<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-92751
2,455,609 SHARES
CAMBRIDGE HEART, INC.
Common Stock
----------------
This prospectus relates to registering for resale shares of common stock
previously issued by Cambridge Heart, Inc. in connection with a private
placement of our common stock.
We will not receive any proceeds from the sale of the shares.
The selling stockholders identified in this prospectus, or their pledgees,
donees, transferees or other successors-in-interest, may offer the shares from
time to time through public or private transactions at prevailing market
prices, at prices related to prevailing market prices or at privately
negotiated prices.
Our common stock is traded on the Nasdaq National Market under the symbol
"CAMH." On December 23, 1999, the closing sale price of the common stock on
Nasdaq was $2.875 per share.
----------------
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 3.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The date of this prospectus is December 23, 1999.
<PAGE>
We have not authorized anyone to provide you with information different from
that contained or incorporated by reference in this prospectus. The selling
stockholders are offering to sell, and seeking offers to buy, shares of our
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of common stock.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY....................................................... 1
RISK FACTORS............................................................. 3
USE OF PROCEEDS.......................................................... 7
SELLING STOCKHOLDERS..................................................... 7
DIVIDEND POLICY.......................................................... 9
MARKET PRICE OF THE COMMON STOCK......................................... 9
SELECTED CONSOLIDATED FINANCIAL DATA..................................... 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 11
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK................ 16
BUSINESS................................................................. 17
MANAGEMENT............................................................... 30
CERTAIN TRANSACTIONS..................................................... 32
DESCRIPTION OF OUR SECURITIES............................................ 33
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS................... 35
TRANSFER AGENT AND REGISTRAR............................................. 36
VALIDITY OF COMMON STOCK................................................. 36
EXPERTS.................................................................. 36
WHERE YOU CAN FIND MORE INFORMATION...................................... 36
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... 36
PLAN OF DISTRIBUTION..................................................... 37
INDEX TO FINANCIAL STATEMENTS............................................ F-1
</TABLE>
Unless the context otherwise requires, references in this prospectus to
"Cambridge Heart," "we," "us" and "our" refer to Cambridge Heart, Inc.
The Cambridge Heart logo, CH 2000, Hi-Res and Alterans Test are trademarks
of Cambridge Heart. All other trademarks and service marks are the property of
their respective owners.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and Cambridge Heart's financial statements and the notes to those
statements appearing elsewhere in this prospectus.
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about Cambridge Heart and
our industry. These forward-looking statements involve risks and uncertainties.
Cambridge Heart's actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, as more
fully described in the "Risk Factors" section and elsewhere in this prospectus.
Cambridge Heart, Inc.
Our Business
Cambridge Heart is engaged in the research, development, manufacture and
commercialization of products for the non-invasive diagnosis of heart disease,
the leading cause of death in the United States and many other developed
countries. Using innovative technologies, including our proprietary disposable
sensors, we are addressing such key problems in cardiac diagnosis as:
. the identification of those at risk of sudden cardiac death, accounting
for approximately 50% of all deaths due to heart attack;
. the early detection of coronary artery disease; and
. the prompt and accurate diagnosis of heart attack.
Our lead product, the CH 2000 Alternans System incorporates our 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 by measuring T-wave alternans
we can assess vulnerability to the ventricular arrhythmias responsible for
sudden cardiac death to a degree comparable to electrophysiology testing, the
most accurate invasive test. The CH 2000 Alternans System is also able to
perform conventional cardiac stress tests.
Our CH 2000 Alternans System and Hi-Resolution sensors have received 510(k)
clearance from the U.S. Food and Drug Administration for sale in the United
States, have received the CE mark for sale in Europe and have been approved for
sale by the Ministry of Health in Japan. The 510(k) clearance for the CH 2000
System includes the claim that the CH 2000 Alternans System can measure T-wave
alternans and the presence of T-wave alternans in patients with known,
suspected or at risk of ventricular tachyarrhythmia predicts increased risk of
ventricular tachyarrhythmia or sudden death.
Our Offices
Cambridge Heart was incorporated in Delaware in 1990. Our principal executive
offices are located at 1 Oak Park Drive, Bedford, MA 01730. Our telephone
number at that location is (781) 271-1200 and our Internet address is
www.cambridgeheart.com. The information contained on our Web site is not
incorporated by reference in this prospectus.
The Offering
Common Stock offered by selling
stockholders..................... 2,455,609 shares
Use of proceeds................... Cambridge Heart will not receive any
proceeds from the sale of shares in this
offering
Nasdaq National Market symbol..... CAMH
1
<PAGE>
Summary Financial Data
The following table summarizes the financial data for our business. You
should read this information with the discussion in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 866,942 $ 1,448,319 $ 2,096,853 $ 1,511,452 $ 1,635,121
Cost of revenue......... 884,229 1,386,627 1,848,155 1,360,623 1,517,214
----------- ----------- ----------- ----------- -----------
Gross Margin............ (17,287) 61,692 248,648 150,829 117,907
Research and
development............ 2,092,132 3,391,664 3,753,296 2,739,321 3,538,891
Selling, general and
administration......... 2,432,284 3,586,965 3,594,941 2,863,002 2,086,515
Total cost and
expenses............... 4,524,416 6,978,629 7,348,237 5,602,323 5,625,406
----------- ----------- ----------- ----------- -----------
Loss from operations.... (4,541,703) (6,916,937) (7,099,539) (5,451,494) (5,507,499)
Interest income......... 506,824 869,318 562,454 462,308 211,236
----------- ----------- ----------- ----------- -----------
Net loss................ $(4,034,879) $(6,047,619) $(6,537,085) $(4,989,186) $(5,296,263)
=========== =========== =========== =========== ===========
Net Loss Per Share--
Basic and Diluted...... $ (0.66) $ (0.58) $ (0.61) $ (0.47) $ (0.46)
=========== =========== =========== =========== ===========
Weighted average shares
of outstanding basic
and diluted............ 6,073,865 10,451,560 10,746,844 10,698,837 11,546,176
=========== =========== =========== =========== ===========
</TABLE>
The following table is a summary of our balance sheet at September 30, 1999.
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
----------------- ------------------
<S> <C> <C>
Balance Sheet Data:
Cash and equivalents....................... $6,490,353 $5,801,634
Working capital............................ $6,761,709 $6,130,121
Total assets............................... $8,714,733 $8,148,815
Total liabilities.......................... $ 901,791 $ 877,793
Stockholders' equity....................... $7,812,942 $7,271,022
</TABLE>
2
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below before you decide to buy our common stock. If any of
the following risks were to occur, our business, financial condition or
results of operations would likely suffer. In that event, the trading price of
our common stock could decline, and you may lose all or part of your
investment.
Risks Related to Our Operations
We may never generate substantial revenues
We are engaged primarily in the commercialization, manufacture, research and
development of products for the non-invasive diagnosis of heart disease. We
have incurred substantial and increasing net losses through September 30,
1999. We may never generate substantial revenues or achieve profitability on a
quarterly or annual basis. We believe that our research and development
expenses will increase in the future as we develop additional products and
fund clinical trials of our product candidates. Our research and development
expenses may also increase in the future as we supplement our internal
research and development with additional third party technology licenses and
potential acquisition of complementary products and technologies. We also
expect that our selling, general and administrative expenses will increase
significantly in connection with the continued expansion of our sales and
marketing activities. Revenues generated from the sale of our products will
depend upon numerous factors, including:
. the timing of regulatory actions;
. progress of product development;
. the extent to which our products gain market acceptance;
. varying pricing promotions and volume discounts to customers;
. competition; and
. the availability of third-party reimbursement.
Our technology may never achieve market acceptance
We believe that our future success will depend, in large part, upon the
successful commercialization and market acceptance of our T-wave alternans
technology. Market acceptance will depend upon our ability to demonstrate the
diagnostic advantages and cost-effectiveness of this technology and upon our
ability to obtain third party reimbursement for users of our technology. We
can give no assurance that we will be able to successfully commercialize or
achieve market acceptance of our T-wave alternans technology or that our
competitors will not develop competing technologies that are superior to our
technology.
The results of future clinical studies may not support the usefulness of our
technology
We have sponsored and are continuing to sponsor clinical studies relating to
our T-wave alternans technology and Hi-Resolution sensors to establish the
predictive value of such technology. Although studies on high risk patients to
date have indicated that the measurement of T-wave alternans to predict the
vulnerability to ventricular arrhythmia is comparable to electrophysiology
testing, we do not know whether the results of such studies, particularly
studies involving patients who are not high risk, will continue to be
favorable. Any clinical studies or trials which fail to demonstrate that the
measurement of T-wave alternans is at least comparable in accuracy to
alternative diagnostic tests, or which otherwise call into question the cost-
effectiveness, efficacy or safety of our technology, would have a material
adverse effect on our business, financial condition and results of operations.
3
<PAGE>
We may have difficulty responding to changing technology
The medical device market is characterized by rapidly advancing technology.
Our future success will depend, in large part, upon our ability to anticipate
and keep pace with advancing technology and competitive innovations. However,
we may not be successful in identifying, developing and marketing new products
or enhancing our existing products. In addition, there can be no assurance
that new products or alternative diagnostic techniques may be developed that
will render our current or planned products obsolete or inferior. Rapid
technological development by competitors may result in our products becoming
obsolete before we recover a significant portion of the research, development
and commercialization expenses incurred with respect to such products.
We have significant competition from a variety of sources
Competition from competitors' medical devices that diagnose cardiac disease
is intense and likely to increase. We compete with manufacturers of
electrocardiogram stress tests, the conventional method of diagnosing ischemic
heart disease, as well as with manufacturers of other invasive and non-
invasive tests, including EP testing, electrocardiograms, Holter monitors,
ultrasound tests and systems of measuring cardiac late potentials. Many of our
competitors and prospective competitors have substantially greater capital
resources, name recognition, research and development experience and
regulatory, manufacturing and marketing capabilities. Many of these
competitors offer broad, well-established product lines and ancillary services
not offered by Cambridge Heart. Some of our competitors have long-term or
preferential supply arrangements with physicians and hospitals which may act
as a barrier to market entry.
We depend heavily on independent manufacturers' representatives and foreign
distributors
We currently market our products in the United States through a small direct
sales force and independent manufacturers' representatives. We may not be able
to continue to recruit and retain skilled sales management, direct sales
persons or independent manufacturers' representatives. We market our products
internationally through independent distributors. These distributors also
distribute competing products under certain circumstances. The loss of a
significant international distributor could have a material adverse effect on
our business if a new distributor, sales representative or other suitable
sales organization could not be found on a timely basis in the relevant
geographic market. To the extent that we rely on sales in certain territories
through distributors, any revenues we receive in those territories will depend
upon the efforts of our distributors. Furthermore, there can be no assurance
that a distributor will market our products successfully or that the terms of
any future distribution arrangements will be acceptable to us.
Risks Related to the Market for Cardiac Diagnostic Equipment
Our business could be subject to product liability claims
The testing, manufacture, marketing and sale of medical devices entails the
inherent risk of liability claims or product recalls. Although we maintain
product liability insurance in the United States and in other countries in
which we conduct business, including clinical trials and product marketing and
sales, such coverage may not be adequate. Product liability insurance is
expensive and in the future may not be available on acceptable terms, if at
all. A successful product liability claim or product recall could inhibit or
prevent commercialization of the CH 2000 Alternans System or cause a
significant financial burden on Cambridge Heart, or both, and could have a
material adverse effect on our business, financial condition and ability to
market the CH 2000 Alternans System as currently contemplated.
Our business could be adversely affected if we are unable to protect our
proprietary technology
Our success will depend, in large part, on our ability to develop patentable
products, enforce our patents and obtain patent protection for our products
both in the United States and in other countries. However, the patent
positions of medical device companies, including Cambridge Heart, are
generally uncertain and involve complex
4
<PAGE>
legal and factual questions. We can give no assurance that patents will issue
from any patent applications we own or license or that, if patents do issue,
the claims allowed will be sufficiently broad to protect our proprietary
technology. In addition, any issued patents we own or license may be
challenged, invalidated or circumvented, and the rights granted under issued
patents may not provide us with competitive advantages. We also rely on
unpatented trade secrets to protect our proprietary technology, and we can
give no assurance that others will not independently develop or otherwise
acquire substantially equivalent techniques, or otherwise gain access to our
proprietary technology, or disclose such technology or that we can ultimately
protect meaningful rights to such unpatented proprietary technology.
Others could claim that we infringe their intellectual property rights
Our commercial success will depend in part on our neither infringing patents
issued to others nor breaching the licenses upon which our products might be
based. Our licenses of patents and patent applications impose various
commercialization, sublicensing, insurance, royalty and other obligations on
our part. If we fail to comply with these requirements, licenses could convert
from being exclusive to nonexclusive in nature or could terminate.
We could become involved in litigation over intellectual property rights
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Litigation, which
would likely result in substantial cost to us, may be necessary to enforce any
patents issued or licensed to us and/or to determine the scope and validity of
others' proprietary rights. In particular, our competitors and other third
parties hold issued patents and are assumed to hold pending patent
applications which may result in claims of infringement against us or other
patent litigation. We also may have to participate in interference proceedings
declared by the United States Patent and Trademark Office, which could result
in substantial cost, to determine the priority of inventions. Furthermore, we
may have to participate at substantial cost in International Trade Commission
proceedings to abate importation of products which would compete unfairly with
our products.
We may not be able to protect our trade secrets
We rely on confidentiality agreements with our collaborators, employees,
advisors, vendors and consultants. We can give no assurance that these
agreements will not be breached, that we would have adequate remedies for any
breach or that our trade secrets will not otherwise become known or be
independently developed by competitors. Failure to obtain or maintain patent
and trade secret protection, for any reason, could have a material adverse
effect on Cambridge Heart.
We may not be able to obtain third-party reimbursement
Our revenues currently depend and will continue to depend, to a significant
extent, on sales of the CH 2000 Alternans System. Our ability to successfully
commercialize the CH 2000 Alternans System depends in part on the availability
of, and our ability to obtain, adequate levels of third-party reimbursement
for use of the CH 2000 Alternans System. Reimbursement is not currently
available for the use of the CH 2000 Alternans System for measuring T-wave
alternans.
The amount of reimbursement in the United States that will be available for
clinical use of the CH 2000 Alternans System, if any, is uncertain and may
vary. In the United States, the cost of medical care is funded, in substantial
part, by government insurance programs, such as Medicare and Medicaid, and
private and corporate health insurance plans. Third-party payors may deny
reimbursement if they determine that a prescribed device has not received
appropriate FDA or other governmental regulatory clearances, is not used in
accordance with cost-effective treatment methods as determined by the payor,
or is experimental, unnecessary or inappropriate. Our ability to commercialize
the CH 2000 Alternans System successfully will depend, in large part, on the
extent to which appropriate reimbursement levels for the cost of the use of
the CH 2000 Alternans System and associated sensors are obtained from
government authorities, private health insurers and other organizations, such
as health maintenance organizations.
5
<PAGE>
We do not know whether reimbursement in the United States or foreign
countries will be available for the CH 2000 Alternans System, or if available,
will not be decreased in the future or that reimbursement amounts will not
reduce the demand for, or the price of, the CH 2000 Alternans System. The
unavailability of third-party reimbursement or the inadequacy of the
reimbursement for medical tests using the CH 2000 Alternans System would have
a material adverse effect on Cambridge Heart.
We have a number of risks associated with the year 2000
Although we do not believe that year 2000 issues will have a significant
impact on our internal operations or on our products, we may experience
interruptions of operations because of year 2000 problems. Year 2000 problems
could require us to incur unanticipated expenses, and such expenses could have
a material adverse effect on our business, financial condition and results of
operations. Furthermore, the purchasing patterns of customers or potential
customers may be affected by year 2000 issues as companies expend significant
resources to correct their current systems for year 2000 compliance. These
expenditures may result in reduced funds being available to purchase products
offered by Cambridge Heart.
Risks Related to the Offering
The market price of our shares has experienced, and may continue to be subject
to, extreme price and volume fluctuations
The stock market has, from time to time, experienced extreme price and
volume fluctuations. The market prices of the securities of medical-device
companies have been especially volatile, including fluctuations that are often
unrelated to the operating performance of the affected companies. Broad market
fluctuations of this type may adversely affect the market price of our common
stock.
The market price of our common stock has experienced, and may continue to be
subject to be subject to extreme fluctuations due to a variety of factors,
including:
. public announcements concerning us, our competitors or of the medical
device industry;
. fluctuations in operating results;
. introductions of new products or services by us or our competitors;
. changes in analysts' earnings estimates; and
. announcements of technological innovations.
In the past, companies that have experienced volatility in the market price
of their stock have been the object of securities class action litigation. If
we were the object of securities class action litigation, we could incur
substantial costs and experience a diversion of our management's attention and
resources and such securities class action litigation could have a material
adverse effect on our business, financial condition and results of operations.
A third party could be prevented from acquiring your shares of stock at a
premium to the market price because of our anti-takeover provisions
Various provisions of our certificate of incorporation, by-laws and Delaware
law could make it more difficult for a third party to acquire us, even if
doing so might be beneficial to you and our other stockholders.
The future sale of shares of our common stock may negatively affect our stock
price
If our stockholders sell substantial amounts of our common stock, including
shares issuable upon the exercise of outstanding warrants and options,
following this offering, the market price of our common stock could fall.
These sales also might make it more difficult for us to sell equity securities
in the future at a time and price that we deem appropriate.
6
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares by the selling
stockholders.
The selling stockholders will pay any underwriting discounts and commissions
and expenses incurred by the selling stockholders for brokerage, accounting,
tax or legal services or any other expenses incurred by the selling
stockholders in disposing of the shares. We will bear all other costs, fees
and expenses incurred in effecting the registration of the shares covered by
this prospectus, including, without limitation, all registration and filing
fees, Nasdaq listing fees and fees and expenses of our counsel and our
accountants.
SELLING STOCKHOLDERS
We issued the shares of common stock covered by this prospectus in a private
placement. The following table sets forth, to our knowledge, certain
information about the selling stockholders as of November 30, 1999.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting or investment power
with respect to shares. Shares of common stock issuable under warrants that
are exercisable within 60 days after November 30, 1999 are deemed outstanding
for computing the percentage ownership of the person holding the options but
are not deemed outstanding for computing the percentage ownership of any other
person. Unless otherwise indicated below, to our knowledge, all persons named
in the table have sole voting and investment power with respect to their
shares of common stock, except to the extent authority is shared by spouses
under applicable law. The inclusion of any shares in this table does not
constitute an admission of beneficial ownership for the person named below.
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock
Beneficially Owned to be Beneficially Owned
Prior to Offering Number of Shares After Offering(1)
------------------------------of Common Stock --------------------------------
Name of Selling Stockholder Number Percentage Being Offered Number Percentage
- --------------------------- ------------ ----------------------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Yale University......... 342,856(2) 2.5% 342,856(2) 0 0%
Little Wing L.P. ....... 270,840(3) 1.9% 270,840(3) 0 0%
Cambridge Options....... 180,000(4) 1.3% 180,000(4) 0 0%
Rebel Investments &
Co. ................... 180,000(5) 1.3% 180,000(5) 0 0%
Nathan Low.............. 197,017(6) 1.2% 197,017(6) 0 0%
Tradewinds Fund Ltd. ... 144,000(7) 1.0% 144,000(7) 0 0%
Paul Scharfer........... 163,374(8) * 163,374(8) 0 0%
Robert L. Swisher,
Jr. ................... 120,000(9) * 120,000(9) 0 0%
Little Wing L.P. Too.... 99,432(10) * 99,432(10) 0 0%
Richard B. Stone........ 37,917(11) * 37,917(11) 0 0%
Matthew Rebold.......... 30,000(12) * 30,000(12) 0 0%
Amy Newmark............. 24,000(13) * 24,000(13) 0 0%
Jerry Heymann........... 17,143(14) * 17,143(14) 0 0%
Judy W. Stone, M.D. .... 10,200(15) * 10,200(15) 0 0%
David Bartash........... 10,000(16) * 10,000(16) 0 0%
Jeff Elliot Margolis.... 539(17) * 539(17) 0 0%
Aurora Capital LLC...... 973(18) * 973(18) 0 0%
Mitchell Sutin.......... 2,088(19) * 2,088(19) 0 0%
Dwight Miller........... 7,982(20) * 7,982(20) 0 0%
Preston Tsao............ 10,254(21) * 10,254(21) 0 0%
The Tail Wind Fund
Ltd. .................. 788,717(22) 5.6% 264,924 523,793(22) 3.8%
Special Situations
Private Equity Fund,
L.P.................... 344,846(23) 2.5% 126,846 218,000(23) 1.6%
Special Situations Fund
III, L.P. ............. 89,823(24) * 32,109 57,714(24) *
Geoffrey H. Galley...... 191,439(25) 1.4% 105,970 85,469(25) *
Cheryl Halpern.......... 17,143(26) * 17,143(26) 0 0%
David S. Hannes......... 17,143(27) * 17,143(27) 0 0%
Norwest Bank North
Dakota, N.A. as Trustee
of the Conmy, Feste,
Hubbard, Corwin &
Brust, Ltd. 401K Profit
Sharing Plan F/B/O
Charles A. Feste....... 25,714(28) * 25,714(28) 0 0%
RLH Options, Inc. ...... 17,143(29) * 17,143(29) 0 0%
</TABLE>
- --------
* Less than one percent.
7
<PAGE>
(1) We do not know when or in what amounts a selling stockholder may offer
shares for sale. The selling stockholders may not sell any or all of the
shares offered by this prospectus. Because the selling stockholders may
offer all or some of the shares pursuant to this offering, and because
there are currently no agreements, arrangements or understandings with
respect to the sale of any of the shares, we can not estimate the number
of the shares that will be held by the selling stockholders after
completion of the offering. However, for purposes of this table, we have
assumed that, after completion of the offering, none of the shares
covered by this prospectus will be held by the selling stockholders.
(2) Includes 57,142 shares of common stock issuable to Yale University
within 60 days after November 30, 1999 pursuant to the exercise of
warrants.
(3) Includes 45,140 shares of common stock issuable to Little Wing L.P.
within 60 days after November 30, 1999 pursuant to the exercise of
warrants.
(4) Includes 30,000 shares of common stock issuable to Cambridge Options
within 60 days after November 30, 1999 pursuant to the exercise of
warrants.
(5) Includes 30,000 shares of common stock issuable to Rebel Investments &
Co. within 60 days after November 30, 1999 pursuant to the exercise of
warrants.
(6) Includes 28,000 shares of common stock issuable to Mr. Low within 60
days after November 30, 1999 pursuant to the exercise of warrants and
29,017 shares of common stock issuable to the Nathan Low Roth IRA within
60 days after November 30, 1999 pursuant to the exercise of warrants.
(7) Includes 24,000 shares of common stock issuable to Tradewinds Fund Ltd.
within 60 days after November 30, 1999 pursuant to the exercise of
warrants.
(8) Includes 63,374 shares of common stock issuable to Mr. Scharfer within
60 days after November 30, 1999 pursuant to the exercise of warrants.
(9) Includes 20,000 shares of common stock issuable to Mr. Swisher within 60
days after November 30, 1999 pursuant to the exercise of warrants.
(10) Includes 16,572 shares of common stock issuable to Little Wing L.P. Too
within 60 days after November 30, 1999 pursuant to the exercise of
warrants.
(11) Includes 7,917 shares of common stock issuable to Mr. Stone within 60
days after November 30, 1999 pursuant to the exercise of warrants.
(12) Includes 5,000 shares of common stock issuable to Mr. Rebold within 60
days after November 30, 1999 pursuant to the exercise of warrants.
(13) Includes 4,000 shares of common stock issuable to Ms. Newmark within 60
days after November 30, 1999 pursuant to the exercise of warrants.
(14) Includes 2,857 shares of common stock issuable to Mr. Heymann within 60
days after November 30, 1999 pursuant to the exercise of warrants.
(15) Includes 1,700 shares of common stock issuable to Dr. Stone within 60
days after November 30, 1999 pursuant to the exercise of warrants.
(16) Consists of 10,000 shares of common stock issuable to Mr. Bartash within
60 days of November 30, 1999 pursuant to the exercise of warrants.
(17) Consists of 539 shares of common stock issuable to Mr. Margolis within
60 days of November 30, 1999 pursuant to the exercise of warrants.
(18) Consists of 973 shares of common stock issuable to Aurora Capital LLC
within 60 days of November 30, 1999 pursuant to the exercise of
warrants.
(19) Consists of 2,088 shares of common stock issuable to Mr. Sutin within 60
days of November 30, 1999 pursuant to the exercise of warrants.
(20) Consists of 7,982 shares of common stock issuable to Mr. Miller within
60 days of November 30, 1999 pursuant to the exercise of warrants.
(21) Consists of 10,254 shares of common stock issuable to Mr. Tsao within 60
days of November 30, 1999 pursuant to the exercise of warrants.
(22) Includes 47,619 shares of common stock issuable to The Tail Wind Fund
Ltd. within 60 days after November 30, 1999 pursuant to the exercise of
warrants.
(23) Includes 22,800 shares of common stock issuable to Special Situations
Private Equity Fund, L.P. within 60 days after November 30, 1999
pursuant to the exercise of warrants.
(24) Includes 5,771 shares of common stock issuable to Special Situations
Fund III, L.P. within 60 days after November 30, 1999 pursuant to the
exercise of warrants.
(25) Includes 19,048 shares of common stock issuable to Mr. Galley within 60
days after November 30, 1999 pursuant to the exercise of warrants.
(26) Includes 2,857 shares of common stock issuable to Ms. Halpern within 60
days of November 30, 1999 pursuant to the exercise of warrants.
(27) Includes 2,857 shares of common stock issuable to Mr. Hannes within 60
days of November 30, 1999 pursuant to the exercise of warrants.
(28) Includes 4,285 shares of common stock issuable to Norwest Bank North
Dakota, N.A. as Trustee of the Conmy, Feste, Hubbard, Corwin & Brust,
Ltd. 401K Profit Sharing Plan F/B/O Charles A. Feste within 60 days of
November 30, 1999 pursuant to the exercise of warrants.
(29) Includes 2,857 shares of common stock issuable to RLH Options, Inc.
within 60 days of November 30, 1999 pursuant to the exercise of
warrants.
None of the selling stockholders has held any position or office with, or
has otherwise had a material relationship with, us within the past three
years.
8
<PAGE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the expansion
of our business and do not expect to pay any cash dividends in the foreseeable
future. Payment of future cash dividends, if any, will be at the discretion of
our board of directors after taking into account various factors, including
our financial condition, operating results, current and anticipated cash needs
and plans for expansion.
MARKET PRICE OF THE COMMON STOCK
Shares of our common stock have been quoted on the Nasdaq National Market
under the symbol "CAMH" since August 2, 1996. Our common stock is not traded
on any other market, foreign or domestic. 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 1997 Fiscal 1998 Fiscal 1999
-------------- -------------- ----------------
Period High Low High Low High Low
- ------ ------- ------ ------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
First Quarter.................. $15.50 $9.875 $ 9.25 $6.375 $10.125 $5.375
Second Quarter................. 11.625 6.50 11.875 7.50 10.5 4.75
Third Quarter.................. 8.375 6.75 9.625 5.00 6.8125 3.3125
Fourth Quarter (through
December 10, 1999)............ 10.50 7.375 8.375 3.50 3.9375 1.875
</TABLE>
- --------
The depositary for our common stock is American Stock Transfer and Trust
Company, 40 Wall Street, New York, New York 10005. On December 23, 1999, the
last reported sale price of our common stock on the Nasdaq National Market was
$2.875 On November 30, 1999, we had approximately 2,560 holders of common
stock of record. This number does not include stockholders for whom shares are
held in a "nominee" or "street" name.
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and the related notes
included elsewhere in this prospectus. The selected consolidated statement of
operations data for the years ended December 31, 1994 and 1995 and the
selected consolidated balance sheet data as of December 31, 1994, 1995 and
1996 are derived from our audited financial statements not included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------------------------------ ------------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ----------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 25 $ 68 $ 867 $ 1,448 $ 2,097 $ 1,511 $ 1,635
Cost of goods sold...... -- 141 884 1,386 1,848 1,360 1,517
---------- ---------- ---------- ----------- ----------- ----------- -----------
Gross profit (loss)..... 25 (73) (17) 62 249 151 118
Costs and expenses:
Research and
development........... 1,124 1,709 2,433 3,587 3,595 2,863 2,086
Selling, general and
administrative........ 724 961 2,092 3,392 3,753 2,739 3,539
---------- ---------- ---------- ----------- ----------- ----------- -----------
Total costs and
expenses.............. 1,848 2,670 4,525 6,979 7,348 5,602 5,625
---------- ---------- ---------- ----------- ----------- ----------- -----------
Loss from operations.... (1,823) (2,743) (4,542) (6,917) (7,099) (5,451) (5,507)
Interest income net..... 164 246 507 869 562 462 211
---------- ---------- ---------- ----------- ----------- ----------- -----------
Net loss............... $ (1,659) $ (2,497) $ (4,035) $ (6,048) $ (6,537) $ (4,989) $ (5,296)
========== ========== ========== =========== =========== =========== ===========
Net loss per share--
basic and diluted...... $ (0.55) $ (0.80) $ (0.66) $ (0.58) $ (0.61) $ (0.47) $ (0.46)
========== ========== ========== =========== =========== =========== ===========
Weighted average shares
outstanding--basic and
diluted(1)............. 3,010,030 3,126,569 6,073,865 10,451,560 10,746,844 10,698,837 11,546,176
========== ========== ========== =========== =========== =========== ===========
<CAPTION>
Nine Months Ended
December 31, September 30,
------------------------------------------------------------ ------------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and marketable
securities............. $ 3,329 $ 3,948 $ 18,589 $ 12,756 $ 6,490 $ 7,832 $ 5,802
Working capital......... 3,081 3,849 19,146 13,456 6,761 8,322 6,130
Total assets............ 3,421 4,277 20,229 14,748 8,715 10,157 8,149
Total liabilities....... 266 266 500 527 902 820 878
Accumulated deficit..... (2,584) (5,081) (9,116) (15,163) (21,700) (20,152) (26,997)
Stockholders' equity.... 3,155 4,011 19,730 14,221 7,813 9,338 7,271
</TABLE>
- --------
(1) All common stock equivalents (including options, warrants and convertible
preferred stock) have been excluded from the calculation of diluted
earnings per share as it is anti-dilutive for all periods presented.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
All statements, trend analysis and other information contained in this
prospectus relative to markets for our products and services, and trends in
revenues and anticipated expense levels, as well as other statements including
words such as "believe," "anticipate," "expect," "estimate," "plan" and
"intend" and other similar expressions, constitute forward-looking statements.
Those forward-looking statements are subject to business and economic risks,
and our actual results of operations may differ materially from those
contained in the forward-looking statements. For a more detailed discussion of
these business and economic risks, see "Risk Factors." The following
discussion of our financial condition and results of operations should also be
read in conjunction with our financial statements and related notes included
elsewhere in this prospectus.
Overview
We are engaged in the research, development and commercialization of
products for the non-invasive diagnosis of heart disease. Using innovative
technologies, we are addressing such key problems in cardiac diagnosis as the
identification of those at risk of sudden cardiac arrest, the early detection
of coronary artery disease, and the prompt and accurate diagnosis of heart
attack. Clinical research published to date has demonstrated that the presence
of T-wave alternans is associated with an increased vulnerability to
ventricular arrhythmias and sudden cardiac death. Sudden cardiac death
accounts for approximately one-half of all cardiac-related deaths, or about
350,000, in the United States each year.
Our principal products are the CH 2000 Alternans System and disposable
Alternans Sensors. Both products have received 510(k) clearance from the FDA
for sale in the United States. The 510(k) clearance for the CH 2000 Alternans
System includes the claim that the CH 2000 System can measure T-wave alternans
and the presence of T-wave alternans in patients with known, suspected or at
risk of ventricular tachyarrhythmia predicts increased risk of ventricular
tachyarrhythmia or sudden death. The CH 2000 Alternans System has received the
CE mark for sale in Europe and is approved for sale by the Ministry of Health
in Japan.
We have experienced substantial net losses since our inception in 1993. We
have incurred cumulative net losses since inception through September 30, 1999
of approximately $26,997,000. We expect that our selling, general and
administrative expenses will increase in connection with the expansion of our
efforts to increase awareness of the benefits of Alternans testing among both
the medical community and the patient population at large. We believe that our
research and development expenses will increase in support of our efforts to
develop additional products and also to fund clinical trials directed at
expanding the indications for use of our T-wave alternans technology.
Results of Operations
Nine Month Period Ended September 30, 1998 Compared to the Nine Period Ended
September 30, 1999
Revenue for the nine month periods ended September 30, 1998 and 1999 were
$1,511,452 and $1,635,121 respectively, an increase of 8%. Revenue from the
sale of Alternans systems and disposable sensors was $666,000, or 44% of total
revenue for the nine month period ended September 30, 1998 and $830,800 or 51%
of total revenue for the same period of 1999. In the U.S. Alternans revenue
was $163,300 or 21% of total U.S. revenue and $236,700 or 30% of total U.S.
revenue for the same periods of 1998 and 1999. The balance of revenue comes
from the sale of standard stress systems i.e., those without T-wave alternans.
After we received clearance from the FDA for expansion of our labeling, the
focus of our U.S. sales organization has been on targeting customers capable
of generating revenue from the sale of proprietary disposable sensors through
clinical use of our Alternans Test. As a result of directing the U.S. sales
force to focus only on T-wave alternans sales, U.S. revenue from the sale of
standard stress test units began to decline as percentage of total U.S.
revenue during the third quarter of 1999. We anticipate this shift in product
mix to continue in the future.
11
<PAGE>
Gross margin for the nine month periods ended September 30, 1998 and 1999
were 10% and 7% of revenue respectively. Revenues insufficient to absorb fixed
overhead, competitive pricing pressure on standard stress test systems in the
U.S. and special pricing incentives provided to several new international
distributors for their purchase of initial demonstration units are reflected
in these results.
Research and development expenses decreased from $2,863,002 in the nine
month period ended September 30, 1998 to $2,086,515 for the same period of
1999. In 1998 we funded the completion of our 337 patient clinical study
supporting the submission of the a 510(k) in August 1998 with the FDA for
expansion of labeling claims for our T-wave alternans technology. These costs
were not repeated in 1999 since FDA approval of the expanded label was
received by the Company in April, 1999. We anticipate that our research and
development expenses will increase during the final quarter of 1999 into the
first quarter of 2000 due to costs associated with the development of our low
cost T-wave alternans product scheduled for market introduction in 2000.
Selling, general and administrative expenses increased from $2,739,321 in
the nine month period ended September 30, 1998 to $3,538,891 in the same
period in 1999. The incremental costs are associated with our various
marketing and media initiatives targeted at increasing awareness of the
benefits of T-wave alternans and the Alternans test among both the medical
community and the patient population at large. We will continue our efforts
targeted at increasing T-wave alternans awareness and have introduced a
program intended to address customer concerns regarding third party
reimbursement for the performance of the Alternans.
Interest income was $462,308 for the nine month period ended September 30,
1998 compared to $211,236 for the same period in 1999. This decrease results
from lower cash balances due to operating losses we have incurred during the
nine month period ended September 30, 1999.
Fiscal 1997 Compared to Fiscal 1998
Revenues were $1,448,300 in the fiscal year ended December 31, 1997 and
$2,096,900 for the fiscal year ended December 31, 1998, an increase of
$648,500, or 45%. Sales of our CH 2000 Alternans System and accessories
accounted for 97% of total revenues in fiscal 1998 compared to 94% in fiscal
1997. The remainder of the revenues were from the sale of our Hi-Resolution
sensors.
Revenues from products sold outside the United States were $967,600 in
fiscal 1998, an increase of $66,700 or 7% over the previous fiscal year.
Revenues from products sold to Japan were $744,100 in fiscal 1998 compared to
$674,600 in fiscal 1997, an increase of 10%. Revenues from products sold to
the remaining international customers were $223,500 in fiscal 1998 compared to
$242,600 in fiscal 1997, a decrease of 8%. At the end of fiscal 1997, we
changed distribution partners in Europe due to their failure to meet contract
terms. A new distributor was appointed, effective April 1, 1998. We believe
this transition accounted for the decline in revenues during fiscal 1998. We
expect European revenues to return to previous levels during 1999. Sales to
all international customers accounted for 46% of our total revenues in fiscal
1998 compared to 67% in fiscal 1997. Sales to U.S. customers were $1,129,200
in fiscal 1998 compared to $547,400 in fiscal 1997, an increase of 106%. The
increase in U.S. revenues was the result of improvement in our sales
organization, which was expanded during 1997. At December 31, 1998 we employed
five direct sales managers in the U.S. and had 35 independent manufacturers'
sales representatives under contract.
Cost of goods sold was $1,386,600, or 96% of total revenues, in fiscal 1997
and $1,848,200, or 88% of total revenues, in fiscal 1998. The improved ratio
of costs to product sales during fiscal 1998 was the result of our product
cost reduction programs targeted at reducing the cost of direct materials and
the impact of increases in production volumes on the allocation of fixed
overhead costs. The continued increase in percentage of revenues from U.S.
customers, which have a higher margin, has favorably affected the overall cost
of sales ratio. We anticipate that these factors together with increases in
revenues of its Hi-Resolution disposable sensors will continue to favorably
effect the overall gross margin.
12
<PAGE>
Research and development costs were $3,587,000 in fiscal 1997 compared to
$3,594,900 in fiscal 1998. We incurred incremental costs totaling $266,700
during fiscal 1998 to complete clinical studies supporting
the 510(k) application we filed with FDA for expansion of our labeling claims
for our T-wave alternans technology. These costs were partially offset by a
reduction in fiscal 1998 of $84,700 in the amount of compensation expense
recorded relating to stock options granted to non-employees for services
rendered and an increase during fiscal 1998 over fiscal 1997 of $200,100 in
the amount of software development costs capitalized under Statement of
Financial Accounting Standards No. 86 "Accounting for the Cost of Computer
Software to be Sold, Leased, or Otherwise Marketed."
Selling, general and administrative expenses were $3,391,700 in fiscal 1997
compared to $3,753,300 in fiscal 1998, an increase of $361,600, or 11%. The
increase was primarily the result of costs associated with compensation paid
to U.S. sales representatives. We intend to continue to increase our marketing
efforts targeted at the rapid adoption of T-wave alternans measurement by
clinical cardiologists and other medical professionals. Additionally, during
fiscal 1997, we experienced several changes in management personnel. As a
result, we recorded $230,500 of termination costs associated with these
changes.
Interest income for fiscal 1997 was $869,300 compared to $562,500 for fiscal
1998. The decrease was primarily the result of a net reduction in our cash and
marketable securities balances by $6,265,900 during fiscal 1998.
Fiscal 1996 Compared to Fiscal 1997
Revenues were $866,900 in the fiscal year ended December 31, 1996 compared
to $1,448,300 for fiscal 1997, an increase of $581,400, or 67%. Sales of our
CH 2000 Alternans System and accessories accounted for 94% of total revenues
in fiscal 1997 compared to 95% in fiscal 1996. The remainder of revenues were
from the sale of our Hi-Resolution sensors.
Revenues from products sold outside the United States were $901,000 in
fiscal 1997, an increase of $228,900, or 34%, over fiscal 1996. Revenues from
products sold outside the United States accounted for 62% of our total
revenues in fiscal 1997 compared to 78% in fiscal 1996. Sales to United States
customers were $547,400 in fiscal 1997 compared to $169,900 in fiscal 1996, an
increase of 322%. This increase reflected the impact of the expansion of the
number of trained sales representatives during fiscal 1997. We employed five
direct sales managers for most of fiscal 1997 compared to two for most of
fiscal 1996. At the end of fiscal 1997, we had over 35 independent
manufacturers' sales representatives under contract compared to 11 at the end
of fiscal 1996.
Cost of goods sold was $884,200, 105% of product sales, in fiscal 1996
compared to $1,386,600, 96% of product sales, in fiscal 1997. The improved
ratio of costs to product sales during fiscal 1997 primarily reflected the
impact of increased volumes on the allocation of fixed manufacturing
overheads, a significant effect on our results of operations for any of the
three years in the period ended December 31, 1997.
Research and development costs were $2,432,300 in fiscal 1996 compared to
$3,587,000 in fiscal 1997, an increase of $1,154,700, or 47%. This increase
reflected the expansion of our clinical trial activities to support the filing
of a 510(k) with the FDA in 1998 for expansion of product labeling claims for
our T-wave alternans technology. We recorded a charge of $100,000 in fiscal
1997 to recognize costs associated with non-qualified stock options issued
under the 1996 Equity Incentive Plan to scientific advisors.
Selling, general and administrative expenses were $2,902,100 in fiscal 1996
compared to $3,391,700 in fiscal 1997, an increase of $489,600, or 17%. The
increase was primarily the result of the costs associated with the expansion
of our U.S. field sales organization during fiscal 1997 and increases in the
cost of marketing efforts targeted at the adoption of T-wave alternans testing
by clinical cardiologists and other medical professionals. Additionally,
during fiscal 1997, we experienced several changes in management personnel. As
a result, we recorded $230,500 of termination costs associated with these
changes.
13
<PAGE>
Interest income for fiscal 1996 was $506,800 compared to $869,300 for fiscal
1997. The increase reflected a full year of interest earned on the investment
of the remaining proceeds associated with our initial public offering of
common stock in August 1996.
Inflation and Income Taxes
Inflation did not have a significant effect on our results of operations for
any of the years in the period ended December 31, 1998 or for the nine month
period ended September 30, 1999.
We have not recorded a provision for income taxes for the years 1995, 1996,
1997 and 1998 or for the nine month period ended September 30, 1999 because we
incurred net losses in each of these years and this period. At December 31,
1998, we had net operating loss carryforwards of $9,164,000, as well as
$856,000 research and development credit carryforwards, respectively,
available to offset future taxable income and income tax liabilities. These
carryforwards generally expire in the years 2007 through 2012 and may be
subject to annual limitations as a result of changes in our ownership,
including as a result of this offering. There can be no assurance that
additional changes in ownership in future periods or continuing losses will
not significantly limit our use of net operating loss and tax credit
carryforwards.
We have generated taxable losses from operations since inception and,
accordingly, have no taxable income available to offset the carryback of net
operating losses. In addition, although our operating plans anticipate taxable
income in future periods, these plans provide for taxable losses over the near
term and make significant assumptions which cannot be reasonably assured
including market acceptance of these products by customers. We have provided a
full valuation allowance ($9,682,000 at December 31, 1998) for our deferred
tax assets since, in our opinion, realization of these future benefits is not
sufficiently assured.
Liquidity and Capital Resources
We initially financed our operations from the sale of equity securities.
Through June 30, 1996, we had raised $9,065,000 (net of stock issuance costs)
from the sales of equity securities. On August 2, 1996, we raised
approximately $19,650,000 (net of stock issuance costs) from the sale of
2,437,750 shares of common stock in our initial public offering. In
conjunction with the initial public offering, 4,455,708 shares of preferred
stock were converted to shares of common stock.
In June 1999, we raised gross proceeds of $5 million in equity capital less
$280,000 in issuance costs from the sale of 952,380 shares of common stock
through a private placement with a group of institutional investors led by the
Tail Wind Fund Ltd. at a per share price of $5.25. In addition, we issued
warrants with a four year term for the purchase of 95,238 shares of common
stock at $7.22 per share. The purchase agreement contains a provision that
requires that the investors shares and warrants be repriced if we sell common
stock in a capital raising transaction at a price lower than $5.25 per share
over a two year period from the date of closing of the transaction. Since the
transaction, which is the subject of this Registration Statement, was
concluded within two years of the closing of the previous transaction and at a
price lower than $5.25, the investors in the previous private placement
received an additional 529,849 shares of common stock. These additional shares
adjusted the investors per share price to $3.37. The investor's warrants to
purchase 95,238 shares of common stock received an adjusted purchase price of
$3.71.
The proceeds of the equity offerings have been used primarily to fund
operating losses of $26,996,652, 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 $1,472,695 in property and equipment through
September 30, 1999. As of September 30, 1999, we had cash, cash equivalents
and marketable securities of $5,801,634.
We expect our capital expenditures to increase as we continue to
commercialize our products and expand our clinical studies. We do not expect
capital expenditures to exceed an aggregate of $2,000,000 over the next two
years.
14
<PAGE>
Under the terms of various license, consulting and technology agreements, we
are required to pay royalties on sales of our 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. We are committed to pay an aggregate of $365,000
of such minimum license maintenance fees subsequent to September 30, 1999. As
part of these agreements, we are 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.
We anticipate that our existing capital resources, including the amounts
raised in our October 1999 private placements, will be adequate to satisfy our
capital requirements for at least the next 12 months. Thereafter, we may
require additional funds to support our 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 terms acceptable to us.
Impact of the Year 2000
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software used by many companies and
governmental agencies may need to be upgraded to comply with year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
State of Readiness.
We have determined that our products are year 2000 compliant. We have
completed an initial assessment of year 2000 issues with respect to our
business systems and have begun to take actions to ensure their compliance.
Based on the completed initial assessment, management does not expect the
costs of bringing our systems into compliance with year 2000 will have a
material adverse effect on our business, financial condition or results of
operations. We do not believe that we are subject to significant business
risks related to our customers' and suppliers' year 2000 efforts.
Costs. To date, we have not incurred any material costs in identifying or
evaluating year 2000 compliance issues. Most of our expenses have related to,
and are expected to continue to relate to, the operating costs associated with
time spent by employees in the evaluation process and year 2000 compliance
matters generally. At this time, we do not possess the information necessary
to estimate the potential costs of revisions to our business systems should
revisions be required or the replacement of third-party software, hardware or
services that are determined not to be year 2000 compliant. Although we do not
anticipate that these expenses will be material, these expenses, if higher
than anticipated, could have a material and adverse effect on our business,
financial condition and results of operations.
Risks. We are not currently aware of any significant year 2000 compliance
problems relating to the software incorporated in the CH 2000 System or our
information technology and non-information technology systems that would have
a material and adverse effect on our business, financial condition and results
of operations, without taking into account our efforts to avoid or fix these
problems. We can give no assurance that we will not discover year 2000
compliance problems in the software incorporated in the CH 2000 System that
will require substantial revisions or replacements. In addition, we can give
no assurance that third-party software, hardware or services incorporated into
our information technology and non-information technology systems will not
need to be revised or replaced, which could be time-consuming and expensive.
Our inability to fix our software, or to fix or replace third-party software,
hardware or services on a timely basis, could result in lost revenues,
increased operating costs and other business interruptions, any of which could
have a material and adverse effect on our business, financial condition and
results of operations. Moreover, the failure to adequately
15
<PAGE>
address year 2000 compliance issues in our software relating to the CH 2000
System, and our information technology and noninformation technology systems
could result in claims of mismanagement, misrepresentation or breach of
contract and related litigation, which could be costly and time-consuming to
defend.
In addition, there can be no assurance that governmental agencies, utility
companies, third-party service providers and others outside our control will
be year 2000 compliant. The failure by these entities to be year 2000
compliant could result in a systemic failure beyond our control, including,
for example, a prolonged telecommunications or electrical failure, any of
which could have a material and adverse effect on our business, financial
condition and results of operations.
Contingency Plan. As discussed above, we are engaged in an ongoing year 2000
assessment and have not developed any contingency plans. The results of our
year 2000 simulation testing and the responses received from third-party
vendors and service providers will be taken into account in determining the
need for and nature and extent of any contingency plans.
Our inability to correct a significant year 2000 problem, if one develops,
could result in an interruption in, or a failure of, certain of our normal
business activities or operations. Any material year 2000 problem could
require us to incur significant unanticipated expenses to remedy and could
divert our management's time and attention, either of which could have a
material and adverse effect on our business, financial condition and results
of operation.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release No. 48, which expands the disclosure requirements for
certain derivatives and other financial instruments. The Company does not
utilize derivative financial instruments. The carrying amounts reflected in
the balance sheet of cash and cash equivalents, marketable securities, trade
receivables and trade payables approximates fair value at September 30, 1999
due to the short maturities of these instruments.
16
<PAGE>
BUSINESS
We are engaged in the research, development, manufacture and
commercialization of products for the non-invasive diagnosis of heart disease.
Using innovative technologies, including proprietary disposable sensors, we
are addressing such key problems in cardiac diagnosis as
. the identification of those at risk of sudden cardiac arrest, accounting
for approximately 50% of all deaths due to heart attack,
. the early detection of coronary artery disease and
. the prompt and accurate diagnosis of heart attack.
Our CH 2000 Alternans System is designed to perform a broad range of
standard cardiac stress tests as well as detect the presence of T-wave
alternans, a beat-to-beat alternation in a portion of a patient's
electrocardiogram. Clinical research published to date has demonstrated that
the presence of T-wave alternans is associated with an increased vulnerability
to ventricular arrhythmias and sudden cardiac arrest. Sudden cardiac arrest
accounts for approximately one-half of all cardiac related deaths, or about
300,000, in the United States each year, and is the leading cause of death in
people between the ages of 45 and 65.
Industry Overview
Heart Disease
Heart disease is the leading cause of death in the United States and many
other developed countries. According to the American Heart Association, in
1993 cardiovascular disease accounted for 42% of all deaths in the United
States. Approximately 1.5 million people suffered heart attacks in the United
States in 1993, resulting in 500,000 deaths. Approximately half of these
deaths were sudden, generally the result of ventricular arrhythmias, which
cause the heart to beat in an abnormal and ineffective manner.
Ischemic Heart Disease and Acute Myocardial Infarction
Disease Characteristics. Ischemic heart disease, also referred to as
coronary artery disease, is related to the progressive narrowing of the blood
vessels that supply oxygen and nutrients to the heart. When blood flow becomes
inadequate, the patient may experience chest pain known as angina, especially
under conditions of stress or exercise. When the build-up of plaque or the
presence of a blood clot further narrows the coronary arteries, an area of the
heart muscle may die, an event called a myocardial infarction, the most common
type of heart attack.
Disease Incidence. Coronary artery disease is a common form of cardiac
disease, affecting approximately 13.5 million people in the United States. It
is estimated that approximately eight million patients each year present
themselves at emergency rooms in the United States with acute chest pain or
other symptoms typical of acute myocardial infarction. Of these patients, we
estimate that approximately 2.7 million are admitted to the hospital for
evaluation, of whom we estimate that about 1.0 million actually have
experienced a myocardial infarction. Despite this high admission rate, it has
been estimated that between 4% and 85% of those patients experiencing
myocardial infarction may be sent home inappropriately, some of whom die soon
thereafter.
Current Therapies. If properly diagnosed, ischemic heart disease is
treatable with coronary artery bypass grafting or coronary angioplasty. These
treatments are used to bypass, reopen or widen blocked or narrowed arteries
often in combination with medicines (such as nitrates, beta blockers and
calcium channel blockers), which are used to improve blood flow or regulate
the heart. In 1993, an estimated 485,000 coronary artery bypass grafting
procedures and 398,000 coronary angioplasty procedures were performed in the
United States.
Current Diagnostic Procedures. The principal non-invasive diagnostic tools
utilized in the diagnosis of ischemic heart disease are the electrocardiogram
and the exercise stress test. Normal heartbeats make a specific pattern of
electrical signals that can be measured by an electrocardiogram through
sensors applied to the patient
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and recorded graphically on paper or displayed on a video monitor. Specific
types of heart disease usually change the pattern of signals in ways
recognizable to a physician.
Most patients with suspected heart disease undergo an exercise stress test,
during which the patient exercises on a motorized treadmill or bicycle
ergometer with electrocardiogram sensors attached to the patient's chest.
Although standard stress tests are widely used as a screening test for heart
disease, stress tests are not considered to be highly sensitive or accurate in
detecting or localizing coronary artery blockages. For example, these tests
generally have a false negative rate on the order of 34%, and, in the absence
of chest pain, as high as 64%. This lack of accuracy may result in unnecessary
follow-on procedures or in the failure to detect significant heart disease.
The accuracy of stress tests and the ability to locate coronary artery
disease may be enhanced by the use of ultrasound imaging technology known as
an "echocardiogram", or through the use of a low level radioactive tracer
isotope known as a "nuclear stress test." Both of these tests are considered
to be more sensitive in detecting and analyzing coronary artery blockages than
a standard treadmill exercise test, but are also substantially more expensive.
Ventricular Arrhythmia and Sudden Cardiac Death
Disease Characteristics. Arrhythmias are abnormalities in the regular
beating pattern of the heart caused by an alteration in the normal pattern of
conduction of electrical signals within the heart. Sudden cardiac arrest is
generally caused by ventricular fibrillation, a disorganized quivering of the
ventricles which interferes with the pumping action of the heart, or by
ventricular tachycardia, a rapid beating of the ventricles which can
degenerate into ventricular fibrillation. Ventricular fibrillation and
ventricular tachycardia most often result from the triggering of an underlying
electrical instability of the heart. This electrical instability may be the
result of congenital factors, may be caused by scar tissue from a previous
myocardial infarction, or may result from coronary artery disease or other
diseases.
Disease Incidence. Each year more than 300,000 individuals in the United
States experience a sudden cardiac arrest episode. Of these, the Company
estimates that approximately 250,000 individuals die and 50,000 individuals
survive, primarily through emergency defibrillation. Most of those who die
suddenly have some pre-identified condition which puts them at elevated risk.
For example, without treatment, the approximately 50,000 annual survivors of a
cardiac arrest episode have over a 25% chance of dying suddenly in the one
year following cardiac arrest. Of the approximately 1.0 million annual
survivors of myocardial infarction, 13% of men and 6% of women will die
suddenly in the following six years. Patients with enlarged hearts due to
hypertrophic cardiomyopathy, patients with congestive heart failure
(approximately 4.7 million patients), patients with known coronary artery
disease (approximately 13.5 million patients) and patients who have
experienced fainting spells are also at elevated risk. Such high risk
subgroups accounted for approximately 75% of sudden cardiac deaths; for the
other 25% there is no prior indication of cardiac disease.
Current Therapies. When properly diagnosed, those patients at risk of sudden
cardiac death are treatable with an implantable cardioverter-defibrilator,
with RF ablation or abnormal tissue in the ventricles, which can improve
electrical conduction in the heart, or with anti-arrhythmic medication. In the
United States, most patients are treated with an implantable cardioverter-
defibrilator, an electronic device similar to a pacemaker that is permanently
implanted in the patient. The implantable cardioverter-defibrilator is
designed to monitor the patient's heartbeat and, in the event of ventricular
fibrillation or ventricular tachycardia, to deliver electric pulses or shocks
to the heart to terminate the arrhythmia.
Current Diagnostic Procedures. Patients believed to be at risk of
ventricular arrhythmia may undergo an electrophysiology study. Diagnostic
electrophysiology studies are invasive and involve the deliberate electric
stimulation of the heart utilizing specially-designed catheters. These
catheters are inserted into the heart through
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a major vein or artery to provoke heart rhythm disturbances which, if they
occur, are then terminated by pacing or defibrillation shocks. Patients in
whom certain types of ventricular arrhythmia can be induced via this procedure
are considered to be at risk of sudden cardiac death.
Although electrophysiology studies are generally effective in diagnosing
cardiac arrhythmias, they are invasive and costly procedures. As a result,
their use is generally limited to patients who have demonstrated previous
episodes of ventricular arrhythmia, or have experienced fainting spells
believed to be caused by these arrhythmias. We estimate that approximately
70,000 electrophysiology studies were performed for the diagnosis of
ventricular arrhythmias in 1998 in the United States at a cost of $3,000 to
$4,000 per procedure. This represents a small fraction of the many millions of
persons believed to be at risk but who are not studied or treated because of
the lack of an effective non-invasive screening test.
We believe that, aside from our technology, there is no effective non-
invasive diagnostic test to assess accurately the risk of sudden cardiac death
caused by ventricular arrhythmia. The non-invasive diagnostic tests that are
available generally either identify only a small subset of patients who are at
risk of sudden cardiac death or are not sufficiently accurate to warrant
further invasive study or treatment. For example, (i) the identification of
short episodes of non-sustained ventricular tachycardia ("VT") on a 24-hour
Holter electrocardiogram recording, (ii) the presence of late potentials
(delayed electrical activity in the ventricles) on the signal average
electrocardiogram, (iii) reduced beat-to-beat variability in heart rate, (iv)
reduced response in heart rate to black pressure changes (baroreceptor
sensitivity) and (v) increased variation in the duration of the QT interval
among different electrocardiogram leads in the same patient, all have been
reported to be associated with an increased risk of sudden cardiac death.
However, only the presence of non-sustained VT on a 24 hour Holter
electrocardiogram combined with a low ejection fraction is considered to be
sufficiently accurate to warrant further invasive study or treatment and this
combination is thought to be applicable to a small subset of patients at risk
of sudden cardiac death. Finally, ejection fraction, which uses ultrasound or
nuclear imaging to measure the percentage of blood ejected from the heart on
each beat, can indicate a damaged heart which is ineffective in pumping blood.
This is associated with increased rates of sudden cardiac death and with
increased risk of mortality in general; however, because ejection fraction is
not specific in identifying those with high risk of ventricular arrhythmia, it
is not generally considered sufficient to identify those who need to be
invasively studied or treated to prevent sudden death.
Need for Improved Diagnostic Techniques
In 1999, developing low-cost, non-invasive technologies to address the
following diagnostic challenges are key problems in cardiac diagnosis:
Sudden Cardiac Death. A study released in April 1996 indicates that
prophylactic implantation of implantable cardioverter-defibrilators can reduce
mortality in high-risk patients. Although such preventive therapies for sudden
cardiac death have recently become available, non-invasive diagnostic
techniques have not matched these advances. Existing non-invasive diagnostic
procedures generally either identify only a small subset of patients who are
at risk of sudden cardiac death or are not sufficiently accurate to warrant
further invasive study or treatment. Electrophysiology studies are not an
attractive alternative because they are both invasive and expensive. As a
result, despite the fact that there are approximately 250,000 sudden deaths
per year in the United States, and at least several times that number of
patients that are at risk, fewer than 50,000 received definitive treatment in
1998. This attests to the need for an accurate, non-invasive, diagnostic
procedure to identify patients at risk of sudden cardiac death.
Accurate and Cost Effective Detection of Coronary Artery Disease. Despite
the fact that approximately six million standard stress tests are performed
each year in the United States at a cost of approximately $1.8 billion, these
tests are generally not considered to be very accurate in detecting or
localizing coronary artery blockages. Other tests, such as echocardiograms and
nuclear stress tests, are somewhat more accurate but are significantly more
expensive. Coronary angiography, like electrophysiology studies, is both
invasive and expensive. The need therefore exists for a more accurate and low
cost non-invasive method to identify patients with ischemic heart disease,
particularly in the asymptomatic population.
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Accurate and Timely Diagnosis of Acute Myocardial Infarction. With eight
million patients in the United States arriving at hospital emergency rooms
each year complaining of acute chest pain or other symptoms typical of acute
myocardial infarction, we believe that a fast and accurate means of diagnosing
acute myocardial infarction is needed. Existing technologies, such as the 12
lead electrocardiogram, can be inaccurate in the diagnosis of impending
myocardial infarctions, and diagnosis based on serial enzyme tests can take
too long. With the recognition that the early use of blood clot dissolving
drugs in those with acute myocardial infarction can improve a patient's
outcome, a faster and more accurate method of diagnosis has become
increasingly important.
Cambridge Heart
Our CH 2000 Alternans System is designed to perform a broad range of cardiac
stress tests as well as measure T-wave alternans during electrocardiogram
stress testing. Research using our T-wave alternans technology and High-
Resolution sensors to predict increased risk of ventricular tachyarrhythmia,
indicates that our CH 2000 Alternans System has the following advantages:
. Accuracy--Clinical studies to date indicate that the presence of T-wave
alternans in patients with known, suspected or at risk of ventricular
tachyarrhythmia predicts increased risk of a cardiac event (ventricular
tachyarrhythmia or sudden death). Our technology's predictive
capabilities exceed those of other non-invasive tests and is comparable
to the results of an invasive electrophysiology study.
. Non-invasive--Unlike electrophysiology studies which require the
insertion of electrical catheters into the patient's heart and the
administration of local anesthesia, the CH 2000 Alternans System
requires only the placement of High-Resolution sensors on the patient's
chest.
. Broad Applicability--Approximately six million standard stress tests and
three million imaging stress tests are performed in the United States
each year. The CH 2000 Alternans System is designed to simultaneously
detect coronary artery disease and assess the risk of sudden cardiac
death due to ventricular arrhythmias with only a modest increase in the
total cost of the procedure.
. Non-Hospital Setting--Unlike electrophysiology studies and other tests
which require a hospital setting, the CH 2000 Alternans System can be
used in a physician's office.
. Procedure Cost Advantages--An alternans test with the CH 2000 Alternans
System costs approximately $400 per procedure, compared with
approximately $3,000 to $4,000 for an electrophysiology study.
. System Affordability--A fully equipped CH 2000 Alternans System is
priced in the United States at approximately $29,000. We have
established several financing programs available to customers aimed at
minimizing the amount of initial upfront capital investment required to
acquire a CH 2000 Alternans System in return for a multi year commitment
to purchase High Resolution sensors at a fixed price.
Our principal products are the CH 2000 Alternans System and Hi-Resolution
sensors. Both products have received 510(k) clearance from the FDA for sale in
the United States. The 510(k) clearance for the CH 2000 Alternans System
includes the claim that the CH 2000 System can measure T-wave alternans and
the presence of T-wave alternans in patients with known, suspected or at risk
of ventricular tachyarrhythmia predicts increased risk of ventricular
tachyarrhythmia or sudden death.
Internationally, the CH 2000 Alternans System has received the CE mark for
sale in Europe and is approved for sale by the Ministry of Health in Japan,
without labeling restrictions.
We are also conducting research into the detection of ischemic heart disease
using its cardiac electrical imaging technology. Cardiac electrical imaging
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. We are conducting
research to determine the extent to which this technology
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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 Alternans System
The CH 2000 Alternans System is designed to perform a broad range of
standard cardiac stress tests, as well as to measure T-wave alternans. Our
proprietary T-wave alternans technology permits evaluation, computation and
recording of T-wave alternans during 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
Alternans System incorporates our proprietary Hi-Resolution sensors and
proprietary signal processing algorithms to minimize noise levels resulting
from patient movement.
Our CH 2000 Alternans System is a fully-featured diagnostic system which
includes a cart-mounted computer with proprietary software, integral
electrocardiogram 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 sensors and with our Hi-Resolution sensors for T-wave alternans
measurement. The CH 2000 System is capable of controlling both treadmill and
bicycle ergometers and is well suited for standard, nuclear or echocardiogram
stress tests. During the Fiscal years ended December 31, 1996, 1997 and 1998
and the nine months ended September 30, 1999, revenues from the sale of the CH
2000 have accounted for 94%, 94%, 96% and 85% of our total revenues,
respectively.
Our CH 2000 Alternans System provides a broad range of special features,
including:
. 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 electrocardiogram
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, reducing the physician's
risk of missing a critical arrhythmia or losing an important record and
thereby freeing the physician to focus on the patient.
T-wave Alternans and Ventricular Arrhythmias: Clinical Studies
The association between ventricular arrhythmia and the presence of extremely
low levels of T-wave alternans not detectable by visual inspection of the
electrocardiogram was unknown until the early 1980s. Research conducted in Dr.
Richard Cohen's laboratory at The Massachusetts Institute of Technology
indicated that the presence of microvolt (one-millionth of a volt) levels of
T-wave alternans was predictive of vulnerability to ventricular arrhythmias
responsible for sudden cardiac arrest. Dr. Cohen, a founder, director of, and
consultant to, Cambridge Heart, 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 our
proprietary technology.
In a study of 83 patients conducted at Massachusetts General Hospital in
collaboration with Dr. Cohen's laboratory at MIT, published in the New England
Journal of Medicine in December 1994, the detection of T-wave alternans at
certain levels in patients referred for electrophysiology studies was shown to
be as accurate as
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invasive electrophysiology testing in predicting sudden cardiac arrest 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 electrophysiology
testing and were more predictive than those that have been reported using
other non-invasive methods.
We have sponsored and continue 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
connection between T-wave alternans detected during exercise with our CH 2000
Alternans System and the results of invasive electrophysiology testing in 27
patients.
Another study was conducted by Professor Stefan Hohnloser of J.W. Goethe
University, Frankfurt, Germany, the results of which, were published in
December 1998 in the Journal of Cardiovascular Electrophysiology. In this
study, 95 patients receiving an implantable cardioverter-defibrilator
underwent electrophysiology testing and most of the other accepted non-
invasive risk stratification tests, including T-wave alternans testing
utilizing the CH 2000 System. Professor Hohnloser reported that the detection
of the presence of T-wave alternans was found to be the more accurate than all
invasive and non-invasive tests in predicting recurrences of ventricular
tachycardia and ventricular fibrillation, the abnormal heart rhythms
associated with sudden cardiac arrest.
During 1998, we completed a multi center study that was included in the
510(k) application submitted to the FDA in August 1998 to obtain expansion of
our labeling claim. In 337 consecutive patients referred for electrophysiology
study to evaluate known, suspected or risk of arrhythmias, T-wave alternans
was measured during bicycle exercise with the CH 2000 System and examined as a
predictor of subsequent cardiac events. 313 patients completed study
procedures and follow-up averaging 9.8 months was obtained in 290 patients.
The primary endpoint was a ventricular tachyarrhythmic event which was defined
as sudden cardiac death, appropriate firing of an implantable cardioverter-
defibrilator or resuscitated sustained ventricular tachycardia or
fibrillation. The secondary endpoint was a ventricular tachyarrhythmic event
plus all death due to any cause. T-wave alternans was a highly significant
predictor of a ventricular tachyarrhythmic event (p=0.002) as was
electrophysiology (p<0.001). It was somewhat more predictive than
electrophysiology, with a relative risk of 10.92 for T-wave alternans versus
7.07 for electrophysiology. T-wave alternans was also a highly significant
predictor of a ventricular tachyarrhythmic event plus death due to any cause
(p<0.001) as was electrophysiology (p=0.001). It was also more predictive of
this endpoint than electrophysiology, with a relative risk of 13.93 for T-wave
alternans versus 4.69 for electrophysiology. Relative risk is the chance of
having a cardiac event if the test is positive divided by the chance of having
a cardiac event if the test is negative. The greater the number, the more
predictive the test.
T-wave alternans was also evaluated as a predictor of electrophysiology
study in a protocol that enrolled a subset of 242 patients. There were no
material differences in patient characteristics between this subset and the
total 337 patients. In 140 patients who completed all study procedures in
accordance with the protocol and had determinate results for both T-wave
alternans and electrophysiology, T-wave alternans predicted the results of
electrophysiology with a sensitivity of 76%, a specificity of 65% and a
relative risk of 3.93 (p<0.001).
Marketing and Sales
In 1998, approximately 2,300 cardiac stress systems were sold in the United
States, and we believe that the total installed base of cardiac stress systems
in the United States is approximately 23,000 units.
We believe that the keys to the adoption of our proprietary T-wave alternans
technology to diagnose heart disease are reimbursement by third party insurers
to healthcare providers for performance of the test, publication of clinical
study results in medical journals and continued positive clinical experience
with the CH 2000
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Alternans System. We believe 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
our proprietary technologies will require marketing, educational and sales
efforts to encourage cardiologists and other medical professionals to utilize
the test for the measurement of T-wave alternans in their medical practices.
We have trained and expect to continue to train well-respected clinicians and
their professional staff in the use of T-wave alternans testing as a means of
identifying patients at risk of sudden cardiac arrest. We have funded studies
to further demonstrate the efficiency of our technologies and intend 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. We also support educational seminars regarding the benefits of
T-wave alternans testing and will continue to participate in industry trade
shows and academic conferences.
In May, 1999 we entered into cooperative marketing agreements with both
Guidant Corporation and Medtronic, Inc. The agreements provide for the
inclusion of T-wave alternans experts to speak at national and regional
seminars and symposia in the U.S. sponsored by Guidant and Medtronic aimed at
providing additional education to cardiologists about the benefits of
alternans testing.
We market our products and services to customers in the United States
through a combination of in-house marketing, sales and clinical education
support staff and independent manufacturers representatives. We are currently
represented by nine independent manufacturers representatives organizations
with 35 representatives. We compensate our manufacturers representatives with
a sales commission. We maintain a small but experienced in-house Service
Department to answer customer questions and provide guidance, advice and
troubleshooting regarding use of the CH 2000 Alternans System. We also employ
three clinical specialists who work with customers to assist with installation
of the CH 2000 Alternans System and to train health care professionals in its
use.
We market our products internationally through independent distributors. We
have entered into distribution agreements with distributors for the sale of
our products in Europe, the Middle East, Japan and Australia. During the years
ended December 31, 1996, 1997, 1998 and the nine months ended September 30,
1999, sales to international distributors comprised 78%, 62%, 46% and 49%,
respectively, of our revenue. Our international independent distributors
provide comprehensive marketing and sales services including identification of
potential purchasers, consummating sales and providing ongoing educational and
support services to customers. The exclusive distribution agreement with our
Japanese distributor, Fukuda Denshi Co., Ltd. expires December 31, 1999, and
the agreements with our European distributor, Reynolds Medical, Ltd. and our
Australian distributor APS, expire March 31, 2000 and June 30, 2000
respectively. We do not anticipate any problems negotiating new agreements
with any of these distributors.
The commercial success of our products will be dependent upon their
acceptance by the medical community and third party payors as to their
clinical usefulness and cost-effectiveness. The measurement of T-wave
alternans to predict vulnerability to ventricular arrhythmias is a relatively
new technology. Expanded market acceptance of our technologies will be
dependent on the continued increase in the amount of published clinical data
supporting the benefits of T-wave alternans measurement as a predictive tool
in the identification of patients at risk of sudden cardiac arrest. Market
acceptance will also be impacted by the availability of third-party
reimbursement and extensive physician and patient education. We can give no
assurance that our products will gain broad market acceptance. Failure to
achieve broad market acceptance would have a material adverse effect on our
business, financial condition and results of operation.
Manufacturing
We perform final assembly of hardware and software components, and testing
of its products, at our corporate headquarters in Bedford, Massachusetts. We
believe this facility will be adequate to meet our needs through the end of
2000. We are required to meet and adhere to all applicable requirements of
U.S. and
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international regulatory agencies, including Good Manufacturing Practices and
Quality System Regulation requirements. Our manufacturing facilities are
subject to periodic inspection by both U.S. and international regulatory
agencies.
We underwent a Quality System Regulation audit, conducted by the FDA, during
January 1999. A response to the FDA's observations was submitted and accepted
by the Agency in February 1999. No regulatory action was required.
The manufacturing process consists primarily of final assembly of purchased
components, testing operations and packaging. Components are purchased
according to our specifications and are subject to inspection and testing. We
rely on outside vendors to manufacture certain major components used in the CH
2000 Alternans System, including our Hi-Resolution sensors. A number of
components are currently supplied by sole source vendors, although we believe
that we could locate additional sources of these components in a timely
fashion, if necessary.
Research and Development
A substantial portion of our research and development investment is focused
on our efforts in the areas of clinical research and the continuing
development of enhancements to its T-wave alternans technology. Our clinical
research is focused on gathering substantial clinical data demonstrating the
efficacy of the T-wave alternans technology and its results as a predictor of
patient risk of ventricular tachyarrhythmia or sudden death.
We are currently developing a new product that will allow the stress test
system of any manufacturer to measure T-wave alternans when utilizing our Hi-
Resolution sensors. We believe that this product will provide us with
increased access to the entire installed base of stress test systems in the
market and increase the utilization of our disposable, higher margin sensors.
The new product is expected to have a lower cost of manufacture than our CH
2000 Alternans System and is expected to carry a selling price below the
current price of a conventional stress test system. We expect the product to
be available sometime during the year 2000.
We are also conducting research into systems to detect ischemic heart
disease based upon our cardiac electrical imaging technology, which provides
an image of the electrical activity of the heart. Animal studies and initial
human studies indicate that cardiac electrical imaging is highly sensitive to
changes resulting from ischemia, the lack of oxygen caused by coronary artery
disease or acute myocardial infarction. We are 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 intend to pursue research to determine the extent to which this
technology provides faster and more accurate diagnosis of patients with acute
myocardial infarction.
We are evaluating the incorporation of our cardiac electrical imaging
technology into the CH 2000 Alternans System, and are continuing to conduct
clinical studies of this technology.
Our research and development expenses were $2,433,000 in 1996, $3,587,000 in
1997, $3,595,000 in 1998 and $2,086,515 for the nine month period ended
September 30, 1999. We expect research and development expenses to increase in
the future as we develop additional products and fund clinical trials of our
products. As of September 30, 1999, we had 10 employees engaged in research
and development activities.
Patents, Trade Secrets and Proprietary Rights
The computer algorithms that allow the CH 2000 Alternans System to measure
T-wave alternans and certain aspects of our cardiac electrical imaging
technology, including the cardiac electrical imaging sensors, are covered by
U.S. patents issued to MIT that are licensed exclusively to us. We were issued
a U.S. patent covering the use of exercise or any other non-invasive means in
the measurement of T-wave alternans. During 1998, we were
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issued a U.S. patent covering additional proprietary signal processing
algorithms and our Hi-Resolution sensors for use in the measurement of T-wave
alternans. Corresponding foreign patents are pending in both cases. The
failure to obtain such patents could have a material adverse effect on our
business, financial condition and results of operations. We own or are the
exclusive licensee of fourteen issued or allowed and six patents pending in
the United States, with 17 corresponding foreign patents issued or pending
with respect to our technology.
Cambridge Heart and MIT have entered into three license agreements, pursuant
to which we are the exclusive licensee of certain technologies upon which our
current and future products are based, including certain associated patents
therewith. Two of the MIT license agreements that cover the T-wave alternans
measurement technology incorporated in our CH 2000 Alternans System and that
relate to cardiac electrical imaging are of material importance to us. 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, we have
entered into a license agreement with Dr. Richard Cohen, a founder, director
of, and consultant to, Cambridge Heart, pursuant to which we are the exclusive
licensee of certain technology developed by Dr. Cohen which we may include in
our future products. These license agreements impose various
commercialization, sublicensing, insurance, royalty, product liability
indemnification and other obligations on us. Our failure 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 our exclusive rights to the T-wave alternans and cardiac electrical
imaging technologies, licensed under two of our MIT license agreements or the
termination of either or both of the agreements would have a material adverse
effect on our business, financial condition and results of operations.
We believe that our intellectual property and expertise, as originally
licensed from MIT and thereafter developed at Cambridge Heart, constitute an
important competitive resource, and we continue to evaluate markets and
products which are most appropriate to exploit the expertise licensed by, and
developed at, Cambridge Heart. In addition, we maintain an active program of
intellectual property protection, both to assure that the proprietary
technology developed by us is appropriately protected, and, where necessary,
to assure that there is no infringement of our proprietary technology by
competitive technologies.
Our future success will depend, in part, on our ability to continue to
develop patentable products, enforce our patents and obtain patent protection
for our products both in the United States and in other countries. However,
the patent positions of medical device companies, including Cambridge Heart,
are generally uncertain and involve complex legal and factual questions. We
can give no assurance that patents will issue from any patent applications
owned by or licensed to us or that, if patents do issue, the claims allowed
will be sufficiently broad to protect our technology. In addition, no
assurance can be given that any issued patents owned by or licensed to us will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to us.
Our commercial success will also depend in part on our neither infringing
patents issued to others nor breaching the licenses upon which our products
are based. We have licensed significant technology and patents from third
parties, including patents and technology relating to T-wave alternans and
cardiac electrical imaging licensed from MIT. Our licenses of patents and
patent applications impose various commercialization, sublicensing, insurance,
royalty and other obligations on us. Failure 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.
We also rely on unpatented trade secrets to protect our 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 our proprietary technology or disclose such
technology or that we can ultimately protect meaningful rights to such
unpatented proprietary technology. We rely on confidentiality agreements with
our collaborators, employees, advisors, vendors and consultants to protect our
trade secrets. There can be no assurance that these agreements will not be
breached, that we would have adequate remedies for any breach or
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that our trade secrets will not otherwise become known or be independently
developed by competitors. Failure to obtain or maintain patent and trade
secret protection for our products, for any reason, would have a material
adverse effect on our business, financial condition and results of operations.
Although we are not currently aware of any potential litigation regarding
our intellectual property rights the medical device industry has been
characterized by extensive litigation regarding patents and other intellectual
property rights. Other companies have received licensed patents concerning the
measurement of T-wave alternans and may claim that Cambridge Heart infringes
one or more of their patents. Litigation, which would likely result in
substantial cost to Cambridge Heart, may be necessary to enforce any patents
issued or licensed to us and/or to determine the scope and validity of others'
proprietary rights. We also may have to participate in interference
proceedings declared by the United States Patent and Trademark Office, which
could result in substantial cost, to determine the priority of inventions.
Furthermore, we may have to participate at substantial cost in International
Trade Commission proceedings to abate importation of products which would
compete unfairly with our products.
Competition
The cardiac diagnostic medical device market is characterized by intensive
development efforts and rapidly advancing technology. Our future success will
depend, in large part, upon our ability to anticipate and keep pace with
advancing technology and competitive innovations. However, we can give no
assurance that we will be successful in identifying, developing and marketing
new products or enhancing our existing products. In addition, there can be no
assurance that new products or alternative diagnostic techniques will not be
developed that will render our current or planned products obsolete or
inferior. Rapid technological development by competitors may result in our
products becoming obsolete before we recover 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 us, including electrocardiograms, 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. We compete with manufacturers of
electrocardiogram stress test equipment, including major multinational
companies. Many of our 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 us. Some of our 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 us, and such companies also may be more
successful than us in producing and marketing such products or their existing
products. Competing companies may also introduce competitive pricing pressures
that may adversely affect our sales levels and margins. We can give no
assurance that we will be able to compete successfully with existing or new
competitors.
Government Regulation
The manufacture and sale of medical devices intended for commercial
distribution is 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.
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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 pre market approval 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 pre market approval
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
pre market approval applications, the manufacturer or distributor may seek
clearance from the FDA to market the device by filing a 510(k) notification.
The 510(k) notification may need to be supported by appropriate data
establishing the claim of substantial equivalence to the FDA. The FDA recently
has been requiring a more rigorous demonstration of substantial equivalence.
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an
order clearing the 510(k) is issued by the FDA. At this time, the FDA
typically responds to the submission of a 510(k) notification within 90 to 200
days. An FDA order may declare that the device is substantially equivalent to
a legally marketed device and allow the proposed device to be marketed in the
United States. The FDA, however, may determine that the proposed device is not
substantially equivalent or requires further information, including clinical
data, to make a determination regarding substantial equivalence. Such
determination or request for additional information generally delays market
introduction of the product that is the subject of the 510(k) notification.
Any products manufactured or distributed by us 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 510(k) supplement for certain changes to a device if they affect the
safety and effectiveness of the device, including, but not limited to, new
indications for use, labeling changes, the use of a different facility to
manufacture, process or package the device, changes in manufacturing methods
or quality control systems and changes in performance or design
specifications. Our failure to receive approval of a 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 our 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 our business, financial
condition and results of operations. The current regulatory environment in
Europe for medical
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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 Alternans System and the Hi-Resolution sensors have received
510(k) clearance from the FDA for sale in the United States. The 510(k)
clearance for the CH 2000 Alternans System includes the claim that the CH 2000
System can measure T-wave alternans and the presence of T-wave alternans in
patients with known, suspected or at risk of ventricular tachyarrhythmia
predicts increased risk of ventricular tachyarrhythmia or sudden death.
Internationally, the CH 2000 Alternans 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 September 30, 1999, we had 40 full-time employees, of whom two hold
Ph.D. degrees and six others hold other advanced degrees. None of our
employees are represented by a collective bargaining agreement, nor have we
experienced work stoppages. We believe that our relations with our 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 our 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.
We believe that the availability and level of third party reimbursement will
influence the decisions of physicians, clinics and hospitals to purchase and
use our products and thereby affect the pricing of our products. We have
initiated efforts to address the issue of reimbursement from third party
payers for the performance of an alternans test by healthcare providers. Our
efforts are directed on two fronts:
. obtain a specific national reimbursement code and designated payment
amount from the American Medical Association for the alternans test, and
. through our provider advocacy and reimbursement guarantee program, gain
reimbursement status from individual payers on a state by state basis by
supporting providers making qualified and effective claims submissions.
We have initiated action to obtain a specific national reimbursement code
and designated payment amount for an alternans test by filing a proposal for
consideration by the Coding and Nomenclature Committee of the American Medical
Association. The earliest possible date that we could have a specific code
assigned for the alternans test is February, 2001. There can be no assurance
that these efforts will be successful.
We have developed a program of reimbursement assistance that provides for
the possible payment of $90.00 for each alternans test performed, up to a
maximum of 50 per calendar quarter, in which a claim for reimbursement is
submitted to a third party payer within prescribed guidelines and is
ultimately denied coverage after appeal. Providers who accept the $90.00
payment from us may not accept duplicate payment from the third party payer
under any circumstances. Once a third party payer has initiated coverage for
the alternans test, the
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$90.00 reimbursement assistance is no longer available. This program is
effective through June 30, 2001 or until a national code has been established
for the alternans test, whichever comes first. There can be no assurance that
any of these efforts will gain reimbursement for the alternans test or
increase the number of alternans test performed.
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 Cambridge Heart.
Properties
Our facilities consist of approximately 14,500 square feet of office,
research and manufacturing space located at 1 Oak Park Drive, Bedford,
Massachusetts. We have a lease for a total of 22,000 square feet, of which we
currently sublet 7,500 square feet. Our lease expires in November 2000. We
believe that suitable additional space will be available to us, when needed,
on commercially reasonable terms.
Legal Proceedings
We are not currently a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth (i) the names, ages and positions of the
current executive officers and directors of Cambridge Heart; (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....... 50 President, Chief Executive Officer and Director
Robert B. Palardy....... 51 Vice President, Finance and Administration and Chief
Financial Officer
Eric Dufford............ 41 Vice President, Sales and Marketing and Secretary
Andra Thomas............ 50 Vice President, Clinical Affairs
James Shepphard......... 40 Vice President, Operations
Richard J. Cohen, M.D.,
Ph.D. ................. 48 Director
Harris A. Berman,
M.D. .................. 61 Director
J. Daniel Cole.......... 51 Director
</TABLE>
Jeffrey M. Arnold. Mr. Arnold has served as President and Chief Executive
Officer of Cambridge Heart since September 1993. Mr. Arnold was appointed
Chairman of the Board of the Directors in August 1997. Mr. Arnold was
president and Chief Executive Officer of Molecular Simulations, Inc., a
supplier of software for rational drug design. Formerly Vice President of
Operations for Datascope Corporation's Instrumentation Products, he has held
senior marketing and research and development positions for Becton Dickinson.
Mr. Arnold holds a B.S. in Electrical Engineering from MIT.
Robert B. Palardy. Mr. Palardy became Vice President, Finance and
Administration and Chief Financial Officer of Cambridge Heart 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 Cambridge Heart 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.
Andra Thomas. Ms. Thomas became Vice President, Clinical Affairs of
Cambridge Heart in August 1998. From January 1988 to February 1993, Ms. Thomas
was Manager of Scientific Studies at Cardial Pacemakers, Inc. From February
1993 to August 1998, Ms. Thomas was Senior Fellow and Director of Medical
Sciences for Guidant CPI. Ms. Thomas earned an R.N. from Barnes Hospital
School of Nursing, Washington University and an executive MBA from the
University of Minnesota.
James Sheppard. Mr. Sheppard has served as Vice President, Operations of
Cambridge Heart, Inc. since August, 1999. Mr. Sheppard has over 18 years of
experience in medical device manufacturing. Prior to joining Cambridge Heart,
Inc., Mr. Sheppard was Vice President of Operations for Nitinol Medical
Technology, Inc., a manufacturer of cardiovascular implants from 1996 to 1998.
Mr. Sheppard also served as Director of Manufacturing for Summit Technology
from 1995 to 1996 and also served in several senior management positions while
employed at C.R. Bard, Inc. from 1982 to 1994 Mr. Sheppard holds a BS in
Industrial Engineering from Virginia Tech.
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Richard J. Cohen, M.D., Ph.D. Dr. Cohen, the scientific founder of Cambridge
Heart, has been a consultant to Cambridge Heart since February 1993. Dr. Cohen
has been, since 1979, Professor of Health Sciences and Technology at the
Harvard-MIT Division of Health Sciences and Technology and is on the staff at
the Brigham and Women's Hospital and Children's Hospital, both in Boston. From
1985 to 1995, Dr. Cohen was the Director of the Harvard-MIT Center for
Biomedical Engineering, and he is currently the Director of the NASA Center
for Quantitative Cardiovascular Physiology, Modeling and Data Analysis located
at MIT. He serves on the editorial board of the Journal of Cardiovascular
Electrophysiology and The Annals of Noninvasive Electrocardiology.
Harris A. Berman, M.D. Dr. Berman was elected to our board of directors on
April 10, 1998 to fill the seat left vacant by M. Fazle Husain. Dr. Berman has
been Chairman of the Board of Directors and Chief Executive Officer of Tufts
Health Plan, a managed healthcare organization, since 1986. Dr. Berman has
also served as Chairman of ManagedComp, Inc. since 1995 and was a Director of
HPR, Inc. from 1994 to 1997. Dr. Berman is Chairman of the Executive Committee
of Massachusetts Association of HMO's, Co-Chair of Tufts Managed Care
Institute, and a Director of American Association of Health Plans, formerly
Group Health Association of America. Dr. Berman is also a Clinical Professor
of Medicine at Tufts University School of Medicine and is a Clinical Professor
of Community Health at Tufts University School of Medicine.
J. Daniel Cole. Mr. Cole has served as a member of our board of directors
since February 1997. Mr. Cole has been General Partner of the Spray Venture
Fund, a venture capital organization funded in part by Boston Scientific
Corporation, since March 1997. From March 1995 to March 1997, Mr. Cole was
Senior Vice President of Boston Scientific Corporation. From 1993 to March
1995, Mr. Cole was President and Chief Operating Officer of SciMed Life
Systems Corporation. From 1990 to April 1993, Mr. Cole was President of the
Edwards Critical Care Division of Baxter Healthcare Corporation. Mr. Cole is a
director of Thoratec Laboratories Corp.
Rolf S. Stutz, a former member of our board of directors, died in October
1999.
Executive officers of Cambridge Heart are elected by and serve at the
discretion of our board of directors. There are no family relationships among
any executive officers or directors.
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CERTAIN TRANSACTIONS
In June 1999, we raised gross proceeds of approximately $5 million in equity
capital less approximately $280,000 in issuance costs from the sale of 952,380
shares of our common stock through a private placement with a group of
institutional investors led by The Tail Wind Fund Ltd. at a per share price of
$5.25. In addition, we issued warrants with a four year term for the purchase
of 95,238 shares of our common stock at a price of $7.22 per share. The
purchase agreement contains a provision that requires that the investors'
shares and warrants be repriced if we sell shares of our common stock in a
capital raising transaction at a price lower than $5.25 per share over a two
year period from the closing date of the transaction.
In October 1999, we issued 1,516,347 shares of common stock to a group of
investors introduced to Cambridge Heart by Sunrise Securities Corp., which
acted as placement agent, in exchange for approximately $4,874,673 (net of
stock issuance costs). We also issued warrants for the purchase of 303,269
shares of common stock at an exercise price of $3.50 per share to the
investors. Cambridge Heart issued warrants for the purchase of 106,144 shares
of common stock at an exercise price of $4.20 per share to Sunrise Securities
Corp. as part of the compensation for its services as placement agent. In
addition, pursuant to the terms of our agreement with the Tail Wind investors
described above, the exercise price per share of the warrants issued to the
Tail Wind investors was reduced to $3.71 per share and we issued an aggregate
of 529,849 additional shares of common stock to the Tail Wind investors.
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DESCRIPTION OF OUR SECURITIES
We are authorized to issue 25,000,000 shares of common stock, $.001 par
value per share of which 13,912,184 were issued and outstanding as of November
30, 1999, and 2,000,000 shares of undesignated preferred stock, $.001 par
value per share, of which no shares are issued and outstanding. Our common
stock is traded on the Nasdaq National Market under the symbol CAMH.
Common Stock
As of November 30, 1999, there were 13,912,184 shares of common stock
outstanding, held of record by approximately 2,560 stockholders. Holders of
our common stock are entitled to one vote for each share held on all matters
submitted to a vote of stockholders and do not have cumulative voting rights.
Accordingly, holders of a majority of the shares of common stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared by the board of directors out of funds
legally available therefor, subject to a preferential dividend rights of
outstanding preferred stock. Upon the liquidation, dissolution or winding up
of Cambridge Heart, the holders of common stock are entitled to receive
ratably the net assets of Cambridge Heart available after the payment of all
debts and other liabilities and subject to the prior rights of any outstanding
preferred stock. The outstanding shares of common stock are fully paid and
nonassessable. The rights, preferences and privileges of holders of common
stock are subject to, and may be adversely affected by the rights of the
holders of shares of any series of preferred stock which we may designate and
issue in the future.
Pursuant to the terms of a purchase agreement dated June 8, 1999 between
Cambridge Heart and a group of investors led by The Tail Wind Fund Ltd., we
sold an aggregate of 952,380 shares of our common stock to the Tail Wind
investors at a price of $5.25 per share. In addition, we granted the Tail Wind
investors the following rights:
. If, prior to June 8, 2001, we sell any shares of our common stock in a
capital raising transaction at a per share selling price less than the
original per share purchase price paid by the Tail Wind investors, the
original purchase price per share paid by the Tail Wind investors will
be adjusted downward to equal the lower per share purchase price and,
accordingly, the Tail Wind investors will be entitled to receive
additional shares.
. Prior to June 8, 2001, the Tail Wind investors have the right to
participate in any non-public capital raising transaction by Cambridge
Heart.
Pursuant to the terms of the subscription agreements dated October 5, 1999
and October 25, 1999 between Cambridge Heart and each of the several investors
introduced to us by Sunrise Securities Corp., we sold an aggregate of
1,516,347 shares of our common stock to the Sunrise investors at a price of
$3.50 per share. In addition, we agreed that if, prior to earlier of one year
from the date of this prospectus and the date on which we complete a sale or
sales of our common stock resulting in net proceeds in excess of $4 million,
we sell any shares of our common stock in a capital raising transaction at a
per share selling price less than $3.50, then each Sunrise investor will be
entitled to receive additional shares of our common stock equal to the
difference between (A) the quotient obtained by dividing (i) $3.50 by (ii) the
lower selling price per share and (B) the number of shares sold to each
Sunrise investor.
Warrants
The Tail Wind Warrants. As part of the purchase agreement between Cambridge
Heart and the Tail Wind investors, we issued warrants that expire on June 9,
2003 to purchase 95,238 shares of our common stock at an exercise price per
share of $7.22. On October 5, 1999, in connection with an additional private
placement of our common stock, the per share exercise price of these warrants
was adjusted downward to $3.71 in accordance with the adjustment provisions
contained in these warrants and described below. As of November 30, 1999, none
of the warrants issued to the Tail Wind investors has been exercised.
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The per share exercise price of the warrants issued to the Tail Wind
investors is subject to adjustment in certain events including but not limited
to the following:
. if we declare a dividend or make any distribution to shareholders
payable in common stock, subdivide or combine our common stock or
reclassify of our common stock;
. merger, consolidation or reorganization of Cambridge Heart or the sale
of substantially all of our assets; or
. until June 8, 2001, if we sell any shares of our common stock at a price
per share less than the price paid by the Tail Wind investors, the per
share exercise price of the warrants issued to the Tail Wind investors
will be reduced to 110% of that lower price.
The Sunrise Warrants. As part of the subscription agreements dated October
5, 1999 and October 25, 1999 between Cambridge Heart and each of several
investors introduced to us by Sunrise Securities Corp., and the sale agency
agreement dated August 16, 1999 between Cambridge Heart and Sunrise Securities
Corp., we issued warrants that expire on October 5, 2004 and October 25, 2004
for the purchase of 290,412 and 12,857 shares of our common stock,
respectively, at a per share exercise price of $3.50. As part of the fee paid
to Sunrise Securities Corp., we issued warrants that expire on October 5, 1999
and October 25, 1999 for the purchase of an aggregate of 106,144 shares of our
common stock at a per share price of $4.20. As of November 30, 1999, none of
the warrants issued to the Sunrise investors has been exercised.
The per share exercise price of the warrants issued to the Sunrise investors
is subject to adjustment in certain events including but not limited to the
following:
. if we declare a dividend or make any distribution to our shareholders
payable in stock or other securities convertible into stock, subdivide
or combine our common stock or reclassify of our common stock; or
. merger, consolidation or reorganization of Cambridge Heart or the sale
of substantially all of our assets.
Preferred Stock
Our certificate of incorporation authorizes us to issue up to 2,000,000
shares of preferred stock. Under the terms of our certificate of
incorporation, the board of directors is authorized, subject to any
limitations prescribed by law, without stockholder approval, to issue such
shares of preferred stock in one or more series. Each such series of preferred
stock shall have such rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the board of
directors.
The purpose of authorizing the board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated
with a stockholder vote on specific issuances. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third part to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of Cambridge Heart.
We have no present plans to issue any shares of preferred stock.
Registration Rights
As part of our issuances of common stock and warrants to the Tail Wind
investors on June 8, 1999 we agreed to register the 952,380 shares of common
stock purchased by the Tail Wind investors and the 95,238 shares of common
stock issuable upon exercise of the warrants issued to the Tail Wind
investors. We registered these shares with the Securities and Exchange
Commission in July 1999. As part of our agreement with the Tail Wind
investors, we also agreed to register any additional shares issued to them
pursuant to the anti-dilution provisions of the Purchase Agreement dated June
8, 1999.
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As part of our issuances of common stock and warrants to the Sunrise
investors on October 5, 1999 we are obligated to register the 1,516,347 shares
of common stock purchased by the Sunrise investors and the 409,413 shares of
common stock issuable upon exercise of the warrants issued to the Sunrise
investors and to Sunrise Securities Corp. With this registration statement and
prospectus, we are fulfilling our obligations to register (i) the 1,516,347
shares of common stock purchased by the Sunrise investors, (ii) the 409,413
shares of common stock issuable to the Sunrise investors and Sunrise
Securities Corp. upon the exercise of warrants and (iii) the 529,849 shares
issued to the Tail Wind investors on October 5, 1999 and October 25, 1999
pursuant to the anti-dilution provisions of the purchase agreement dated June
8, 1999.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 prohibits a publicly held Delaware corporation
from engaging in a "business combination" with any interested stockholder for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is (i)
a person who, together with affiliates and associates, owns 15% or more of the
corporation's voting stock or (ii) is an affiliate or associate of Cambridge
Heart and was the owner, together with affiliates and associates of 15% or
more of our outstanding voting stock at any time within the 3-year period
prior to the date for determining whether such person is "interested".
Our certificate of incorporation provides for the division of our board of
directors into three classes as nearly equal in size as possible with
staggered three-year terms. See "Management--Executive Officers and
Directors". In addition, our certificate of incorporation provides that
directors may be removed only for cause by the affirmative vote of the holders
of two-third of the shares of capitals stock of the corporation entitled to
vote. Under our certificate of incorporation, any vacancy on our board of
directors, however occurring, including a vacancy resulting from an
enlargement of the board, may only be filled by vote of a majority of the
directors then in office. The classification of our board of directors and the
limitations on the removal of directors and filling of vacancies could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, control of Cambridge Heart.
Our certificate of incorporation also provides that any action required or
permitted to be taken by our stockholders at an annual meeting or special
meeting of stockholders may only be taken if it is properly brought before
such meeting and may not be taken by written action in lieu of a meeting. Our
certificate of incorporation further provides that special meetings of our
stockholders may only be called by the President of Cambridge Heart or by our
board of directors. Under our by-laws, in order for any matter to be
considered properly brought before a meeting, a stockholder must comply with
certain requirements regarding advance notice to Cambridge Heart. The
foregoing provisions could have the effect of delaying until the next
stockholders' meeting stockholder actions which are favored by the holders of
a majority of our outstanding voting securities. These provisions may also
discourage another person or entity from making a tender offer for our common
stock, because such person or entity, even if it acquired a majority of our
outstanding voting securities, would be able to take action as a stockholder
(such as electing new directors or approving a merger) only at a duly called
stockholders' meeting, and not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case
may be, requires a greater percentage. Our certificate of incorporation and
by-laws require the affirmative vote of the holders of at least 75% of our
shares of capital stock issued and outstanding and entitled to vote to amend
or repeal any of the provisions described in the prior two paragraphs.
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Our certificate of incorporation contains certain provisions permitted under
the General Corporation Law of Delaware relating to the liability of
directors. The provisions eliminate a director's liability for monetary
damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation
of law. Further, our certificate of incorporation contains provisions to
indemnify our directors and officers to the fullest extent permitted by the
General Corporation Law of Delaware. We believe that these provisions will
assist us in attracting and retaining qualified individuals to serve as
directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
VALIDITY OF COMMON STOCK
The validity of the common stock offered hereby will be passed upon for
Cambridge Heart by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998 included in this
Registration Statement have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other documents with the Securities
and Exchange Commission. You may read and copy any document we file at the
SEC's public reference room at Judiciary Plaza Building, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. You should call 1-800-SEC-0330 for
more information on the public reference room. Our SEC filings are also
available to you on the SEC's Internet site at http://www.sec.gov.
This prospectus is part of a registration statement that we filed with the
SEC. The registration statement contains more information than this prospectus
regarding us and our common stock, including certain exhibits and schedules.
You can obtain a copy of the registration statement from the SEC at the
address listed above or from the SEC's Internet site.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate" into this prospectus information that we
file with the SEC in other documents. This means that we can disclose
important information to you by referring to other documents that contain that
information. The information incorporated by reference is considered to be
part of this prospectus. Information contained in this prospectus
automatically updates and supersedes previously filed information. We are
incorporating by reference the documents listed below and all of our filings
pursuant to the Exchange Act after the date of filing the initial registration
statement and prior to effectiveness of the registration statement.
The following documents filed by Cambridge Heart with the SEC are
incorporated herein by reference:
. Our Annual Report on Form 10-K for the year ended December 31, 1998, as
filed with the SEC on March 31, 1999.
36
<PAGE>
. Our definitive proxy statement for the 1999 Annual Meeting of
Stockholders, as filed with the SEC on April 30, 1999.
. Our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999,
as filed with the SEC on May 17, 1999.
. Our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999,
as filed with the SEC on August 16, 1999, as amended by Form 10-Q/A
filed with the SEC on August 18, 1999.
. Our Quarterly Report on Form 10-Q for the quarter ended September 30,
1999, as filed with the SEC on November 15, 1999, as amended by Form 10-
Q/A filed with the SEC on November 30, 1999.
. Our Current Report on Form 8-K, as filed with the SEC on June 16, 1999.
You may request a copy of these documents, at no cost, by telephone or email
or by writing to:
Cambridge Heart, Inc.
1 Oak Park Drive
Bedford, Massachusetts 01730
Attention: Robert B. Palardy
(781) 271-1200
[email protected]
PLAN OF DISTRIBUTION
The shares covered by this prospectus may be offered and sold from time to
time by the selling stockholders. The term "selling stockholders" includes
donees, pledgees, transferees or other successors-in-interest selling shares
received after the date of this prospectus from a selling stockholder as a
gift, pledge, partnership distribution or other non-sale related transfer. The
selling stockholders will act independently of us in making decisions with
respect to the timing, manner and size of each sale. Such sales may be made on
one or more exchanges or in the over-the-counter market or otherwise, at
prices and under terms then prevailing or at prices related to the then
current market price or in negotiated transactions. The selling stockholders
may sell their shares by one or more of, or a combination of, the following
methods:
. purchases by a broker-dealer as principal and resale by such broker-
dealer for its own account pursuant to this prospectus;
. ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
. block trades in which the broker-dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
. an over-the-counter distribution in accordance with the rules of the
Nasdaq National Market;
. in privately negotiated transactions; and
. in options transactions.
In addition, any shares that qualify for sale pursuant to Rule 144 may be
sold under Rule 144 rather than pursuant to this prospectus.
To the extent required, this prospectus may be amended or supplemented from
time to time to describe a specific plan of distribution. In connection with
distributions of the shares or otherwise, the selling stockholders may enter
into hedging transactions with broker-dealers or other financial institutions.
In connection with such transactions, broker-dealers or other financial
institutions may engage in short sales of the common stock in the course of
hedging the positions they assume with selling stockholders. The selling
stockholders may also sell the common stock short and redeliver the shares to
close out such short positions. The selling stockholders may also enter into
option or other transactions with broker-dealers or other financial
institutions which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares
37
<PAGE>
such broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction). The
selling stockholders may also pledge shares to a broker-dealer or other
financial institution, and, upon a default, such broker-dealer or other
financial institution, may effect sales of the pledged shares pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
In effecting sales, broker-dealers or agents engaged by the selling
stockholders may arrange for other broker-dealers to participate. Broker-
dealers or agents may receive commissions, discounts or concessions from the
selling stockholders in amounts to be negotiated immediately prior to the
sale.
In offering the shares covered by this prospectus, the selling stockholders
and any broker-dealers who execute sales for the selling stockholders may be
deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. Any profits realized by the selling stockholders
and the compensation of any broker-dealer may be deemed to be underwriting
discounts and commissions.
In order to comply with the securities laws of certain states, if
applicable, the shares must be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless they have been registered or qualified for sale
in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
We have advised the selling stockholders that the anti-manipulation rules of
Regulation M under the Exchange Act may apply to sales of shares in the market
and to the activities of the selling stockholders and their affiliates. In
addition, we will make copies of this prospectus available to the selling
stockholders for the purpose of satisfying the prospectus delivery
requirements of the Securities Act. The selling stockholders may indemnify any
broker-dealer that participates in transactions involving the sale of the
shares against certain liabilities, including liabilities arising under the
Securities Act.
At the time a particular offer of shares is made, if required, a prospectus
supplement will be distributed that will set forth the number of shares being
offered and the terms of the offering, including the name of any underwriter,
dealer or agent, the purchase price paid by any underwriter, any discount,
commission and other item constituting compensation, any discount, commission
or concession allowed or reallowed or paid to any dealer, and the proposed
selling price to the public.
We have agreed to indemnify the selling stockholders against certain
liabilities, including certain liabilities under the Securities Act.
We have agreed with the selling stockholders to keep the Registration
Statement of which this prospectus constitutes a part effective until the
earlier of (i) such time as all of the shares covered by this prospectus have
been disposed of pursuant to and in accordance with the Registration Statement
or (ii) the selling stockholders become eligible to resell the shares covered
by this prospectus pursuant to Rule 144(k) under the Securities Act.
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ F-2
Balance Sheet at December 31, 1997 and 1998.............................. F-3
Statement of Operations for the three years ended December 31, 1998...... F-4
Statement of Changes in Stockholders' Equity for the three years ended
December 31, 1998....................................................... F-5
Statement of Cash Flows for the three years ended December 31, 1998...... F-6
Notes to Financial Statements............................................ F-7
Balance Sheet at December 31, 1998 and September 30, 1999 (unaudited).... F-18
Statement of Operations for the three and nine month periods ended
September 30, 1998 and 1999 (unaudited)................................. F-19
Statements of Cash Flows for the nine month periods ended September 30,
1998 and 1999 (unaudited)............................................... F-20
Notes to Condensed Financial Statements.................................. F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cambridge Heart, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Cambridge Heart,
Inc. at December 31, 1997 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998,
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.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 10, 1999
F-2
<PAGE>
CAMBRIDGE HEART, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................ $ 5,665,736 $ 2,426,032
Marketable securities............................ 7,090,605 4,064,321
Accounts receivable, net of allowance for
doubtful accounts of $20,800 and $32,000 at
December 31, 1997 and 1998, respectively........ 509,918 555,991
Inventory........................................ 416,224 426,489
Prepaid expenses and other current assets........ 301,127 190,667
------------ ------------
Total current assets........................... 13,983,610 7,663,500
Fixed assets, net.................................. 574,660 647,629
Other assets....................................... 190,167 403,604
------------ ------------
$ 14,748,437 $ 8,714,733
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................. $ 170,531 $ 415,842
Accrued expenses................................. 346,770 471,003
License fees payable............................. 9,836 14,946
------------ ------------
Total current liabilities...................... 527,137 901,791
------------ ------------
Commitments (Notes 9 and 10)
Stockholders' equity:
Preferred Stock, $0.001 par value; 2,000,000
shares authorized, no shares issued and
outstanding..................................... -- --
Common Stock, $0.001 par value; 25,000,000 shares
authorized; 10,606,041 and 10,906,174 shares
issued and outstanding at December 31, 1997 and
1998, respectively.............................. 10,606 10,906
Additional paid-in capital....................... 29,405,685 29,603,435
Accumulated deficit.............................. (15,163,304) (21,700,389)
------------ ------------
14,252,987 7,913,952
Less: deferred compensation........................ (31,687) (101,010)
------------ ------------
14,221,300 7,812,942
------------ ------------
$ 14,748,437 $ 8,714,733
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CAMBRIDGE HEART, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenue................................ $ 866,942 $ 1,448,319 $ 2,096,853
Cost of goods sold..................... 884,229 1,386,627 1,848,155
----------- ----------- -----------
(17,287) 61,692 248,698
Costs and expenses:
Research and development............. 2,432,284 3,586,965 3,594,941
Selling, general and administrative.. 2,092,132 3,391,664 3,753,296
----------- ----------- -----------
Loss from operations............... (4,541,703) (6,916,937) (7,099,539)
Interest income........................ 506,824 869,318 562,454
----------- ----------- -----------
Net loss............................... $(4,034,879) $(6,047,619) $(6,537,085)
=========== =========== ===========
Net loss per share--basic and diluted.. $ (0.66) $ (0.58) $ (0.61)
=========== =========== ===========
Weighted average shares outstanding--
basic and diluted..................... 6,073,865 10,451,560 10,746,844
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CAMBRIDGE HEART
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series B Series A
convertible convertible
preferred stock preferred stock Common Stock
------------------ ------------------ ------------------ Additional Total
Number of Par Number of Par Number of Par paid-in Accumulated Deferred stockholders'
Shares value Shares value Shares value capital deficit compensation equity
---------- ------ ---------- ------ ---------- ------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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) -- 4,010,939
Issuance of
common stock in
initial public
offering........ 2,437,750 2,438 19,651,447 19,653,885
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 32,481
Deferred
compensation
related to
common stock
options
granted......... 448,750 (448,750) --
Amortization of
deferred
compensation.... 67,312 67,312
Net loss........ (4,034,879) (4,034,879)
---------- ------ ---------- ------ ---------- ------- ----------- ------------ --------- ----------
Balance at
December 31,
1996............ -- -- -- -- 10,214,783 10,215 29,216,646 (9,115,685) (381,438) 19,729,738
Issuance of
common stock
through exercise
of stock
options,
warrants and
employee stock
purchase plan... 391,258 391 280,914 281,305
Compensation
related to
cashless
exercise of
certain common
stock options... 91,875 91,875
Compensation
related to non-
employee stock
options
granted......... 100,000 100,000
Amortization of
deferred
compensation.... 66,001 66,001
Reversal of
deferred
compensation
related to
common stock
options
forfeited....... (283,750) 283,750 --
Net loss........ (6,047,619) (6,047,619)
---------- ------ ---------- ------ ---------- ------- ----------- ------------ --------- ----------
Balance at
December 31,
1997............ -- -- -- -- 10,606,041 10,606 29,405,685 (15,163,304) (31,687) 14,221,300
Issuance of
common stock
through exercise
of stock
options,
warrants and
employee stock
purchase plan... 300,133 300 101,479 101,779
Compensation
related to non-
employee stock
options
granted......... 15,719 15,719
Deferred
compensation
related to
common stock
options granted
in connection
with repricing
of common stock
options......... 105,344 (105,344) --
Reversal of
deferred
compensation
related to
common stock
options
forfeited....... (24,792) 24,792 --
Amortization of
deferred
compensation.... 11,229 11,229
Net loss........ (6,537,085) (6,537,085)
---------- ------ ---------- ------ ---------- ------- ----------- ------------ --------- ----------
Balance at
December 31,
1998............ -- $ -- -- $ -- 10,906,174 $10,906 $29,603,435 $(21,700,389) $(101,010) $7,812,942
========== ====== ========== ====== ========== ======= =========== ============ ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CAMBRIDGE HEART, INC.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $(4,034,879) $ (6,047,619) $(6,537,085)
Adjustments to reconcile net loss to
net cash used for operating
activities:
Depreciation and amortization........ 104,319 226,074 297,575
Loss on disposal of fixed assets..... 12,178 20,241 --
Compensation expense on stock
options............................. 67,312 257,876 26,220
Changes in assets and liabilities:
Increase in accounts receivable..... (420,984) (88,934) (46,073)
Increase in inventory............... (132,923) (164,436) (10,265)
(Increase) decrease in prepaid
expenses and other current assets.. (336,053) 83,296 110,460
(Increase) decrease in other
assets............................. (166,514) 40,964 97,360
Increase in accounts payable and
accrued expenses................... 250,501 31,591 369,544
Increase (decrease) in license fees
payable............................ (17,201) (4,175) 5,110
----------- ------------ -----------
Net cash used for operating
activities........................ (4,674,244) (5,645,122) (5,687,154)
----------- ------------ -----------
Cash flows from investing activities:
Purchases of fixed assets............. (371,686) (357,698) (369,817)
Capitalization of software development
costs................................ -- (110,727) (310,796)
Purchases of marketable securities.... -- (7,090,605) --
Liquidation of marketable securities.. -- -- 3,026,284
----------- ------------ -----------
Net cash (used for)/provided by
investing activities.............. (371,686) (7,559,030) 2,345,671
----------- ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common
stock, net of issuance costs......... 19,686,366 281,305 101,779
----------- ------------ -----------
Net cash provided by financing
activities........................ 19,686,366 281,305 101,779
----------- ------------ -----------
Net increase (decrease) in cash and
cash equivalents...................... 14,640,436 (12,922,847) (3,239,704)
Cash and cash equivalents, beginning of
year.................................. 3,948,147 18,588,583 5,665,736
----------- ------------ -----------
Cash and cash equivalents, end of
year.................................. $18,588,583 $ 5,665,736 $ 2,426,032
=========== ============ ===========
</TABLE>
See supplemental disclosure of non-cash financing activity in Note 5.
The accompanying notes are an integral part of these financial statements.
F-6
<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.
The Company has also experienced substantial net losses in each fiscal
period since its inception and, as of December 31, 1998, had an accumulated
deficit of $21,700,400. Such losses and accumulated deficit resulted from the
Company's lack of substantial revenue and significantly increased costs
incurred in the development of the Company's products and in the preliminary
establishment of the Company's infrastructure. The Company anticipates that
its existing capital resources, including the amounts raised in the initial
public offering, will be adequate to fund operations through 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.
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 $7,090,600 and $4,064,300
at December 31, 1997 and 1998, respectively, are classified as held to
maturity, and mature within one year. The securities of state government
agencies, totaling $5,879,700 and $2,447,700 at December 31, 1997 and 1998,
respectively, are classified as available for sale. All of these investments
have been recorded at amortized cost, which approximates fair market value.
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, 1997 and 1998.
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.
F-7
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Segment
The Company is engaged principally in one industry segment that represents
100% of revenues. The Company also operates principally in one geographic
area. See Note 11 with respect to significant customers and with respect to
sales in other geographic areas.
Revenue Recognition
Revenue is recognized upon shipment of goods, provided that all obligations
of the Company have been fulfilled and collection of the related receivable is
probable. 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 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, generally two
years.
Costs capitalized at December 31, 1998, which are included in other assets
in the accompanying balance sheet, totaled $343,000 ($85,000 at December 31,
1997), net of $78,500 of accumulated amortization ($26,000 at December 31,
1997).
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, 1998 totaled $61,000 ($58,000 at December 31,
1997), net of $39,000 of accumulated amortization ($20,000 at December 31,
1997), 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
F-8
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
disclosure of contingencies at December 31, 1997 and 1998, and the reported
amounts of revenues and expenses during the three years in the period ended
December 31, 1998. Actual results could differ from these estimates.
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. Diluted earnings per share
includes dilutive potential common stock (such as options, warrants and
convertible preferred stock) and is computed similarly to fully-diluted
earnings per share pursuant to APB 15.
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 1996, 1997 and 1998,
as its inclusion would have been anti-dilutive.
3. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
Estimated
useful December 31,
lives -------------------
(years) 1997 1998
--------- -------- ----------
<S> <C> <C> <C>
Computer equipment............................ 3-5 $271,661 $ 333,177
Manufacturing equipment....................... 5 87,183 158,544
Office furniture.............................. 7 69,781 81,444
Sales display and clinical equipment.......... 3 406,810 588,126
Leasehold Improvements........................ -- 17,275
-------- ----------
835,435 1,178,566
Less-accumulated depreciation........................... 260,775 530,937
-------- ----------
$574,660 $ 647,629
======== ==========
</TABLE>
4. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Accrued bonus............................................. $ 84,167 $149,900
Accrued clinical trial costs.............................. 61,650 5,950
Accrued professional fees................................. 44,579 99,425
Accrued vacation.......................................... 28,604 53,931
Accrued other............................................. 127,770 161,797
-------- --------
$346,770 $471,003
======== ========
</TABLE>
F-9
<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 expired on September 24, 1998. During 1997 and
1998, warrants to purchase 191,208 and 180,609 shares of common stock,
respectively, were exercised, resulting in the issuance of 168,086 and 140,454
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. The warrants were exercised during 1998 and 85,510 shares of common
stock were issued to this related party.
In conjunction with certain license agreements entered into during 1996, 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 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.
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
F-10
<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, 1996, 1997 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997 December 31, 1998
------------------- ------------------- -------------------
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................ 1,284,499 $0.47 1,354,249 $1.54 1,372,750 $3.57
Granted................. 244,500 7.04 514,700 7.85 653,000 5.92
Exercised............... (156,250) 0.16 (218,549) 0.42 (147,750) 0.23
Canceled................ (18,500) 0.72 (277,650) 3.83 (536,500) 7.80
--------- --------- ---------
Outstanding at end of
year................... 1,354,249 $1.54 1,372,750 $3.57 1,341,500 $3.55
========= ===== ========= ===== ========= =====
Exercisable at end of
year................... 593,964 $0.41 539,034 $0.49 560,467 $0.74
========= ===== ========= ===== ========= =====
Weighted average fair
value of options
granted during the
year................... $6.17 $5.29 $1.71
===== ===== =====
</TABLE>
F-11
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
All options granted during 1997 and 1998 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.
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.
During 1998, the Board of Directors determined that, certain stock options
held by employees and members of the Company's Scientific Advisory Board
("SAB") had an exercise price significantly higher than the fair market value
of the Company's Common stock, and therefore such options were not providing
the desired incentive to employees and SAB members. Accordingly, the Board
provided employees the right to elect to surrender previously granted
unexercised options with exercise prices between $6.75 and $10.25 in return
for new option grants at $5.00, the fair market value of the Company's Common
stock on October 16, 1998. All vesting in the exchanged options was forteited
by employees. The new options vest at the rate of 25% each year over four
years starting October 16, 1998. Options to purchase 396,250 shares of Common
stock were surrendered by employees and repriced. Options to purchase a total
of 538,998 shares of Common stock were eligible for this program. The
company's CEO and all other members of the Board of Directors were excluded
from this program.
Members of the Company's SAB were granted the right to elect to surrender
previously granted unexercised options with an exercise price of $7.75 in
return for new option grants at $6.75, the fair market value of the Company's
Common stock on October 21, 1998. All vesting in the exchanged options was
forfeited. The new options vest at the rate of 33% per year over three years
starting October 21, 1998. Options to purchase 40,000 shares of Common stock
were surrendered by SAB members and repriced. Options to purchase a total of
60,000 shares of Common stock were eligible for this program.
The following table summarizes information about stock options outstanding
under the Company's stock option plans at December 31, 1998:
<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............. 32,070 5.30 $0.02 32,070 $0.02
$.20-$.50............... 517,018 6.80 0.63 507,874 0.27
$1.00-$2.00............. 118,162 7.09 1.77 112,163 1.81
$4.00-$5.00............. 416,000 9.73 5.00 500 4.00
$7.00-$9.38............. 258,250 8.40 8.14 80,230 8.70
--------- -------
1,341,500 7.46 $3.52 682,757 $1.53
========= =======
</TABLE>
At December 31, 1998, 2,223,388 shares of common stock are reserved for
issuance upon exercise of the options issued under the Company's stock option
plans and there are 761,450 options available for future grant. Outstanding
options generally vest on a pro rata basis over a period of two to five years.
F-12
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, $66,001 and $29,437 during 1996, 1997 and 1998 respectively. The
forfeiture of options granted to certain of these employees resulted in the
reversal of previously recorded deferred compensation totaling $283,750 and
$24,792 during 1997 and 1998, respectively.
The Company also recorded additional compensation expense totaling $191,875
and $16,541 during 1997 and 1998, respectively. Compensation expense related
to 60,000 options granted to non-employee consultants for services rendered
was $100,000 in 1997 and $16,541 in 1998. Compensation expense of $91,875
related to the cashless exercise of 15,000 options by an employee was also
recorded in 1997.
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 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 and 11,929 shares of common stock at an average price of $8.02
and $5.72 during 1997 and 1998 respectively. No shares were issued during
1996. At December 31, 1998, the Company had 79,511 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
1996, 1997 and 1998, the Company's net loss and net loss per share would have
been as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net loss:
As reported.............................. $4,034,879 $6,047,619 $6,537,085
Pro forma................................ $4,161,030 $6,511,042 $6,900,661
Net loss per share:
As reported--basic and diluted........... $ 0.66 $ 0.58 $ 0.61
Pro forma--basic and diluted............. $ 0.69 $ 0.62 $ 0.65
</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 1996, 1997 and 1998, respectively: (i) dividend
yield of 0% for all periods; (ii) expected volatility of 0%-50%, 60% and 50%;
(iii) risk free interest rates of 5.8%-6.8%, 6.1%-6.9% and 4.58%; and (iv)
expected option terms of 7 years for 1996, 4 to 7 years for 1997 and five
years for 1998. SFAS 123 requires that volatility be considered in the
calculation of
F-13
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 1996, 1997
and 1998 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 of reported results of
operations for future years.
7. Income Taxes
The income tax benefit consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Income tax benefit:
Federal............................. $1,393,000 $2,146,000 $ 2,344,000
State............................... 249,000 402,000 513,000
---------- ---------- -----------
1,642,000 2,548,000 2,857,000
Deferred tax asset valuation
allowance............................ (1,642,000) (2,548,000) (2,857,000)
---------- ---------- -----------
$ -- $ -- $ --
========== ========== ===========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforwards................. $ 6,435,000 $ 9,164,000
Research and development tax credit
carryforwards................................... 598,000 856,000
Deferred start up and organization expenses...... 9,000 --
Other............................................ 11,000 43,000
----------- -----------
Gross deferred tax assets...................... 7,053,000 10,063,000
Capitalized software............................. -- (137,000)
Fixed assets..................................... (29,000) (48,000)
Patent costs..................................... (23,000) (16,000)
----------- -----------
Net deferred tax assets........................ 7,001,000 9,862,000
Deferred tax asset valuation allowance......... (7,001,000) (9,862,000)
----------- -----------
$ -- $ --
=========== ===========
</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).
F-14
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Approximately $614,000 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.
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,
---------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Statutory U.S. federal
tax rate............... (35.0)% (35.0)% (35.0)%
State taxes, net of
federal tax benefit.... (6.2) (6.7) (6.4)
Non-deductible
expenses............... 1.3 1.6 0.2
Federal research and
development credits.... (1.6) (2.6) (2.7)
Other................... .8 0.6 0.2
Valuation allowance on
deferred tax assets.... 40.7 42.1 43.7
----- ----- -----
-- % -- % -- %
===== ===== =====
</TABLE>
As of December 31, 1998, the Company has $22,973,000 of net operating loss
carryforwards and $576,000 and $425,000 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 2018.
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 2001. Certain of these leases
provide the Company with various renewal options. Total rent expense under all
operating leases was approximately $98,700, $159,700 and $178,600 for the
years ended December 31, 1996, 1997 and 1998, respectively.
F-15
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, 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>
1999................................................................ $175,010
2000................................................................ 41,283
2001................................................................ 33,117
--------
$249,411
========
</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 1996, 1997 and 1998 amounted to $20,000 in each year. The future
minimum license maintenance fee commitments at December 31, 1998 are
approximately as follows:
<TABLE>
<S> <C>
1999................................................................ $ 20,000
2000................................................................ 40,000
2001................................................................ 40,000
2002................................................................ 40,000
Thereafter.......................................................... 240,000
--------
$380,000
========
</TABLE>
During the term of these license agreements, the Company is obligated to pay
a royalty (ranging from 1.5% to 2.0%) 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 2.0%
to 3.5%) 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).
F-16
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. Related Party Transactions, Including Royalty Obligations
License Agreement/Consulting and Technology Agreement
The Company has 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 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.
The Company has also entered into a consulting and technology agreement with
this individual. This agreement, which has been extended to May 31, 2000,
requires the Company to pay monthly consulting fees of either $12,500 or
$10,000, as stipulated in the agreement. Total payments made during 1996, 1997
and 1998 were approximately $106,000, $112,600 and $118,600, 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). This warrant was
exercised during 1998, and 85,510 shares of common stock were issued.
Operations through December 31, 1998 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 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. During 1998, the Company terminated its distribution
contract with this European distributor. Revenues from the Company's Japanese
and European distributors accounted for 36% and 8% respectively of total
revenues during 1998 and 37% and 7% respectively of the accounts receivable
balance at December 31, 1998. The Company does not anticipate non-performance
by the counterparties and, accordingly, does not require collateral.
F-17
<PAGE>
CAMBRIDGE HEART, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
September
December 31, 30,
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................ $ 2,426,032 $ 1,120,092
Marketable securities............................ 4,064,321 4,681,542
Accounts receivable, (net of allowance for
doubtful accounts of $32,000 and $40,000 at
December 31, 1998 and September 30, 1999,
respectively)................................... 555,991 650,854
Inventory........................................ 426,489 397,984
Prepaid expenses and other current assets........ 190,667 157,442
------------ ------------
Total current assets........................... 7,663,500 7,007,914
Fixed assets, net.................................. 647,629 684,886
Other assets....................................... 403,604 456,015
------------ ------------
$ 8,714,733 $ 8,148,815
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................. $ 415,842 $ 310,230
Accrued expenses................................. 485,949 567,563
------------ ------------
Total current liabilities...................... 901,791 877,793
------------ ------------
Stockholder's equity:
Common stock, $.001 par value; 20,000,000 shares
authorized; 10,906,174 and 11,865,988 shares
issued and outstanding at December 31, 1998 and
September 30, 1999, respectively................ 10,906 11,866
Additional paid-in capital....................... 29,603,435 34,310,675
Accumulated deficit.............................. (21,700,389) (26,996,652)
------------ ------------
7,913,952 7,325,889
Less: deferred compensation........................ (101,010) (54,867)
------------ ------------
Total stockholders' equity......................... 7,812,942 7,271,022
------------ ------------
$ 8,714,733 $ 8,148,815
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
F-18
<PAGE>
CAMBRIDGE HEART, INC.
STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue................... $ 661,260 $ 540,298 $ 1,511,452 $ 1,635,121
Cost of goods sold........ 550,415 537,699 1,360,623 1,517,214
----------- ----------- ----------- -----------
(110,845) 2,599 150,829 117,907
Cost and expenses:
Research and
development............ 899,259 699,332 2,863,002 2,086,515
Selling, general and
administrative......... 868,979 1,214,224 2,739,321 3,538,891
----------- ----------- ----------- -----------
Loss from operations.. (1,657,393) (1,910,957) (5,451,494) (5,507,499)
Interest income........... 133,424 80,048 462,308 211,236
----------- ----------- ----------- -----------
Net loss.................. $(1,523,969) $(1,830,909) $(4,989,186) $(5,296,263)
=========== =========== =========== ===========
Net loss per share--basic
and diluted.............. $ (0.14) $ (0.15) $ (0.47) $ (0.46)
=========== =========== =========== ===========
Weighted average common
shares outstanding--basic
and diluted.............. 10,810,080 11,865,739 10,698,837 11,546,176
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-19
<PAGE>
CAMBRIDGE HEART, INC.
STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(4,989,186) $(5,296,263)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization...................... 216,590 399,297
Compensation expense related to stock options...... 51,316 27,855
Changes in assets and liabilities:
Increase in accounts receivable................... (230,893) (94,863)
Decrease in inventory............................. 110,252 28,505
Decrease in prepaid expenses and other current
assets........................................... 37,034 33,225
Decrease in other assets.......................... 61,977 13,807
Increase (decrease) in accounts payable and
accrued expenses................................. 292,874 (23,998)
----------- -----------
Net cash used for operating activities........... (4,450,036) (4,912,435)
Cash flows from investing activities:
(Purchase) sale of marketable securities............ 2,123,214 (617,221)
Purchase of fixed assets............................ (291,304) (294,129)
Capitalization of software development costs........ (237,475) (208,644)
----------- -----------
Net cash provided by (used for) investing
activity........................................ 1,594,435 (1,119,994)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs..................................... 54,093 4,726,489
----------- -----------
Net cash provided by financing activities........ 54,093 4,726,489
Net decrease in cash and cash equivalents............ (2,801,508) (1,305,940)
Cash and cash equivalents at beginning of period..... 5,665,736 2,426,032
----------- -----------
Cash and cash equivalents at end of period........... $ 2,864,228 $ 1,120,092
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-20
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Nature of Business
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 cardiology specialists.
2. Basis of Presentation
The condensed financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. These
condensed financial statements should be read in conjunction with the
financial statements dated December 31, 1998 and the notes thereto included in
the Company's 1998 Annual Report on Form 10-K. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company as of September 30, 1999,
and the results of its operations and its cash flows for the nine month
periods ended September 30, 1998 and 1999, have been made. The results of
operations for such interim periods are not necessarily indicative of the
results for the full year or any future period.
3. Inventories
Inventories, consisting primarily of purchased components, are stated at the
lower of cost or market. Cost is determined using the first in, first out
(FIFO) method.
4. Net Loss per Share
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 1,431,222 and 1,519,238 of potential
common stock from the calculation of diluted weighted average share amounts
for the three and nine month periods ended September 30, 1998 and 1999
respectively, as its inclusion would have been anti-dilutive.
5. Subsequent Event
In October 1999 the Company raised gross proceeds of $4.9 million in equity
capital less approximately $395,455 in issuance costs from the sale of
1,386,347 shares of Common Stock through a private placement with a group of
investors at a 19% premium to the final trading price of the Company's stock
on the NASDAQ on the date of the closing. In addition, warrants with a four
year term for the purchase of 277,269 shares of Common Stock at $3.50 per
share were issued. If the Company sells Common Stock in a capital raising
transaction at a lower price per share over the next 12 months, the investors
have the right to receive additional shares to adjust the price of their
transaction. The sales agent in the transaction, Sunrise Securities, Inc. also
received warrants with a four year term for the purchase of 97,044 shares of
Common Stock at $4.20 per share. The proceeds of the sale will be used to fund
operations. The Company has executed Subscription Agreements for an additional
130,000 shares of Common Stock for gross proceeds of $455,000 that have not
yet closed from this transaction. The Company anticipates that these
Subscription Agreements will be funded before December 31, 1999.
As a result of this sale of Common Stock at $3.50 per share, the Company was
obligated to issue 529,817 additional shares of Common Stock to the investors
that participated in the Company's June, 1999 sale of Common Stock. Terms of
that transaction provided the investors with the right to receive additional
shares if the Company sold Common Stock at a price below the $5.25 per share
they paid.
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