. Palardy
By: _________________________________
ROBERT B. PALARDY
VICE PRESIDENT, FINANCE &
ADMINISTRATION AND
CHIEF FINANCIAL OFFICER
38
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
##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.
##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.
##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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
<C> <S> <C>
##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.
#10.21 Amended and Restated Lease By and Between the Registrant
and R.W. Connelly, dated October 22, 1997.
#10.22 Sublease By and Between Registrant and Pinpoint
Corporation, dated January 30, 1998.
#10.23 Agreement to Extend the Consulting and Technology Agreement
between the Registrant and Dr. Richard J. Cohen, dated
January 23, 1998.
#11.1 Computation of Net Loss Per Share.
#23.1 Consent of Price Waterhouse LLP.
#27 Financial Data Schedule.
#27.1 Restated Financial Data Schedule for the 9 months ended
September 30, 1997.
#27.2 Restated Financial Data Schedule for the 6 months ended
June 30, 1997.
#27.3 Restated Financial Data Schedule for the 3 months ended
March 31, 1997
#27.4 Restated Financial Data Schedule for the 12 months ended
December 31, 1996.
#27.5 Restated Financial Data Schedule for the 9 months ended
September 30, 1996.
#27.6 Restated Financial Data Schedule for the 6 months ended
June 30, 1996.
#27.7 Restated Financial Data Schedule for the 12 months ended
December 31, 1995.
</TABLE>
- --------
# Filed herewith.
## Incorporated by reference from the Company's Registration Statement in Form
S-1 dated August 2, 1996.
* Confidential treatment has been granted as to certain portions.
<PAGE>
EXHIBIT 10.21
AMENDED AND RESTATED LEASE
This AMENDED AND RESTATED LEASE is made as of the 22nd day of October, 1997
by and between Robert W. Connelly (the "Landlord") and Cambridge Heart, Inc.
(the "Tenant").
WITNESSETH
WHEREAS, the Landlord and the Tenant entered into a certain lease dated as
of June 1, 1995 (the "Lease"), and
WHEREAS, the Landlord and the Tenant now wish to amend the lease as
hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Landlord and the Tenant
hereby amend and modify the Lease by a restatement of the same in the form and
containing those provisions in the pages next following and attached hereto
and constituting a part hereof. To the extent of any inconsistency between the
terms of the Lease and this Amended and Restated Lease, the terms and
provisions contained herein shall control in all instances. Except as
specifically amended hereby, the Lease is hereby ratified and confirmed in its
entirety as of the date hereof.
WITNESS the execution hereof under seal as of the day and year first above
written.
/s/ Robert W. Connelly
_____________________________________
Robert W. Connelly
Cambridge Heart, Inc.
/s/ Jeffrey M. Arnold
By: _________________________________
Name:Jeffrey M. Arnold
Title:Chief Executive Officer
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AMENDED AND RESTATED LEASE
1. IDENTIFICATIONS
This AMENDED AND RESTATED LEASE made as of October 22, 1997 by and between
ROBERT W. CONNELLY (the "Landlord"), having an address at 57 Bedford Street,
Suite 100, Lexington, Massachusetts 02173 and CAMBRIDGE HEART, Inc. a
Massachusetts corporation (the "Tenant"), having an address at One Oak Park
Drive, Bedford, Massachusetts 01730.
2. LEASE; THE PREMISES; EXPANSION OPTION
In consideration of the Basic Rent, Additional Rent, and other payments and
covenants of the Tenant hereinafter set forth, and upon the following terms
and conditions, the Landlord hereby leases to the Tenant and the Tenant hereby
leases from the Landlord approximately 22,000 rentable square feet of floor
area in that certain building (the "Building") situated on that certain parcel
of land (the "Property") known as and numbered One Oak Park Drive, in the Town
of Bedford, Middlesex County, Massachusetts, as more particularly described in
Exhibit A attached hereto (said Property and Building hereinafter collectively
referred to as the "Premises"). The Premises are leased together with all
rights necessary for the use of the Premises as permitted herein, in common
with the Landlord and all others from time to time lawfully entitled thereto,
to use the driveways, walkways, parking area and other common areas of the
Property for their intended purposes.
3. CONDITION OF PREMISES
The Tenant acknowledges and agrees that the Premises will be delivered by
the Landlord in an "as is" condition as of the date hereof and of the Term
Commencement Date (as defined below). Except as may be expressly set forth in
this Lease, no representations or warranties have been made by the Landlord or
anyone purporting to act on behalf of the Landlord as to the condition or
repair of the Premises or any portion thereof.
4. TERM
The Term of this Lease shall commence on the earlier of (i) December 1,
1997, or (ii) such time as the partitions described in Paragraph 12 shall have
been erected (the "Term Commencement Date") and shall expire, unless earlier
extended or terminated in accordance with the terms hereof, at midnight on
November 30, 1999. Notwithstanding the foregoing, the Tenant shall have access
to the Premises beginning on the date hereof for the purpose of showing the
Premises to prospective subtenants (it being understood and agreed that
nothing contained in this Paragraph 4 shall be deemed to in any way obviate
the need to obtain the consent of the Landlord for any subletting in
accordance with Paragraph 19 below) provided that the Landlord is given
reasonable prior notice thereof and an opportunity to be present when the
Premises are being shown. In addition, any early access to the Premises shall
be governed by and subject to the terms and provisions of this Lease.
Provided the Tenant is not in default under any of the provisions of this
Lease and provided further that the Tenant has given to the Landlord written
notice at least one hundred and eighty (180) days before the end of the Term,
the Tenant shall have the option to extend the Term for an additional period
of one (1) year commencing after the expiration of the original Term (the
"Extended Term"). The Extended Term shall be upon the same terms and
conditions as herein set forth.
5. USE OF THE PREMISES' LICENSES AND PERMITS
The Tenant shall use the Premises only for general office, research and
development and light manufacturing purposes to the extent now and hereafter
from time to time permitted under applicable laws, by-laws, ordinances, codes,
rules, regulations, orders and other lawful requirements of governmental
bodies having jurisdiction. The Tenant, its subtenants, licensees, invitees
and any other users of the Premises shall apply in their own names for and
obtain at their own expense any and all licenses, permits and other approvals
which may be required from such governmental bodies in connection with any
particular use of the Premises during the Term.
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<PAGE>
6. BASIC RENT; ADDITIONAL RENT
The Tenant shall pay Basic Rent to the Landlord at the annual rate of Two
Hundred Forty-Two Thousand Dollars and No Cents ($242,000.00). Basic Rent
shall be payable in advance on the first day of each month in equal
installments at the rate of $20,166.67 per month to the Landlord at the
address set forth above or such other address as the Landlord may thereafter
specify by notice to the Tenant, without counterclaim, set off, deduction or
defense and, except as otherwise expressly provided herein, without abatement.
This Lease is intended by the parties hereto to be a so-called "net" lease
and, to the end that the Basic Rent shall be received by the Landlord net of
all costs and expenses related to the Premises, except as expressly set forth
herein. The Tenant agrees to pay, in addition to the Tenant's obligations with
respect to real estate taxes, insurance premiums, utilities costs, costs of
repairs and maintenance to the Premises and other costs which are specifically
set forth herein, to the Landlord upon demand as Additional Rent, in the same
manner as Basic Rent: (i) any and all charges, costs, expenses, and
obligations of every kind and nature whatever as the Landlord may from time to
time actually incur in good faith with regard to the Premises or the operation
or maintenance thereof, except as otherwise expressly agreed in this Lease,
including, without limiting the generality of the foregoing, reasonable
attorneys' fees incurred by the Landlord in connection with any amendments to,
consents under and subleases and assignments of this Lease requested by the
Tenant and in connection with the enforcement of rights and pursuit of the
remedies of the Landlord under this Lease (whether during or after the
expiration or termination of the Term of this Lease) and (ii) one hundred
percent (100%) of Common Expenses as hereinafter defined. Except as otherwise
specifically set forth in Paragraph 10 hereof, "Common Expenses" shall mean
any and all charges, costs and expenses of every kind and nature whatever,
which the Landlord may from time to time actually incur and the reasonable
value, based on competitive rates, of any materials and services which the
Landlord may provide in good faith with respect to the ownership, operation
and maintenance of the Building and the Premises, including, without
limitation, (i) making non-capital repairs (or capital repairs to the extent
permitted in the next following paragraph) to and undertaking maintenance of
the Building and the Property; (ii) providing utilities and services, other
than as provided in Paragraph 9 hereof, to the Premises; (iii) providing daily
cleaning and rubbish removal; (iv) providing watering, landscaping and lawn
care for the Property; (v) sanding, plowing and removal of snow and ice from
the driveways, walkways and parking areas; (vi) maintaining insurance on the
Premises; and (vii) reasonable administrative and management costs of the
Landlord, which shall be commensurate with those normally charged for suburban
office buildings of this nature in the metropolitan Boston area.
Notwithstanding anything contained herein to the contrary, Additional Rent
on account of operating expenses shall not include the following: amounts
received by the Landlord through proceeds of insurance, specific tenant
reimbursements, condemnation awards, warranties, or other similar sources;
brokerage commissions; taxes (other than as provided in Paragraph 7 below);
costs in the nature of fees, fines or penalties arising out of the breach of
any obligation, contractual or at law, by the Landlord or its contractors,
employees or agents, including attorneys' fees (unless such breach is the
result of the acts or omissions of the Tenant or those for whom the Tenant is
legally responsible); tenant buildout expenses, including permit, license and
inspection costs relating thereto; costs or expenses relating to the
correction of latent defects in the Building or noncompliance of the Building
with laws in effect as of the date hereof; costs relating to environmental
compliance or remediation, unless necessitated as a result of the acts or
omissions of the Tenant or those for whom the Tenant is legally responsible;
capital expenditures, other than those required to bring the Building into
compliance with laws enacted after the date of this Lease; reserves for future
expenditures not yet incurred; attorneys' fees and other expenses incurred in
connection with negotiations or disputes with present or prospective tenants
of the Building (other than the Tenant); overhead and profit increment paid to
the Landlord or any of its affiliates to the extent the same exceed market
rates; interest, principal, points and fees on any debt or loans; advertising
and promotional expenditures; and depreciation.
Notwithstanding anything contained herein to the contrary, it is expressly
understood that the Tenant shall only be required to pay as Additional Rent:
(a) the amount by which real estate taxes for any fiscal year exceed $1.25 per
rentable square foot; and (b) the amount by which Common Expenses for any
calendar year exceed
A-3
<PAGE>
$2.50 per rentable square foot. Additional Rent shall not increase from $1.25
per rentable square foot for real estate taxes and $2.50 per rentable square
foot for Common Expenses by more than the Consumer Price Index for all Urban
Consumers (CPI-U), Boston, Massachusetts, with the commencement month and year
being the base.
Additional Rent shall be calculated on a fiscal year ending May 31. The
Tenant agrees to pay the Landlord all amounts owed as Additional Rent
hereunder within thirty (30) days after receipt of an invoice and calculations
of actual amounts owed from the Landlord.
If any payment of Basic Rent or Additional Rent is not paid to the Landlord
when due or within any applicable grace period, then at the Landlord's option,
without notice and in addition to all other remedies hereunder, the Tenant
shall pay upon demand to the Landlord as Additional Rent interest thereon at
an annual rate equal to the corporate rate of the Bank of Boston from time to
time in effect plus four (4) percent, such interest to be computed from the
date such Basic Rent or Additional Rent was originally due through the date
when paid in full.
7. TAXES
The Tenant shall pay or cause to be paid to the Landlord (or, where
appropriate, directly to the authority by which the same are assessed or
imposed, with evidence of such payment to the Landlord) as Additional Rent not
later than ten (10) days prior to the date the same are due or twenty-one (21)
days after written notice thereof to the Tenant, whichever is later, all taxes
and excises upon the personal property and equipment of the Tenant located at
the Premises and any and all real estate taxes, betterments and special
assessments or amounts in lieu or in the nature thereof and any other taxes,
levies, water rents, sewer use charges and other excises, franchises, imposts
and charges, general and special (and the entire amount of any interest,
penalties and costs attributable to delayed payment of the Tenant's portion
thereof where such delay is the fault of the Tenant) of whatever name and
nature, and whether or not now within the contemplation of the parties hereto,
which may now or hereafter be levied, assessed or imposed by the United States
of America, The Commonwealth of Massachusetts, the Town of Bedford or any
other authority, or become a lien, upon all or any part of the Property, the
Building, the Premises, the use or occupation thereof, or upon the Landlord
and the Tenant in respect thereof, or upon the basis of rentals thereof or
therefrom (except for the Landlord's income, estate, gift, franchise,
corporation, profit or transfer taxes or any capital levy assessed upon the
Landlord), or upon the estate hereby created, or upon the Landlord by reason
of ownership of the reversion.
The Tenant shall, upon written notice from the Landlord that the same is
required by any Mortgagee (as defined in Paragraph 21 hereof), prepay to the
Mortgagee or the Landlord monthly as Additional Rent, in the same manner as
Basic Rent, one-twelfth ( 1/12) of the total of all such amounts as the
Landlord may from time to time reasonably estimate will be payable annually by
the Tenant under this Lease which prepayments the Landlord agrees shall be
applied, without interest (other than such interest as the Mortgagee may
credit or pay to the Landlord in respect thereof) to such amounts as actually
become payable. As soon as any such amounts so payable are actually
determined, appropriate adjustments of any overpayments and underpayments
shall be made.
Subject to the rights of any Mortgagees, the Landlord may, at the request of
the Tenant, use reasonable efforts to obtain an abatement of or to contest or
review by legal proceedings or otherwise any such tax, levy, charge or
assessment. In such event the Tenant shall pay such tax, levy, charge or
assessment (under protest, if necessary). The Tenant shall pay as Additional
Rent (i) any such tax, levy, charge or assessment that may be determined to be
due and (ii) such reasonable costs or expenses (including reasonable
attorneys' fees) the Landlord may incur in connection with any such
proceedings. The Tenant shall be entitled to share in any refund or abatement,
net of such costs and expenses, which may be made of any tax, levy, charge or
assessment in the same proportion that the same was paid by the Tenant or with
the Tenant's funds.
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<PAGE>
8. INSURANCE; WAIVERS OF SUBROGATION
The Tenant shall, at its own cost and expense, obtain and throughout the
Term shall maintain, with companies qualified to do business in Massachusetts
and acceptable to any Mortgagees and reasonably acceptable to the Landlord,
for the benefit as additional insureds of the Landlord and any Mortgagees as
their respective interests may appear, comprehensive general liability
insurance (with contractual liability rider) against claims for bodily injury,
death or property damage occurring to, upon or about the Premises in limits of
$1,000,000 for bodily injury or death and property damage occurring to, upon
or about the Premises. The risk of loss to all contents of, and personal
property and trade fixtures located in, the Premises is upon the Tenant, and
the Landlord shall have no liability with respect thereto.
The Landlord and the Tenant each hereby release the other from any liability
for any loss or damage to the Building, the Premises or other property and for
injury to or death of persons occurring on the Property or in the Building or
the Premises or in any manner growing out of or connected with the Tenant's
use and occupation of the Premises, the Building or the Property or the
condition thereof, whether or not caused by the negligence or other fault of
the Landlord, the Tenant or their respective agents, employees, subtenants,
licensees, invitees or assignees; provided, however, that this release (i)
shall apply notwithstanding the indemnities set forth in Paragraph 14, but
only to the extent that such loss or damage to the Building or other property
or injury to or death of persons is covered by insurance which protects the
Landlord or the Tenant or both of them as the case may be; (ii) shall not be
construed to impose any other or greater liability upon either the Landlord or
the Tenant than would have existed in the absence hereof; and (iii) shall be
in effect only to the extent and so long as the applicable insurance policies
provide that this release shall not affect the right of the insureds to
recover under such policies, which clauses shall be obtained by the parties
hereto whenever available.
9. UTILITIES
The Tenant shall pay directly to the utility company for all electricity
(which includes heat and air conditioning) provided to the Premises, as
measured through separate meters serving different areas within the Building.
The Landlord shall provide all other utility services to the Premises, shall
furnish reasonable heat and air conditioning (the costs of which shall be paid
by the Tenant as set forth above) during normal business hours on regular
business days of the heating and air conditioning seasons of the year and
reasonable hot and cold water, shall light the passageways and stairways of
the Building during normal business hours on regular business days, and shall
provide such cleaning services as are customary in similar buildings in the
Bedford area, all subject to interruption due to accidents, the performance of
repairs or improvements, labor difficulties, difficulties in obtaining
supplies from the sources from which they are usually obtained, or to any
cause beyond the Landlord's control.
The Landlord shall have no obligation to provide utilities or equipment
other than those provided to or located in the Premises as of the date hereof.
In the event the Tenant shall require additional utilities or equipment, the
installation or maintenance thereof shall be solely the obligation of the
Tenant (provided, however, that the Landlord has given his prior written
consent to any such installation).
10. REPAIRS
From and after the commencement of and during the Term, the Tenant shall, at
its own cost and expense: (i) make interior non-structural repairs,
replacements and renewals necessary to keep the Premises in as good condition,
order and repair as the same are at the commencement of the Term or thereafter
may be put, reasonable wear and use and damage by fire or other casualty only
excepted (it being understood, however, that the foregoing exception for
reasonable wear and use shall not relieve the Tenant from the obligation to
keep the Premises in good order, repair and condition); and (ii) keep and
maintain all portions of the Building in a clean and orderly condition, free
of accumulation of dirt, rubbish, and other debris.
From and after the commencement of and during the Term, the Landlord shall
make all necessary repairs, replacements and renewals, interior and exterior,
structural and non-structural: at his own cost and expense to
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<PAGE>
keep the roof of the Building free of leaks and to maintain the foundation,
floor slabs and other structural supports of the Building in good and sound
condition, maintenance and repairs occasioned by the acts or negligence of the
Tenant or its agents excepted unless such acts or negligence are covered by
the release provided in Paragraph 8 hereof; and as Common Expenses as in
Paragraph 6 defined to keep the electrical, plumbing and other building
systems serving the Building and the parking areas, sprinklers and other
improvements on the Property in as good condition, order and repair as the
same are at the commencement of the Term or thereafter may be put, damage by
fire or other casualty only excepted; keep all driveways, walkways, parking
areas and other improvements on the Property free of snow and sanded as
appropriate; and keep all lawns and landscaped areas of the Property watered,
fertilized and neatly trimmed.
11. COMPLIANCE WITH LAWS AND REGULATIONS
The Tenant agrees that its obligations to make payment of the Basic Rent,
Additional Rent and all other charges on its part to be paid, and to perform
all of the covenants and agreements on its part to be performed during the
Term hereunder shall not, except as set forth in Paragraph 15 in the event of
casualty to the Premises or in Paragraph 16 in the event of condemnation by
public authority, be affected by any present or future law, by-law, ordinance,
code, rule, regulation, order or other lawful requirement regulating or
affecting the use which may be made of the Premises.
During the Term the Tenant shall comply, at its own cost and expense, with:
all applicable laws, by-laws, ordinances, codes, rules, regulations, orders,
and other lawful requirements of the governmental bodies having jurisdiction,
which are applicable to, or by reason of, the Tenant's particular use of the
Premises (as opposed to office, research and development and light
manufacturing uses generally) or the fixtures and equipment therein and
thereon; the orders, rules and regulations of the National Board of Fire
Underwriters, or any other body hereafter constituted exercising similar
functions, which may be applicable to the Premises, the fixtures and equipment
therein or thereon or the use thereof; and the requirements of all policies of
public liability, fire and all other types of insurance at any time in force
with respect to the Premises, the Building or the Property and the fixtures
and equipment therein and thereon.
12. ALTERATIONS BY TENANT
The Tenant shall erect no signs and shall make no alterations, additions or
improvements in or to any portion of the Premises or any portion of the
Building or the Property without the Landlord's prior written consent and
without first providing the Landlord with suitable assurance of the Tenant's
obligation to complete the same at no expense to the Landlord and without any
mechanics' or materialmen's lien upon the Property. The Landlord agrees that
its consent shall not be unreasonably withheld for interior, non-structural
alterations, additions and improvements to the Premises consistent with the
use of the Premises as contemplated hereby; any such consents to interior,
non-structural alterations, additions and improvements may, if the Landlord so
advises the Tenant as part of or by notice at the time of any such consent, be
conditioned upon the Tenant's being obligated to remove the same at the
expiration or termination of this Lease and to restore the Premises to their
condition prior to such alterations, additions and improvements.
The Landlord is aware of the Tenant's intentions to subdivide the second
floor and sublease a majority portion located in the front of the Building,
and hereby consents to the use of partitions to this end. The Landlord will
erect such partitions at the Tenant's request upon reasonable prior notice,
and will use its best to have such partitions completed prior to December 1,
1997. In the event the Tenant does not request that the Landlord erect the
partitions, the Landlord will similarly use its best efforts to provide the
Tenant with access to the Premises prior to December 1, 1997 so that the
Tenant may erect the partitions itself (it being understood and agreed that
such early access shall be governed by and subject to the terms and provisions
of this Lease). In all events, the partitions shall be erected at the sole
cost and expense of the Tenant and must be removed by the Tenant upon the
expiration or earlier termination of this Lease.
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<PAGE>
13. LANDLORD'S ACCESS
The Tenant agrees to permit the Landlord and any Mortgagees and their
authorized representatives to enter the Premises (i) at all reasonable times
after at least 24 hours' prior oral notice during usual business hours for the
purposes of inspecting the same, exercising such other rights as it or they
may have hereunder or under any mortgages and exhibiting the same to other
prospective tenants, purchasers or mortgagees and (ii) at any time and without
notice in the event of emergency. In exercising such rights, the Landlord
shall use due diligence to minimize or prevent inconvenience to the Tenant.
14. INDEMNITIES
The Tenant agrees to protect, defend (with counsel approved by the
Landlord), indemnify and save the Landlord harmless from and against any and
all claims and liabilities (other than claims and liabilities resulting from
the Landlord's negligence or misconduct or that of its agents, employees,
licensees or invitees) arising: (i) from the conduct or management of or from
any work or thing whatsoever done in or about the Premises during the Term and
from any condition existing, or any injury to or death of persons or damage to
property occurring or resulting from an occurrence, during the Term in or
about the Premises; and (ii) from any negligent act or omission on the part of
the Tenant or any of its agents, employees, subtenants, licensees or
assignees. The Tenant further agrees to indemnify the Landlord from and
against all costs, expenses (including reasonable attorneys' fees) and other
liabilities incurred in connection with any such indemnified claim or action
or proceeding brought thereon, any and all of which, if reasonably suffered,
paid or incurred by the Landlord, the Tenant shall pay promptly upon demand to
the Landlord as Additional Rent.
15. CASUALTY DAMAGE
Except as provided below, in the event of partial or total destruction of
the Building during the Term by fire or other casualty, the Landlord shall, as
promptly as practicable after receipt of any insurance proceeds available as a
result of such casualty, repair, reconstruct or replace the portions of the
Building destroyed as nearly as possible to their condition prior to such
destruction, except that in no event shall the Landlord be obligated to expend
more for such repair, reconstruction or replacement than the amounts of any
such insurance proceeds actually received. During the period of such repair,
reconstruction and replacement there shall be an equitable abatement of Basic
Rent hereunder for up to one (1) year from the date of such casualty in
proportion to the loss of usable floor area in the Building.
If the Building is so extensively destroyed by fire or other casualty that
an independent engineer or architect certifies that it cannot reasonably be
expected to be susceptible of repair, reconstruction or replacement within a
period of six (6) months from the date work were to commence thereon, or if
any damage results from causes or risks not required to be insured against by
the Landlord hereunder or if any Mortgagee refuses to make such net proceeds
available for such repair, reconstruction or replacement, then either of the
Landlord or the Tenant may terminate this Lease by giving written notice to
the other within thirty (30) days after the date of such destruction. Provided
further, that if, despite diligent efforts, the Landlord has been unable to
restore the Premises to their condition prior to such destruction within nine
(9) months following the date of such casualty, then either of the Landlord or
the Tenant may terminate this Lease by written notice to the other. In the
event of any such notice of termination, this Lease shall terminate as of, and
Basic Rent and Additional Rent shall be appropriately apportioned through and
abated from and after, the date of such notice of termination.
16. CONDEMNATION
If more than 20% of the usable floor area of the Building, or more than 20%
of the parking spaces designated for use by the Tenant shall be taken by
eminent domain or appropriated by public authority, the Landlord may terminate
this Lease by giving written notice to the Tenant within thirty (30) days
after such taking or appropriation. In the event of such a termination, this
Lease shall terminate as of the date the Tenant must surrender possession or,
if later, the date the Tenant actually surrenders possession, and the Basic
Rent and Additional Rent reserved shall be apportioned and paid to and as of
such date.
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If all or any part of the Premises is taken or appropriated by public
authority as aforesaid and this Lease is not terminated as set forth above,
the Landlord shall, subject to the rights of any Mortgagees, apply any such
damages and compensation awarded (net of the costs and expenses, including
reasonable attorneys' fees, incurred by the Landlord in obtaining the same) to
secure and close so much of the Premises as remain and shall restore the
Building to an architectural whole and except that in no event shall the
Landlord be obligated to expend more for such replacement than the net amount
of any such damages, compensation or award which the Landlord may have
received as damages in respect of the Building and any other improvements
situated on the Property as they existed immediately prior to such taking or
appropriation; in such event there shall be an equitable abatement of Basic
Rent in proportion to the loss of usable floor area in the Premises after
giving effect to such restoration, from and after the date the Tenant must
surrender possession or, if later, the date the Tenant actually surrenders
possession.
The Landlord hereby reserves, and the Tenant hereby assigns to the Landlord,
any and all interest in and claims to the entirety of any damages or other
compensation by way of damages which may be awarded in connection with any
such taking or appropriation, except so much of such damages or award as is
specifically and separately awarded to the Tenant and expressly attributable
to trade fixtures or moving expenses of the Tenant.
17. LANDLORD'S COVENANT OF QUIET ENJOYMENT; TITLE
The Landlord covenants that the Tenant, upon paying the Basic Rent and
Additional Rent provided for hereunder and performing and observing all of the
other covenants and provisions hereof, may peaceably and quietly hold and
enjoy the Premises for the Term as aforesaid, subject, however, to all of the
terms and provisions of this Lease and to the title matters set forth or
referred to in Exhibit A attached hereto.
18. TENANT'S OBLIGATION TO QUIT; HOLDOVER
The Tenant shall, upon expiration of the Term or other termination of this
Lease, leave and peaceably and quietly surrender and deliver to the Landlord
the Premises and any replacements or renewals thereof broom clean and in the
order, condition and repair required by Paragraph 10 hereof and the other
provisions of this Lease, except, however, that the Tenant shall first remove
any trade fixtures and equipment and any alterations, additions and
improvements which the Landlord has required be removed pursuant to the terms
of Paragraph 12 hereof, restoring the Premises in each case to their condition
prior to the installation of such fixtures or the undertaking of such
alterations, additions or improvements, as the case may be. If the Tenant
shall fail timely to surrender the Premises, Basic Rent henceforth shall be
payable to the Landlord at a rate equal to 1.5 times the rate of Basic Rent in
effect immediately prior thereto until the Premises are surrendered by the
Tenant and delivered to the Landlord in accordance with this Paragraph 18. If
the Tenant shall fail so to remove its fixtures, equipment, alterations,
additions and improvements, they shall be deemed abandoned by the Tenant and
the Landlord may remove and dispose of the same at the Tenant's expense. The
provisions of this Paragraph 18 shall expressly survive the termination or
expiration of this Lease.
19. TRANSFERS OF TENANT'S INTEREST
The Tenant shall not assign or sublease or otherwise encumber all or any
part of its interest in this Lease, the Premises, or the estate hereby
created, without in each case first obtaining the prior written consent of the
Landlord, which such consent shall not be unreasonably withheld so long as the
Tenant originally named herein shall continue to occupy the majority of the
space in the Building. In all events, the Landlord may condition the consent
to any sublease or assignment upon the Tenant's agreeing to pay to the
Landlord fifty percent (50%) of the net amount by which any rentals and other
amounts from time to time payable to or for the Tenant under any subleases
exceed the sum of the Basic Rent and Additional Rent from time to time payable
hereunder and the expenses actually incurred by the Tenant in thus subleasing
the Premises (including, without limitation, the associated costs of
installing partitions, the estimated costs of removing such partitions to the
extent removal is required by the Landlord, and costs of real estate agents
used in connection with the sublease), and upon the
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sublessee's or assignee's agreement to obtain the consent of the Landlord to
any future or further sublease or assignment of its interest under this Lease.
The Landlord shall have the right to inspect, after reasonable advance notice,
all records relating to the costs claimed to have been incurred by the Tenant
pursuant to the previous sentence. Any attempted assignment without the
consent of the Landlord as contemplated hereby shall be void. Any change in
ownership or power to vote of a majority of the outstanding stock of the
Tenant from the owners of such stock or those controlling the power to vote of
such stock shall constitute an assignment for purposes of this Lease.
Notwithstanding anything contained herein to the contrary, the Tenant shall
have the right to assign its interest in the Lease or to sublet the whole or
any part of the Premises to any entity that controls, is controlled by, or is
under common control with the Tenant, or in connection with the consolidation,
merger, restructuring or reorganization of the Tenant or the sale by the
Tenant of all or any significant portion of its stock or assets, and in none
of the foregoing events shall the consent of the Landlord be required;
provided, however, that any such assignee must agree in writing to be bound by
the terms of this Lease and to assume the obligations of the Tenant hereunder.
In all events the Tenant originally named herein and any guarantor of the
obligations of the Tenant under this Lease shall, except to the extent of so
much of the Premises as the Landlord elects to lease directly to any proposed
sublease or assignee as above provided, remain primarily and jointly and
severally liable for, and any sublessee or assignee shall in writing assume,
the obligations of the Tenant under this Lease.
The Tenant shall reimburse the Landlord as Additional Rent, upon demand, for
any costs that may be incurred by the Landlord in connection with any proposed
assignment or sublease and any request for consent thereto, including without
limitation the costs of making investigations as to the acceptability of any
proposed assignee or subtenant, and attorneys' fees.
20. TRANSFERS OF LANDLORD'S INTEREST
The Landlord shall have the right from time to time to sell or mortgage its
interest in the Premises, to assign its interest in this Lease, or to assign
from time to time the whole or any portion of the Basic Rent, Additional Rent
or other sums and charges at any time paid or payable hereunder by the Tenant
to the Landlord, to any Mortgagees or other transferees designated by the
Landlord in duly recorded instruments, and in any such case the Tenant shall
pay the Basic Rent, Additional Rent and such other sums and charges so
assigned, subject to the terms of the Lease, upon demand to such Mortgagees
and other transferees at the addresses mentioned in and in accordance with the
terms of such instruments.
21. MORTGAGEES' RIGHTS
The Tenant hereby agrees that this Lease is and shall be subject and
subordinate to any mortgage (and to any amendments, extensions, increases,
refinancings or restructurings thereof) of the Premises, whether or not such
mortgage is filed subsequent to the execution, delivery or the recording of
this Lease or any notice hereof (the holder from time to time of any such
mortgage being in this Lease sometimes called the "Mortgagee"). The foregoing
subordination shall be self-operative and automatically effective, and the
Tenant hereby agrees to execute, acknowledge and deliver in recordable form
such instruments confirming and evidencing the foregoing subordination as the
Landlord or any such Mortgagee may from time to time reasonably require. The
Landlord agrees to use its best efforts to obtain a subordination, non-
disturbance and attornment agreement in the Tenant's favor from any Mortgagee
of the Premises.
Provided that the Tenant has been provided with notice of such mortgage and
appropriate addresses to which notice should be sent, no notice from the
Tenant of any default by the Landlord in its obligations shall be valid, and
the Tenant shall not attempt to terminate this Lease, withhold Basic Rent or
Additional Rent or exercise any other remedy which may arise under law by
reason of any such default (it being understood that no such remedy exists, or
is implied by reason of this provision, under this Lease), unless the Tenant
first gives
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such notice to any Mortgagees and provides such Mortgagees with sixty (60)
days after such notice to cure such default, or if such default is not
reasonably susceptible of cure by Mortgagees (as in the case of the need to
obtain possession of or right of entry into or upon the Premises) in sixty
(60) days, with such longer period of time (not to exceed an additional thirty
(30) days) as is reasonably necessary to cure such default, provided efforts
to effectuate such cure are commenced within sixty (60) days and thereafter
prosecuted to completion with reasonable diligence. The Tenant shall and does
hereby agree, upon default by the Landlord under any mortgage, to attorn to
and recognize the Mortgagee or anyone else claiming under such mortgage,
including a purchaser at a foreclosure sale, at its request as successor to
the interest of the Landlord under this Lease, to execute, acknowledge and
deliver such evidence of this attornment, which shall nevertheless be self-
operative and automatically effective, as the Mortgagee or such successor may
request and to make payments of Basic Rent and Additional Rent hereunder
directly to the Mortgagee or any such successor, as the case may be, upon
request. Any Mortgagee may, at any time, by giving written notice to, and
without any further consent from, the Tenant, subordinate its mortgage to this
Lease, and thereupon the interest of the Tenant under this Lease shall
automatically be deemed to be prior to the lien of such mortgage without
regard to the relative dates of execution, delivery or filing thereof or
otherwise.
22. TENANT'S DEFAULT; LANDLORD'S REMEDIES
If (i) the Tenant shall default in the payment when due of any Basic Rent or
Additional Rent, or if the Tenant shall default in the timely performance or
observance of any of the other covenants contained in these presents and on
the Tenant's part to be performed or observed within five (5) days after
written notice of such default in payment, performance or observance by the
Landlord to the Tenant, (ii) if the estate hereby created shall be taken on
execution, or (iii) by other process of law, or if the Tenant shall be
involved in financial difficulties as evidenced
(1) by its commencement of a voluntary case under Title 11 of the United
States Code as from time to time in effect, or by its authorizing, by
appropriate proceedings of trustees or other governing body the
commencement of such a voluntary case,
(2) by its filing an answer or other pleading admitting or failing to
deny the material allegations of a petition filed against it commencing an
involuntary case under said Title 11, or seeking, consenting to or
acquiescing in the relief therein provided, or by its failing to controvert
timely the material allegations of any such petition,
(3) by the entry of an order for relief in any involuntary case commenced
under said Title 11,
(4) by its seeking relief as a debtor under any applicable law, other
than said Title 11, of any jurisdiction relating to the liquidation or
reorganization of debtors or to the modification or alteration of the
rights of creditors, or by its consenting to or acquiescing in such relief.
(5) by the entry of an order by a court of competent jurisdiction (i)
finding it to be bankrupt or insolvent, (ii) ordering or approving its
liquidation, reorganization or any modification or alteration of the rights
of its creditors, or (iii) assuming custody of, or appointing a receiver or
other custodian for, all or a substantial part of its property, or
(6) by its making an assignment for the benefit of, or entering into a
composition with, its creditors, or appointing or consenting to the
appointment of a receiver or other custodian for all or a substantial part
of its property;
then and in any of said cases, the Landlord may, to the extent permitted by
law, immediately or at any time thereafter and without demand or notice,
terminate this Lease and enter into and upon the Premises, or any part thereof
in the name of the whole, and repossess the same as of the Landlord's former
estate, and expel the Tenant and those claiming through or under the Tent and
remove its effects without being deemed guilty of any manner of trespass, and
without prejudice to any remedies which might otherwise be used for arrears of
rent or preceding breach of covenant.
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No termination or repossession provided for in this Paragraph 22 shall
relieve the Tenant or any guarantor of the obligations of the Tenant under
this Lease of its liabilities and obligations under this Lease, all of which
shall survive any such termination or repossession. In the event of any such
termination or repossession, the Tenant shall pay to the Landlord either (i)
in advance on the first day of each month, for what would have been the entire
balance of the Term, one-twelfth ( 1/12) (and a pro rata portion thereof for
any fraction of a month) of the annual Basic Rent, Additional Rent and all
other amounts for which the Tenant is obligated hereunder, less, in each case,
the actual net receipts by the Landlord by reason of any reletting of the
Premises after deducting the Landlord's reasonable expenses in connection with
such reletting, including, without limitation, removal, storage and repair
costs and reasonable brokers' and attorneys' fees, or (ii) upon demand and at
the option of the Landlord exercisable by the Landlord's giving notice to the
Tenant within thirty (30) days after any such termination, the present value
(computed at a capitalization rate based upon the so-called "Prime Rate" then
in effect at The First National Bank of Boston) of the amount by which the
payments of Basic Rent and Additional Rent reasonably estimated to be payable
for the balance of the Term after the date of the exercise of said option
would exceed the payments reasonably estimated to be the fair rental value of
the Premises on the terms and conditions of this Lease over such period,
determined as of such date.
Without thereby affecting any other right or remedy of the Landlord
hereunder, the Landlord may, at its option and after reasonable prior notice
to the Tenant, cure for the Tenant's account any default by the Tenant
hereunder which remains uncured after said thirty (30) days' notice of default
from the Landlord to the Tenant, and the cost to the Landlord of such cure
shall be deemed to be Additional Rent and shall be paid to the Landlord by the
Tenant with the installment of Basic Rent next accruing. It is understood and
agreed that nothing in this paragraph shall be deemed to extend or enlarge any
notice and cure periods beyond those set forth in the first paragraph of this
Paragraph 22.
23. REMEDIES CUMULATIVE; WAIVERS
The specific remedies to which the Landlord may resort under the terms of
this Lease are cumulative and are not intended to be exclusive of any other
remedies or means of redress to which the Landlord may be lawfully entitled in
any provision of this Lease or otherwise. The failure of the Landlord or the
Tenant to insist in any one or more cases upon the strict performance of any
of the covenants of this Lease, or to exercise any option herein contained,
shall not be construed as a waiver or relinquishment for the future of such
covenant or option. A receipt by the Landlord, or payment by the Tenant, of
Basic Rent or Additional Rent with knowledge of the breach of any covenant
hereof shall not be deemed a waiver of such breach, and no waiver, change,
modification or discharge by the Landlord or the Tenant of any provision in
this Lease shall be deemed to have been made or shall be effective unless
expressed in writing and signed by an authorized representative of the
Landlord or the Tenant as appropriate. In addition to the other remedies in
this Lease provided, the Landlord shall be entitled to the restraint by
injunction of the covenants, conditions or provisions of this Lease, or to a
decree compelling performance of or compliance with any of such covenants,
conditions or provisions.
24. BROKERS
The Landlord and the Tenant each warrant and represent to the other that
each has not dealt with any broker in connection with the Premises or this
Lease. The Landlord and the Tenant each hereby indemnifies and holds the other
harmless from and against any liability for commissions due any broker or
finder with whom each has dealt in connection with this Lease.
25. NOTICES
Any notices, approvals, specifications, or consents required or permitted
hereunder shall be in writing and mailed, postage prepaid, by registered or
certified mail, return receipt requested, if to the Landlord or the Tenant at
the addresses set forth herein, and if to any Mortgagee at such address as it
may specify by such notice to the Landlord and the Tenant, or at such other
address as any of them may from time to time specify by like notice to the
others. Any such notice shall be deemed given when mailed, except that if any
time period commences
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hereunder with notice, such time period shall be deemed to commence when such
notice is delivered or, if earlier, when postal records indicate delivery was
first attempted.
26. ESTOPPEL CERTIFICATES
The Landlord and the Tenant hereby agree from time to time, each after not
less than ten (10) days' prior written notice from the other or any Mortgagee,
to execute, acknowledge and deliver, without charge, to the other party, the
Mortgagee or any other person designated by the other party, a statement in
writing certifying: that this Lease is unmodified and in full force and effect
(or if there have been modifications, identifying the same by the date thereof
and specifying the nature thereof); that to the knowledge of such party there
exist no defaults (or if there be any defaults, specifying the same); the
amount of the Basic Rent, the dates to which the Basic Rent, Additional Rent
and other sums and charges payable hereunder have been paid; and that such
party to its knowledge has no claims against the other party hereunder except
for the continuing obligations under this Lease (or if such party has any such
claims, specifying the same).
27. BIND AND INURE; LIMITED LIABILITY OF LANDLORD
All of the covenants, agreements, stipulations, provisions, conditions and
obligations herein expressed and set forth shall be considered as running with
the land and shall extend to, bind and inure to the benefit of the Landlord
and the Tenant, which terms as used in this Lease shall include their
respective successors and assigns where the context hereof so admits.
The Landlord shall not have any individual or personal liability for the
fulfillment of the covenants, agreements and obligations of the Landlord
hereunder, the Tenant's recourse and the Landlord's liability hereunder being
limited to the Property and the Building. The term "Landlord" as used in this
Lease shall refer only to the owner or owners from time to time of the
Property or the Building, it being understood that no such owner shall have
any liability hereunder for matters arising from and after the date such owner
ceases to have any interest in the Property or the Building.
In no event shall the Landlord be liable to the Tenant for any special,
consequential or indirect damages suffered by the Tenant or any other person
or entity by reason of a default by the Landlord under any provisions of this
Lease.
28. ENVIRONMENTAL COMPLIANCE
Tenant hereby covenants to Landlord that: (a) Tenant shall (i) comply with
all Laws applicable to the discharge, generation, manufacturing, removal,
transportation, treatment, storage, disposal and handling of Hazardous
Materials or Wastes as apply to the activities of the Tenant, its directors,
officers, employees, agents, contractors, subcontractors, licensees, invitees,
successors and assigns at the Premises, (ii) remove any Hazardous Materials or
Wastes from the Premises (other than such as preceded the Tenant's occupancy
of any portion of the Premises) immediately upon discovery of same if the same
are not being stored and used in accordance with all applicable Laws and
orders of governmental authorities having jurisdiction, (iii) pay or cause to
be paid all costs associated with such removal including restoration of the
Premises, and (iv) indemnify Landlord from and against all losses, claims and
costs arising out of the migration of Hazardous Materials or Wastes from or
through the Premises into or onto or under other properties; (b) Tenant shall
keep the Premises free of any lien imposed pursuant to any applicable Law in
connection with the existence of Hazardous Materials or Wastes in or on the
Premises; (c) Tenant shall not install or permit to be installed or to exist
in the Premises any asbestos, asbestos-containing materials, urea formaldehyde
insulation or except to the extent the same are stored and used in accordance
with all applicable laws and orders of governmental authorities having
jurisdiction any other chemical or substance which has been determined to be a
hazard to health and environment; (d) Tenant shall not cause or permit to
exist, as a result of an intentional or unintentional act or omission on the
part of Tenant or any occupant of the Premises, a releasing, spilling,
leaking, pumping, emitting, pouring, discharging, emptying or dumping of any
Hazardous Materials or Wastes onto the Premises; (e) Tenant shall give all
notifications and
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prepare all reports required by Laws or any other law with respect to
Hazardous Materials or Wastes existing on, released from or emitted from the
Premises; (f) Tenant shall promptly notify Landlord in writing of any release,
spill, leak, emittance, pouring, discharging, emptying or dumping of Hazardous
Materials or Wastes in or on the Premises; and (g) Tenant shall promptly
notify Landlord in writing of any summons, citation, directive, notice, letter
or other communication, written or oral, from any local, state or federal
governmental agency, or of any claim or threat of claim known to Tenant, made
by any third party relating to the presence or releasing, spilling, leaking,
pumping, emitting, pouring, discharging, emptying or dumping of any Hazardous
Materials or Wastes onto the Premises. The foregoing covenants shall not apply
to Hazardous Materials or Wastes existing in the Premises prior to the date of
this Lease.
The term "Hazardous Materials or Wastes" shall mean any hazardous or toxic
materials, pollutants, chemicals, or contaminants, including without
limitation asbestos, asbestos-containing materials, urea formaldehyde foam
insulation, polychlorinated biphenyls (PCBs) and petroleum products as
defined, determined or identified as such in any Laws, as hereinafter defined,
as well as any biomedical materials, products or substances generated, stored,
handled, disposed or otherwise used by the Tenant at the Premises. The term
"Laws" means any federal, state, county, municipal or local laws, rules or
regulations (whether now existing or hereinafter enacted or promulgated)
including, without limitation, the Clean Water Act, 33 U.S.C. (S) 1251 et seq.
1972), the Clean Air Act, 42 U.S.C.(S) 7401 et seq. (1970), the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42
U.S.C. Subsection 1802, and The Resource Conservation and Recovery Act, 42
U.S.C. Subsection 6901 et seq., any similar state laws, as well as any
judicial or administrative interpretation thereof, including any judicial or
administrative orders or judgments.
Tenant hereby agrees to defend, indemnify and hold harmless Landlord, its
employees, agents, contractors, subcontractors, licensees, invitees,
successors and assigns from and against any and all claims, losses, damages,
liabilities, judgements, costs and expenses (including, without limitation,
attorneys' fees and costs incurred in the investigation, defense and
settlement of claims or remediation of contamination) incurred by such
indemnified parties as a result of or in connection with the presence at or
removal of Hazardous Materials or Wastes from the Premises (except for
Hazardous Materials or Wastes existing at the Premises prior to the date of
this Lease) or as a result of or in connection with activities prohibited
under this Paragraph 28. Tenant shall bear, pay and discharge, as and when the
same become due and payable, any and all such judgments or claims for damages,
penalties or otherwise against such indemnified parties, shall hold such
indemnified parties harmless against all claims, losses, damages, liabilities,
costs and expenses, and shall assume the burden and expense of defending all
suits, administrative proceedings, and negotiations of any description with
any and all persons, political subdivisions or government agencies arising out
of any of the occurrences set forth in this Paragraph 28.
The Landlord hereby agrees to defend, indemnify and hold the Tenant harmless
from and against any and all loss, cost, damage, claim or expense (including
attorneys' fees) incurred in connection with or arising out of or relating in
any way to the presence of Hazardous Materials or Waste existing at the
Premises prior to the Tenant's occupancy of any part thereof.
29. CAPTIONS
The captions for the numbered Paragraphs of this Lease are provided for
reference only and they do not constitute a part of this agreement or any
indication of the intentions of the parties hereto.
30. INTEGRATION
The parties acknowledge that all prior written and oral agreements between
them and all prior representations made by either party to the other have been
incorporated in this instrument or otherwise satisfied prior to the execution
hereof.
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31. SEVERABILITY; CHOICE OF LAW
If any provision of this Lease shall be declared to be void or unenforceable
either by law or by a court of competent jurisdiction, the validity or
enforceability of remaining provisions shall not thereby be affected.
This Lease is made under, and shall be construed in accordance with, the
laws of The Commonwealth of Massachusetts.
32. SECURITY DEPOSIT
The Landlord hereby acknowledges that the Tenant has previously paid to him
the amount of $8,479.17, which shall be held as a security for the Tenant's
performance as herein provided and refunded to the Tenant at the end of this
Lease subject to the Tenant's satisfactory compliance with the conditions
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in quadruplicate under seal as of the date first above written.
Landlord
/s/ Robert W. Connelly
_____________________________________
Robert W. Connelly
Tenant
Cambridge Heart, Inc.
/s/ Jeffrey M. Arnold
By: _________________________________
Name:Jeffrey M. Arnold
Title:Chief Executive Officer
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EXHIBIT A
LEGAL DESCRIPTION OF PREMISES
A certain parcel of land situated in the Town of Bedford, County of
Middlesex, Commonwealth of Massachusetts, known as Lot 4, Land Court Case
11345 and more particularly described as follows:
BEGINNING at the northeasterly corner of said parcel, same point
being on the westerly sideline of Middlesex Turnpike and
at land of Frost as shown on said plan;
THENCE running along the westerly sideline of Middlesex Turnpike
S42(degrees) -51'-31'E Three Hundred Two and 28/100
(308.28) feet to a point of curvature
THENCE turning and running by a curved line to the right having
an arc of Seventy-eight and 54/100 (78.54) and a radius
of Fifty (50.00) feet to a point of tangency on the
westerly sideline of Oak Park Drive;
THENCE running along the westerly sideline of Oak Park Drive
S47(degrees) -08'-27'W One Hundred Forty-Eight and 50/100
(148.50) feet to a point;
THENCE turning and running N59(degrees) -21'-30'W One Hundred
Fifty-Six and 23/100 feet to a point;
THENCE turning and running S77(degrees) -25'-28'W Sixty-Six
(66.00) feet to a point
THENCE turning and running N57(degrees) -43'-28'W Eighty-Nine
and 89/100 (89.89) feet to a point;
THENCE turning and running N39(degrees) -45'-16'W Sixty-Three
and 89/100 (63.89) feet to a point;
THENCE turning and running N43(degrees) -49'-21'E Three Hundred
Twenty (320.00) feet to the point of beginning.
Subject to the matters set forth or referred to in the Landlord's Owner's
Duplicate Certificate of Title No. 167175.
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EXHIBIT 10.22
SUBLEASE
This SUBLEASE (the "Sublease") is dated as of the 30th day of January, 1998
by and between CAMBRIDGE HEART, INC., a Massachusetts corporation
("Sublandlord"), and PINPOINT CORPORATION, a Delaware corporation
("Subtenant").
R E C I T A L S
WHEREAS, pursuant to that certain Amended and Restated Lease dated as of
October 22, 1995 by and between Robert W. Connelly ("Prime Landlord"), as
landlord, and Sublandlord, as tenant, (the "Prime Lease"), a copy of which
Lease is attached hereto as Exhibit A, Sublandlord leased from Prime Landlord
certain premises (the "Original Premises") located in the building commonly
known as One Oak Park Drive, Bedford, Massachusetts (the "Building"), which
Original Premises contain approximately 22,000 rentable square feet of space,
as more fully described in the Prime Lease; and
WHEREAS, Subtenant desires to sublease from Sublandlord a portion of the
Original Premises containing approximately 7,500 rentable square feet on the
second floor of the Building and more particularly shown on the floor plan
attached hereto as Exhibit B (the "Subleased Premises"), and Sublandlord is
willing to sublease the Subleased Premises to Subtenant on the provisions,
covenants and conditions hereinafter set forth.
A G R E E M E N T
NOW, THEREFORE, in consideration of Ten Dollars ($10.00), the mutual
covenants made herein, and other consideration, the receipt and sufficient of
which are hereby acknowledged and agreed, Sublandlord hereby subleases to
Subtenant and Subtenant hereby takes and hires from Sublandlord the Subleased
Premises, on the terms and conditions set forth below:
1. Defined Terms. All terms defined in the Prime Lease and used herein
shall, unless otherwise defined herein, have the meanings ascribed to such
terms in the Prime Lease.
2. Term. The term of this Sublease (the "Sublease Term") shall commence on
February 1, 1998 (the "Sublease Term Commencement Date"), and shall continue
until November 30, 1999, unless sooner terminated in accordance with the
provisions of this Sublease.
3. Delivery. The Subleased Premises shall be delivered to Subtenant on the
Sublease Term Commencement Date, broom-clean and free of all occupants but
otherwise "as-is, where-is and with all faults", without representation or
warranty, express or implied, and Subtenant hereby waives, disclaims and
renounces any representation or warranty. In the event construction of any
demising walls is necessary in connection with this Sublease, the same shall
be performed at Sublandlord's sole cost and expense in accordance with the
provisions of the Prime Lease. Other than construction of the demising walls,
Sublandlord shall have no obligation to make any improvements in or to the
Subleased Premises.
4. Base Rent. Subtenant shall pay to Sublandlord, in advance, monthly
installments, without withholding, offset or reduction, Base Rent at the rate
of $13.00 per rentable square foot per annum (i.e., $8,125 per month),
commencing on the Sublease Term Commencement Date. Base Rent for any partial
calendar months at the beginning or end of the Sublease Term shall be prorated
on a daily basis. Subtenant acknowledges that Sublandlord's payments of Base
Rent for the Original Premises are paid to Prime Landlord on the first day of
each calendar month during the Term and Subtenant therefore covenants and
agrees that its payments of Base Rent hereunder shall be paid to Sublandlord
at least two (2) business days prior to the first of each calendar month.
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5. Additional Rent. Subtenant acknowledges that pursuant to Section 6 and 7
of the Prime Lease, Sublandlord is obligated to pay to Prime Landlord
additional rent on account of operating costs, insurance and real estate taxes
for the Building, as more particularly described in such Sections. Subtenant
shall pay to Sublandlord with its monthly payment of Base Rent Subtenant's
proportionate share of Sublandlord's additional rent obligations under the
Prime Lease, such proportionate share being 34.09% (the number of rentable
square feet in the Subleased Premises expressed as a percentage of the number
of rentable square feet in the Original Premises, referred to hereinafter as
"Subtenant's Proportionate Share"). Sublandlord shall deliver to Subtenant
promptly after receipt thereof any statements of operating costs, insurance or
real estate taxes delivered to Sublandlord by Prime Landlord. Additional Rent
payable hereunder for any partial calendar month at the beginning or end of
the Sublease Term shall be pro-rated on a daily basis.
6. Use. The Subleased Premises shall be used for general office and research
and development uses and for uses ancillary thereto but for no other uses.
7. Prime Lease. Subtenant agrees that it will do nothing in, on or about the
Subleased Premises which would result in the breach by Sublandlord of its
undertakings and obligations under the Prime Lease. Except for the following
provisions, this Sublease shall be subject to and on all of the terms and
conditions as are contained in the Prime Lease and the provisions of the Prime
Lease are hereby incorporated into this Sublease as if Sublandlord were the
landlord thereunder and Subtenant the tenant thereunder:
A. The defined economic terms for "Base Rent," Term," Premises" and the
like are inapplicable;
B. Sections 6 and 7 of the Prime Lease (relating to additional rent) are
applicable, as modified by the provisions of Paragraph 5 of this Sublease;
C. Section 20 (relating to assignment and subletting) is inapplicable;
D. Section 24 of the Prime Lease (relating to brokers) is inapplicable;
and
E. Where appropriate, references to "Landlord" in the Prime Lease shall
be deemed to mean "Sublandlord" hereunder and references to "Tenant" in the
Prime Lease shall be deemed to mean "Subtenant" hereunder, it being
understood and agreed that Sublandlord will not be acting as, or assuming
any of the responsibilities of, Prime Landlord, and all references in the
Prime Lease to Landlord-provided services or Landlord insurance
requirements, and any other references which by their nature relate to the
owner or operator of the Building, rather than to a tenant of the Building
subleasing space to a subtenant, shall continue to be references to Prime
Landlord and not to Sublandlord.
8. Subtenant's Covenants. Subtenant covenants to Sublandlord to perform all
of the covenants and obligations to be performed by Sublandlord as Tenant
under the Prime Lease as the same relate to the Subleased Premises and to
comply with this Sublease and the applicable provisions of the Prime Lease, as
modified by this Sublease, in all respects (including, without limitation,
complying with all OSHA, environmental and other applicable laws, regulations
and standards). If Subtenant shall fail to make any payment or perform any act
required to be made or performed by Subtenant under the Prime Lease pursuant
to Subtenant's assumption of Sublandlord's obligations thereunder as they
relate to the Subleased Premises, and such default is not cured by Subtenant
by the first to occur of (i) one-half of the period specified in the Prime
Lease for curing such default, or (ii) five (5) days prior to the expiration
of such Prime Lease cure period, Sublandlord, without waiving or releasing any
obligation or default hereunder, may (but shall be under no obligation to)
make such payment or perform such act for the account and at the expense of
Subtenant, and may take any and all such actions as Sublandlord in its sole
discretion deems necessary or appropriate to accomplish such cure. If
Sublandlord shall reasonably incur any expense in remedying such default,
Sublandlord shall be entitled to recover such sums upon demand from Subtenant
as Additional Rent under this Sublease.
9. Sublandlord's Covenants. Sublandlord covenants to Subtenant to perform
all of the terms and provisions required of it under the Prime Lease and to
promptly pay when due all rents due and accruing to Prime Landlord.
Sublandlord will use reasonable efforts to enforce on behalf of Subtenant
Sublandlord's rights
B-2
<PAGE>
under the Prime Lease. Nothing contained in this Sublease shall be construed
as a guarantee by Sublandlord of any of the obligations, covenants,
warranties, agreements or undertakings of Prime Landlord in the Prime Lease,
nor as an undertaking by Sublandlord to Subtenant on the same or similar terms
as are contained in the Prime Lease.
10. Indemnification. Subtenant shall indemnify Sublandlord and hold
Sublandlord harmless from and against any and all claims, demands suits,
judgments, liabilities, costs and expenses, including reasonable attorneys
fees, arising out of or in connection with Subtenant's use and possession of
the Subleased Premises, or arising out of the failure of Subtenant, its
agents, contractors or employees to perform any covenant, term or condition of
this Sublease or of the Prime Lease to be performed by Subtenant hereunder.
Sublandlord shall indemnify Subtenant and hold Subtenant harmless from and
against any and all claims, demands, suits, judgments, liabilities, costs and
expenses, including reasonable attorneys fees, arising out of the failure of
Sublandlord to perform any covenant, term or condition of this Sublease or of
the Prime Lease to be performed by Sublandlord hereunder.
11. Assignment and Subletting. Subtenant shall not assign this Sublease in
whole or in part or sublet the Subleased Premises in whole or in part without
the prior written consent of Sublandlord, which may be withheld or conditioned
by Sublandlord in Sublandlord's sole and absolute discretion. No such sublease
or assignment shall be effective without the consent of Prime Landlord under
the Prime Lease. If, as to any sublease or assignment for which Sublandlord's
consent is necessary, Subtenant receives rent or other consideration in excess
of the Base Rent and Additional Rent payable under this Sublease, Subtenant
shall pay to Sublandlord all of such excess, after deducting Subtenant's
reasonable legal and brokerage expenses and fit--up expenses paid for by
Subtenant at the time of such subleasing or assignment. Amounts received by
Sublandlord under the immediately preceding sentence shall, after deducting
Sublandlord's reasonable legal expenses incurred in connection therewith, be
divided evenly between Prime Landlord and Sublandlord. If Sublandlord and
Prime Landlord consent to any such assignment or subletting, Subtenant shall
remain fully and primarily liable to Sublandlord, in all respects, under the
Sublease.
12. Security Deposit. Upon execution hereof, Subtenant has delivered to
Sublandlord the amount of $12,187.50 ("Subtenant's Security Deposit"), such
sum to be held by Sublandlord as security for the performance of Subtenant's
obligations under this Sublease. Upon the occurrence of any default by
Subtenant hereunder after expiration of all grace or cure periods, Subtenant
agrees that Sublandlord may apply all or any part of Subtenant's Security
Deposit, together with accrued interest, if any, to any obligation of
Subtenant hereunder. If all or any portion of Subtenant's Security Deposit is
applied by Sublandlord against any of Subtenant's obligations hereunder,
Subtenant shall promptly restore Subtenant's Security Deposit to its original
amount. Interest on Subtenant's Security Deposit shall in all instances be
retained by Sublandlord.
13. Brokers. Each of Sublandlord and Subtenant represents and warrants to
the other that it has not dealt with any broker in connection with this
Sublease other than Meredith & Grew (David Pergola, Jr.) and Freeman Realty
(James Freeman) ("Brokers"), and each agrees to indemnify, defend and hold the
other harmless from and against any breach of said representation and
warranty. Sublandlord shall be responsible for the commission to be paid to
Brokers pursuant to a separate agreement.
14. Uitlities. Subtenant shall be responsible for all utilities (including
light, plug and HVAC electricity) in the Subleased Premises, to be paid by
Subtenant to Sublandlord within ten (10) days after billing therefor.
Subtenant's payment obligation hereunder shall be equal to the utility costs
for the second floor of the Building (which second floor is separately
metered) times 68.2%, such percentage being the portion of the second floor
that is included within the Subleased Premises.
15. Parking. Subtenant shall be entitled to use Subtenant's Proportionate
Share of the parking spaces allocated to Sublandlord under the Prime Lease, on
a non--exclusive basis. Sublandlord shall have no obligation to police the
parking areas or enforce Subtenant's parking rights hereunder.
B-3
<PAGE>
16. Miscellaneous.
A. Counterparts. This instrument may be signed in counterpart originals,
which, taken together, shall constitute a single original instrument.
B. Notices. Notices to Sublandlord or Subtenant required or permitted
hereunder shall be sent in the manner prescribed in the Prime Lease to the
Premises in the case of notices to Sublandlord and to the Subleased Premises
in the case of notices to Subtenant.
C. Amendments. This Sublease may not be changed or terminated orally but
only by an agreement in writing signed by both Sublandlord and Subtenant.
D. Estoppel Certificates. Sublandlord and Subtenant each agree to furnish
within twenty (20) days after written request therefor by the other, a
certificate stating (i) that this Sublease is in full force and effect and has
not been amended or modified (or describing such amendment or modification, if
any); (ii) the dates through which Base Rent and additional rent have been
paid hereunder; and (iii) that there are no defaults under this Sublease known
to the signer of the certificate (or specifying such defaults, if known).
E. No Waiver. The failure of either party to insist on strict performance of
any covenant or condition hereof, or to exercise any option contained herein,
shall not be construed as a waiver of such covenant, condition or option in
any other instance.
F. Memorandum of Lease. Subtenant shall not record this Sublease or any
memorandum hereof.
G. Governing Law. This Sublease has been negotiated, executed and delivered
in the Commonwealth of Massachusetts, and the parties agree that the rights
and obligations of the parties under this Sublease shall be governed and
construed in accordance with the laws of the Commonwealth of Massachusetts.
H. Severability. The invalidity of any of the provisions of this Sublease
will not impair or affect in any manner the validity, enforceability or effect
of the rest of this Sublease.
I. Entire Agreement. All understandings and agreements, oral or written,
heretofore made between the parties hereto are merged in this Sublease, which
alone fully and completely expresses the agreement between Sublandlord and
Subtenant.
J. Relationship Between the Parties. This Sublease does not create the
relationship of principal and agent, nor does it create any partnership, joint
venture, or any association or relationship between Sublandlord and Subtenant
other than as and to the extent specifically provided in this Sublease, the
sole relationship of Sublandlord and Subtenant being that of sublandlord and
subtenant as provided in this Sublease.
K. Remedies Cumulative. Except as specifically provided herein, all rights
and remedies of Sublandlord under this Sublease shall be cumulative and none
shall exclude any other rights and remedies allowed by law.
L. Condition Precedent. The effectiveness of this Sublease is expressly
subject to and conditional upon obtaining Prime Landlord's written consent to
this Sublease pursuant to Section 19 of the Prime Lease.
B-4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Sublease as an instrument
under seal as of the date first written above.
SUBLANDLORD:
CAMBRIDGE HEART, INC., a
Massachusetts corporation
/s/ Robert B. Palardy
By: _________________________________
Title: Robert B. Palardy
Name: Chief Financial Officer
SUBTENANT:
PINPOINT CORPORATION, a Delaware
corporation
/s/ Ron D. Remy
By: _________________________________
Title: Ron D. Remy
Name: Chief Executive Officer
B-5
<PAGE>
PRIME LANDLORD CONSENT
By its signature below, Prime Landlord hereby consents to this Sublease and
agrees that Subtenant may, at Subtenant's sole cost and expense and subject to
obtaining any necessary governmental permits or approvals, remove the signage
at the Building currently naming and replace the same with
signage identifying Subtenant.
/s/ Robert W. Connelly
___________________________________
Robert W. Connelly
B-6
<PAGE>
EXHIBIT A
PRIME LEASE
[SEE EXHIBIT 10.9]
B-7
<PAGE>
Exhibit 10.23
CAMBRIDGE HEART, INC. MEMORANDUM
- --------------------------------------------------------------------------------
DATE: January 23, 1998
TO: R. Cohen
FROM: Jeff Arnold
SUBJECT: Consulting Agreement
CC: Bob Palardy
This is to confirm our agreement to extend your consulting contract for four
months from its current expiration date of February 8, 1998.
/s/ Jeffrey Arnold
- ---------------------------------
Jeffrey Arnold
AGREED:
/s/ Richard Cohen
- ---------------------------------
Richard Cohen
Cambridge Heart, Inc. * 1 Oak Park Drive * Bedford, MA 01730
Voice: (781) 271-1200 * Fax: (781) 275-8431
<PAGE>
EXHIBIT 11.1
CAMBRIDGE HEART, INC.
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net loss.............................. $(2,496,958) $(4,034,879) $(6,047,619)
Weighted average shares outstanding:
Shares attributable to common stock
outstanding......................... 2,814,069 (1) 6,073,865 10,451,560
----------- ----------- -----------
Net loss per share--basic and
diluted(2)........................... $ (0.89) $ (0.66) $ (0.58)
----------- =========== ===========
</TABLE>
(1) Excludes 312,500 restricted shares which were subject to repurchase by the
Company for minimal consideration if certain specified employment conditions
were not met. These restrictions lapsed on September 29, 1995.
(2) All potential common stock (including restricted stock, options, warrants
and convertible preferred stock) has been excluded from the calculation of
diluted earnings per share as it is anti-dilutive for all periods presented.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of Cambridge Heart, Inc. of our report dated February 3,
1998, except as to the last paragraph of Note 2 which is as of April 1, 1998,
appearing on page 20 of this Annual Report on Form 10-K.
Price Waterhouse LLP
Boston, Massachusetts
April 1, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,665,736
<SECURITIES> 7,080,605
<RECEIVABLES> 530,718
<ALLOWANCES> 20,800
<INVENTORY> 416,224
<CURRENT-ASSETS> 13,983,610
<PP&E> 835,435
<DEPRECIATION> 260,775
<TOTAL-ASSETS> 14,748,437
<CURRENT-LIABILITIES> 527,137
<BONDS> 0
0
0
<COMMON> 10,606
<OTHER-SE> 14,210,694
<TOTAL-LIABILITY-AND-EQUITY> 14,748,437
<SALES> 1,448,319
<TOTAL-REVENUES> 1,448,314
<CGS> 1,386,627
<TOTAL-COSTS> 1,386,627
<OTHER-EXPENSES> 35,886,965
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,047,619)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,047,619)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,047,619)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.58)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED SEPTEMBER 30, 1997 FINANCIAL STATEMENT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,854,315
<SECURITIES> 6,569,271
<RECEIVABLES> 510,500
<ALLOWANCES> 50,000
<INVENTORY> 274,848
<CURRENT-ASSETS> 15,428,901
<PP&E> 890,523
<DEPRECIATION> 257,919
<TOTAL-ASSETS> 16,168,878
<CURRENT-LIABILITIES> 474,214
<BONDS> 0
0
0
<COMMON> 10,550
<OTHER-SE> 15,684,114
<TOTAL-LIABILITY-AND-EQUITY> 16,168,878
<SALES> 1,077,658
<TOTAL-REVENUES> 1,077,658
<CGS> 969,245
<TOTAL-COSTS> 969,245
<OTHER-EXPENSES> 5,253,398
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,437,107)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,437,107)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,437,107)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED JUNE 30, 1997 FINANCIAL STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 11,544,617
<SECURITIES> 4,108,241
<RECEIVABLES> 542,999
<ALLOWANCES> 0
<INVENTORY> 235,407
<CURRENT-ASSETS> 16,615,799
<PP&E> 781,145
<DEPRECIATION> 207,774
<TOTAL-ASSETS> 17,314,350
<CURRENT-LIABILITIES> 457,115
<BONDS> 0
0
0
<COMMON> 10,474
<OTHER-SE> 16,846,761
<TOTAL-LIABILITY-AND-EQUITY> 17,314,350
<SALES> 737,480
<TOTAL-REVENUES> 737,480
<CGS> 637,717
<TOTAL-COSTS> 637,717
<OTHER-EXPENSES> 3,752,962
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,187,847)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,187,847)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,187,847)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED MARCH 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 12,811,879
<SECURITIES> 4,105,721
<RECEIVABLES> 456,109
<ALLOWANCES> 0
<INVENTORY> 315,623
<CURRENT-ASSETS> 18,002,106
<PP&E> 696,447
<DEPRECIATION> 164,020
<TOTAL-ASSETS> 18,677,522
<CURRENT-LIABILITIES> 348,152
<BONDS> 0
0
0
<COMMON> 10,364
<OTHER-SE> 18,319,006
<TOTAL-LIABILITY-AND-EQUITY> 18,677,522
<SALES> 319,028
<TOTAL-REVENUES> 319,028
<CGS> 305,358
<TOTAL-COSTS> 305,358
<OTHER-EXPENSES> 1,752,896
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,483,442)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,483,442)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,483,442)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,588,583
<SECURITIES> 0
<RECEIVABLES> 420,984
<ALLOWANCES> 0
<INVENTORY> 251,788
<CURRENT-ASSETS> 19,645,778
<PP&E> 423,158
<DEPRECIATION> 124,738
<TOTAL-ASSETS> 20,229,454
<CURRENT-LIABILITIES> 499,721
<BONDS> 0
0
0
<COMMON> 10,215
<OTHER-SE> 19,719,523
<TOTAL-LIABILITY-AND-EQUITY> 20,229,459
<SALES> 841,942
<TOTAL-REVENUES> 866,942
<CGS> 884,229
<TOTAL-COSTS> 884,229
<OTHER-EXPENSES> 4,524,416
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,034,879)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,034,879)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,034,879)
<EPS-PRIMARY> (0.66)<F1>
<EPS-DILUTED> (0.66)<F1>
<FN>
<F1>RESTATED TO REFLECT THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
NO. 128 AND SEC STAFF ACCOUNTING BULLETIN NO. 98.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1996 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 20,221,213
<SECURITIES> 0
<RECEIVABLES> 203,365
<ALLOWANCES> 0
<INVENTORY> 279,812
<CURRENT-ASSETS> 21,099,633
<PP&E> 353,149
<DEPRECIATION> 86,921
<TOTAL-ASSETS> 21,487,277
<CURRENT-LIABILITIES> 463,950
<BONDS> 0
0
0
<COMMON> 10,184
<OTHER-SE> 21,013,143
<TOTAL-LIABILITY-AND-EQUITY> 21,487,277
<SALES> 475,007
<TOTAL-REVENUES> 500,007
<CGS> 553,740
<TOTAL-COSTS> 553,740
<OTHER-EXPENSES> 2,898,054
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,713,281)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,713,281)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,713,281)
<EPS-PRIMARY> (0.58)<F1>
<EPS-DILUTED> (0.58)<F1>
<FN>
<F1>RESTATED TO REFLECT THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
NO. 128 AND SEC STAFF ACCOUNTING BULLETIN NO. 98.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JUNE 30, 1996 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,929,127
<SECURITIES> 0
<RECEIVABLES> 223,218
<ALLOWANCES> 0
<INVENTORY> 181,334
<CURRENT-ASSETS> 2,363,716
<PP&E> 297,667
<DEPRECIATION> 71,452
<TOTAL-ASSETS> 2,733,992
<CURRENT-LIABILITIES> 337,473
<BONDS> 0
0
8,911
<COMMON> 3,277
<OTHER-SE> 2,384,331
<TOTAL-LIABILITY-AND-EQUITY> 2,733,992
<SALES> 239,702
<TOTAL-REVENUES> 264,702
<CGS> 307,331
<TOTAL-COSTS> 307,331
<OTHER-EXPENSES> 1,689,919
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,652,234)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,652,234)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,652,234)
<EPS-PRIMARY> (0.52)<F1>
<EPS-DILUTED> (0.52)<F1>
<FN>
<F1>RESTATED TO REFLECT THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
NO. 128 AND SEC STAFF ACCOUNTING BULLETIN NO. 98.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1995 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,948,147
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 118,865
<CURRENT-ASSETS> 4,115,382
<PP&E> 161,978
<DEPRECIATION> 45,910
<TOTAL-ASSETS> 4,277,360
<CURRENT-LIABILITIES> 266,421
<BONDS> 0
0
8,911
<COMMON> 3,163
<OTHER-SE> 3,998,865
<TOTAL-LIABILITY-AND-EQUITY> 4,277,360
<SALES> 68,047
<TOTAL-REVENUES> 68,047
<CGS> 141,312
<TOTAL-COSTS> 141,312
<OTHER-EXPENSES> 2,669,639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,496,958)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,496,958)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,496,958)
<EPS-PRIMARY> (0.89)<F1>
<EPS-DILUTED> (0.89)<F1>
<FN>
<F1>RESTATED TO REFLECT THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
NO. 128 AND SEC STAFF ACCOUNTING BULLETIN NO. 98.
</FN>
</TABLE>
