<PAGE>
Filed Pursuant to Rule 424(b)(3)
File Number 333-46988
3,268,250 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 private placements
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 October 17, 2000, the closing sale price of the common stock on
Nasdaq was $4.00 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 OCTOBER 18, 2000
<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>
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PAGE
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<S> <C>
PROSPECTUS SUMMARY.......................................... 1
RISK FACTORS................................................ 3
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION.......... 8
USE OF PROCEEDS............................................. 8
SELLING STOCKHOLDERS........................................ 9
DIVIDEND POLICY............................................. 11
MARKET PRICE OF THE COMMON STOCK............................ 11
SELECTED CONSOLIDATED FINANCIAL DATA........................ 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 13
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK... 17
BUSINESS.................................................... 18
MANAGEMENT.................................................. 32
CERTAIN TRANSACTIONS........................................ 34
DESCRIPTION OF OUR SECURITIES............................... 35
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS...... 37
TRANSFER AGENT AND REGISTRAR................................ 38
VALIDITY OF COMMON STOCK.................................... 38
EXPERTS..................................................... 38
WHERE YOU CAN FIND MORE INFORMATION......................... 39
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 39
PLAN OF DISTRIBUTION........................................ 40
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 Alternans Test are trademarks
of Cambridge Heart. All other trademarks and service marks are the property of
their respective owners.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY CONTAINS BASIC INFORMATION ABOUT US AND THIS OFFERING. BECAUSE
IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY,
INCLUDING THE SECTION ENTITLED "RISK FACTORS" AND OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES BEFORE MAKING AN INVESTMENT DECISION.
CAMBRIDGE HEART, INC.
OUR BUSINESS
Cambridge Heart is engaged in the research, development 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 products, the CH 2000 Alternans System, the Heartwave-TM- System and
associated Micro-V Alternans Sensors incorporate our proprietary technology to
non-invasively measure extremely low levels of T-wave alternans, a beat-to-beat
alternation in a portion of a patient's electrocardiogram. Clinical research 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, Heartwave-TM- System and Micro-V Alternans
Sensors have received 510(k) clearance from the U.S. Food and Drug
Administration for sale in the United States. Our CH 2000 Alternans System and
Micro-V Alternans Sensors 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) clearances
for the CH 2000 System and Heartwave-TM- System include the claim that they 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 world wide web
address is WWW.CAMBRIDGEHEART.COM. The information contained on our Web site is
not incorporated by reference into this prospectus and should not be considered
a part of this document. Our web site address is included in this document as an
inactive textural reference only.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by selling 3,268,250 shares
stockholders...............................
Use of proceeds.............................. Cambridge Heart will not receive any proceeds
from the sale of shares in this offering
Nasdaq National Market symbol................ CAMH
</TABLE>
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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................... $ 68,047 $ 866,942 $ 1,448,319 $ 2,096,853 $ 2,135,981 $ 1,094,823 $ 870,484
Cost of revenue................. 141,312 884,229 1,386,627 1,848,155 2,006,567 979,515 890,228
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross Margin.................... (73,265) (17,287) 61,692 248,648 129,424 115,308 (19,744)
Research and development........ 1,708,815 2,432,284 3,586,965 3,594,941 2,850,423 1,387,183 1,585,977
Selling, general and
administration................ 960,824 2,092,132 3,391,664 3,753,296 4,945,499 2,324,667 2,618,491
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total cost and expenses......... 2,669,639 4,524,416 6,978,629 7,348,237 7,795,922 3,711,850 4,204,468
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss from operations............ (2,742,904) (4,541,703) (6,916,937) (7,099,539) (7,666,498) (3,596,542) (4,224,212)
Interest income................. 245,946 506,824 869,318 562,454 331,084 131,188 248,722
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss........................ $(2,496,958) $(4,034,879) $(6,047,619) $(6,537,085) $(7,335,414) $(3,465,354) $(3,975,490)
=========== =========== =========== =========== =========== =========== ===========
Net loss per share--
basic and diluted............. $ (0.89) $ (0.66) $ (0.58) $ (0.61) $ (0.61) $ (0.31) $ (0.27)
=========== =========== =========== =========== =========== =========== ===========
Weighted average shares of
outstanding basic and
diluted....................... 2,814,069 6,073,865 10,451,560 10,746,844 11,933,261 11,021,184 14,575,745
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The following table is a summary of our balance sheets.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 2000
------------------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents............................ $ 9,176,316 $7,244,803
Working capital................................. $ 8,950,259 $7,250,084
Total assets.................................... $11,453,610 $9,745,505
Total liabilities............................... $ 1,404,323 $1,253,727
Stockholders' equity............................ $10,049,287 $8,491,778
</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 IN
US.
RISKS RELATED TO OUR OPERATIONS
WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO CONTINUE TO INCUR NET LOSSES
AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY
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 June 30, 2000. 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.
WE HAVE NOT BEEN ABLE TO FUND OUR OPERATIONS FROM CASH GENERATED BY OUR
BUSINESS, AND IF WE CANNOT MEET OUR FUTURE CAPITAL REQUIREMENTS, WE MAY NOT BE
ABLE TO DEVELOP OR ENHANCE OUR TECHNOLOGY, TAKE ADVANTAGE OF BUSINESS
OPPORTUNITIES AND RESPOND TO COMPETITIVE PRESSURES.
We have principally financed our operations over the past year through the
private placement of shares of our common stock. If we do not generate
sufficient cash from our business to fund operations or if we cannot obtain
additional capital through equity or debt financings, we will be unable to grow
as planned and may not be able to take advantage of business opportunities,
develop new technology or respond to competitive pressures. This could limit our
growth and have a material adverse effect on the market price of our common
stock.
Any additional financing we may need in the future may not be available on
terms favorable to us, if at all. If we raise additional funds through the
issuance of equity or convertible debt securities, the percentage ownership of
Cambridge Heart by our stockholders would be reduced and the securities issued
could have rights, preferences and privileges more favorable than those of our
current stockholders.
3
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WE DEPEND ON OUR MICROVOLT T-WAVE ALTERNANS TECHNOLOGY FOR SUBSTANTIALLY ALL OF
OUR REVENUES AND IF IT DOES NOT ACHIEVE BROAD MARKET ACCEPTANCE, OUR REVENUES
COULD DECLINE
We believe that our future success will depend, in large part, upon the
successful commercialization and market acceptance of our microvolt 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. The failure of our microvolt T-wave alternans technology to achieve
broad market acceptance, the failure of the market for our products to grow or
to grow at the rate we anticipate, or a decline in the price of our products
would reduce our revenues. This could have a material adverse effect on the
market price of our common stock. We can give no assurance that we will be able
to successfully commercialize or achieve market acceptance of our microvolt
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 Micro-V Alternans Sensors to establish the
predictive value of such technology. Although studies on high risk patients to
date have indicated that the measurement of microvolt 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 microvolt 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.
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, we can give 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 FACE SUBSTANTIAL COMPETITION, WHICH MAY RESULT IN OTHERS DISCOVERING,
DEVELOPING OR COMMERCIALIZING COMPETING PRODUCTS BEFORE OR MORE SUCCESSFULLY
THAN WE DO
Competition from competitors' medical devices that diagnose cardiac disease
is intense and likely to increase. Our success will depend on our ability to
develop products and apply our technology and our ability to establish and
maintain a market for our products. 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.
4
<PAGE>
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
WE COULD BE EXPOSED TO SIGNIFICANT LIABILITY CLAIMS IF WE ARE UNABLE TO OBTAIN
INSURANCE AT ACCEPTABLE COSTS AND ADEQUATE LEVELS OR OTHERWISE PROTECT OURSELVES
AGAINST POTENTIAL 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 and the Heartwave-TM- 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 both systems as currently contemplated.
WE MAY NOT BE ABLE TO OBTAIN OR MAINTAIN PATENT PROTECTION FOR OUR PRODUCTS
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 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. 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 The Massachusetts Institute of Technology. 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.
5
<PAGE>
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.
IF WE ARE NOT ABLE TO KEEP OUR TRADE SECRETS CONFIDENTIAL, OUR TECHNOLOGY AND
INFORMATION MAY BE USED BY OTHERS TO COMPETE AGAINST US
We rely on unpatented trade secrets to protect our proprietary technology.
We can give no assurance that others will not independently develop or 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. We may not have adequate remedies for any breach by a party to
these confidentiality agreements. 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 OR MAINTAIN ADEQUATE LEVELS OF THIRD-PARTY
REIMBURSEMENT
Our revenues currently depend and will continue to depend, to a significant
extent, on sales of our CH 2000 Alternans System and Heartwave-TM- System. Our
ability to successfully commercialize these systems depends in part on the
availability of, and our ability to obtain and maintain, adequate levels of
third-party reimbursement for use of these systems. Only limited reimbursement
is currently available for performance of the alternans test for measuring
T-wave alternans.
The amount of reimbursement in the United States that will be available for
clinical use of the alternans test 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 and Heartwave-TM- System successfully will depend, in large part, on the
extent to which appropriate reimbursement levels for the cost of performing an
alternans test are obtained from government authorities, private health insurers
and other organizations, such as health maintenance organizations.
We do not know whether reimbursement in the United States or foreign
countries for the alternans test will increase, or 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 and Heartwave-TM- System. The
unavailability of third-party reimbursement or the inadequacy of the
reimbursement for alternans tests using the CH 2000 Alternans System and
Heartwave-TM- System would have a material adverse effect on Cambridge Heart.
6
<PAGE>
RISKS RELATED TO THE OFFERING
OUR STOCK PRICE COULD BE VOLATILE, WHICH COULD CAUSE YOU TO LOSE ALL OR PART OF
YOUR INVESTMENT
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 volatility 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.
7
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This prospectus and the documents incorporated by reference in this
prospectus contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 that involve risks and uncertainties, such as statements
concerning:
- growth and future operating results;
- discovery and development of products;
- developments in our markets and strategic focus;
- new products;
- strategic alliances;
- intellectual property;
- our manufacturing, marketing, sales and distribution capabilities; and
- future economic, business and regulatory conditions.
These forward-looking statements are accompanied in some cases by words such
as "project," "believe," "anticipate," "plan," "expect," "estimate," "intend,"
"should," "would," "could" or "may," or other words that convey uncertainty of
future events or outcome. Important factors that could cause actual results to
differ materially from these expectations are disclosed in this prospectus,
including under the caption "Risk Factors." These factors and other cautionary
statements made in this prospectus and the documents incorporated by reference
should be read as being applicable to all related forward-looking statements
wherever they appear in this prospectus and in the documents incorporated by
reference. The forward-looking statements in this prospectus are made as of the
date of this prospectus. We assume no obligation to update them even though our
situation may change in the future.
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.
8
<PAGE>
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 September 15, 2000.
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 September 15, 2000 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
BENEFICIALLY OWNED NUMBER OF STOCK TO BE BENEFICIALLY
PRIOR TO OFFERING SHARES OF OWNED AFTER OFFERING(1)
------------------------ COMMON STOCK -------------------------
NAME OF SELLING STOCKHOLDER NUMBER PERCENTAGE BEING OFFERED NUMBER PERCENTAGE
--------------------------- -------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Frontier Performance Partnership,
L.P.................................. 832,000(2) 4.8% 832,000(2) 0 0%
Frontier Partners Fund II, L.P......... 699,400(3) 4.1% 699,400(3) 0 0%
Boston Small Cap Investment Fund....... 492,700(4) 2.9% 492,700(4) 0 0%
The Tail Wind Fund Ltd................. 530,119(5) 3.1% 357,500(6) 172,619(7) 1.0%
Aberdeen Strategic Capital, L.P........ 309,508(8) 1.8% 223,600(8) 85,908 *
SG Partners, L.P....................... 189,980(9) 1.1% 132,080(9) 57,900 *
The Walt Disney Company
Retirement Plan...................... 155,640(10) 1.0% 55,640(10) 100,000 *
Paul Scharfer.......................... 125,819(11) * 62,445(12) 63,374(13) *
Nathan Low Roth IRA.................... 101,227(14) * 72,210(14) 29,017 *
Core Technology Fund, Inc.............. 79,950(15) * 56,550(15) 23,400 *
Rochester Institute of Technology...... 71,340(16) * 41,340(16) 30,000 *
Wardenclyffe Micro Cap Fund, L.P....... 70,492(17) * 55,900(17) 14,592 *
Sci-Tech Investment Partners, L.P...... 64,270(18) * 45,370(18) 18,900 *
Frontier Partners Fund, L.P............ 55,900(19) * 55,900(19) 0 0%
Other selling stockholders
(8 persons).......................... 132,369(20) * 85,615(21) 46,754(22) *
</TABLE>
------------------------
* Less than one percent.
(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.
9
<PAGE>
(2) Includes 192,000 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(3) Includes 161,400 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(4) Includes 113,700 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(5) Includes 130,119 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(6) Includes 82,500 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(7) Includes 47,619 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(8) Includes 51,600 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(9) Includes 30,480 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(10) Includes 12,840 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(11) Includes 125,819 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(12) Includes 62,445 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(13) Includes 63,374 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(14) Includes 54,360 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(15) Includes 13,050 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(16) Includes 9,540 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(17) Includes 12,900 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(18) Includes 10,470 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(19) Includes 12,900 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(20) Includes 64,669 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
(21) Includes 40,215 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
10
<PAGE>
(22) Includes 24,454 shares of common stock issuable within 60 days after
September 15, 2000 pursuant to the exercise of warrants.
None of the selling stockholders has held any position or office with, or
otherwise had a material relationship with, us in the past three years.
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 1998 FISCAL 1999 FISCAL 2000
------------------- ------------------- -------------------
PERIOD HIGH LOW HIGH LOW HIGH LOW
------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
First Quarter............................ $ 9.25 $6.375 $10.125 $ 5.375 $7.50 $ 2.75
Second Quarter........................... 11.875 7.50 10.5 4.75 5.25 2.1875
Third Quarter (through September 28,
2000).................................. 9.625 5.00 6.8125 3.3125 4.375 2.875
Fourth Quarter........................... 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 October 17, 2000, the last
reported sale price of our common stock on the Nasdaq National Market was $4.00.
On September 15, 2000, we had approximately 124 holders of common stock of
record. This number does not include stockholders for whom shares are held in a
"nominee" or "street" name.
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<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, 1995 and 1996 and the selected
consolidated balance sheet data as of December 31, 1995, 1996 and 1997 are
derived from our audited financial statements not included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................ $ 68 $ 867 $ 1,448 $ 2,097 $ 2,136 $ 1,095 $ 870
Cost of goods sold............. 141 884 1,386 1,848 2,007 980 890
---------- ---------- ----------- ----------- ----------- ----------- -----------
Gross profit (loss)............ (73) (17) 62 249 129 115 (20)
Costs and expenses:
Research and development..... 1,709 2,433 3,587 3,595 2,850 1,387 1,586
Selling, general and
administrative............. 961 2,092 3,392 3,753 4,945 2,325 2,618
---------- ---------- ----------- ----------- ----------- ----------- -----------
Total costs and expenses... 2,670 4,525 6,979 7,348 7,795 3,712 4,204
---------- ---------- ----------- ----------- ----------- ----------- -----------
Loss from operations........... (2,743) (4,542) (6,917) (7,099) (7,666) (3,597) (4,224)
Interest income net............ 246 507 869 562 331 132 249
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net loss................... $ (2,497) $ (4,035) $ (6,048) $ (6,537) $ (7,335) $ (3,465) $ (3,975)
========== ========== =========== =========== =========== =========== ===========
Net loss per share--basic and
diluted.................... $ (0.80) $ (0.66) $ (0.58) $ (0.61) $ (0.61) $ (0.31) $ (0.27)
========== ========== =========== =========== =========== =========== ===========
Weighted average shares
outstanding--basic and
diluted(1)................... 3,126,569 6,073,865 10,451,560 10,746,844 11,933,261 11,021,184 14,575,745
========== ========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities........ $ 3,948 $ 18,589 $ 12,756 $ 6,490 $ 9,176 $ 7,811 $ 7,245
Working capital................ 3,849 19,146 13,456 6,761 8,950 8,006 7,250
Total assets................... 4,277 20,229 14,748 8,715 11,454 10,020 9,746
Total liabilities.............. 266 500 527 902 1,404 881 1,254
Accumulated deficit............ (5,081) (9,116) (15,163) (21,700) (29,036) (25,165) (33,011)
Stockholders' equity........... 4,011 19,730 14,221 7,813 10,049 9,138 8,492
</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.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD 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 250,000, in the
United States each year.
Our principal products are the CH 2000 Alternans System, the Heartwave-TM-
System, and disposable Micro-V Alternans Sensors. All 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, and the Heartwave-TM- System include
the claim that they 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 June 30, 2000 of
approximately $33,011,000. 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 microvolt T-wave alternans technology.
RESULTS OF OPERATIONS
SIX MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTH PERIOD ENDED
JUNE 30, 1999
Revenue was $1,094,823 for the six month period ended June 30, 1999 and
$870,484 for the six month period ended June 30, 2000, a decrease of 20%. The
overall decline in revenue is primarily attributable to a change in our sales
focus away from standard stress systems to T-wave alternans systems. Sales of
standard stress test systems declined 60% for the six months ended June 2000
while revenue from the sale of T-wave alternans product increased 31% for the
same period. T-wave alternans product accounted for 42% of our total revenue for
the six month period ended June 30, 1999 as compared to 69% for the same period
of 2000.
Our revenue recognition method for license fees is to recognize income
evenly over a 12 month period. The license fee revenue for the six month periods
ended June 30, 2000 contributed $25,000 or 11% of the total revenue decline as
compared to the same period in 1999.
Gross margin was 11% for the six month period ended June 30, 1999 and (2%)
for the six month period ended June 30, 2000. The decline in margin percentage
to sales reflects the effect of lower equipment sales volume on the utilization
of fixed labor and overhead costs.
Research and Development expenses were $1,387,183 for the six month period
ended June 30, 1999 and $1,585,977 for the six month period ended June 30, 2000.
Costs associated with the
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<PAGE>
development of our Heartwave-TM- System account for the majority of costs. We
anticipate that these costs will decline during the second half of the year as
both the Heartwave-TM- System and Heartwave-TM- EP are scheduled for market
introduction. We anticipate that, overall, our research and development expenses
will decrease during the second half of 2000.
Selling, general and administrative expenses were $2,324,667 for the six
month period ended June 30, 1999 and $2,618,491 for the six month period ended
June 30, 2000. The increase reflects marketing promotional and communications
costs associated with the upcoming introduction of the Heartwave-TM- System. In
addition, costs related to our efforts targeted at gaining reimbursement from
third party private payers and Medicare healthcare providers who clinically
perform the Alternans Test continue to impact these numbers. Selling, general
and administrative expenses are expected to increase as revenues improve and we
expand our direct sales headcount.
Interest income was $131,188 for the six month period ended June 30, 1999
and $248,722 for the six month period ended June 30, 2000. This increase
resulted from a higher level of invested cash when compared to the same period
last year.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues were $2,136,000 in 1999 and $2,096,900 in 1998, an increase of 2%.
Revenue from the sale of capital equipment and other miscellaneous products was
$2,017,000 for 1999 and $2,032,100 for 1998, a decline of 1%. Revenue from the
sale of Micro-V Alternans Sensors was $119,400 for 1999 and $64,600 for 1998, an
increase of 85% due primarily to increase in unit sales in the United States.
Revenue from the sale of the CH 2000 Alternans System and our proprietary
Micro-V Alternans Sensors increased 12% during 1999 while revenue from the sale
of standard stress systems declined 28% during the same period. These results
reflect our planned transition away from its previous sales focus on standard
stress systems to one primarily focused on potential customers interested in the
clinical use of our Alternans test and proprietary disposable sensors.
U.S. revenue from the sale of the CH 2000 Alternans System and Micro-V
Alternans Sensors increased 46% during 1999 while revenue from the sale of
standard stress test systems declined 41%.
International revenue from the sale of the CH 2000 Alternans System and
Micro-V Alternans Sensors declined by 2% during 1999. Sales of alternans product
to Japan declined 13%. Our Japanese distributor Fukuda Denshi, Ltd reduced their
purchases during the year in an effort to reduce on hand inventories. Sales to
all other international customers increased 116% during 1999. Sales of standard
stress test systems increased 211%, while revenue from the sale of the CH 2000
System with the Alternans Option and disposable sensors increased 109% during
the same period. We believe that its decision to change distribution partners in
Europe during 1998 has resulted in an improved focus and commitment to sale of
our standard stress test and T-wave alternans products.
Gross profits declined to 6% of total revenue in 1999 from 12% for 1998. The
decrease is due to the effect of the strong increase in the sale of product to
our European distributors at distributor pricing, which is lower than commercial
pricing, had a major effect on the gross profit percentage.
Research and development costs were $2,850,400 in 1999 compared to
$3,594,900 in 1998, a decrease of 21%. The 1998 amount included approximately
$900,000 of costs associated with our 337 patient multi center clinical study
supporting the 510(k) filed with FDA in August 1998 and cleared in April 1999,
for expansion of its labeling claims for T- wave alternans. These costs are
partially offset by an increase in development costs associated with our new
add-on module scheduled for introduction in 2000.
Selling and marketing costs were $3,211,500 in 1999 compared to $2,178,100
in 1998, an increase of 47%. The growth in 1999 expenditures reflects spending
on initiatives targeted at increased
14
<PAGE>
awareness of our proprietary T-wave alternans technology and the clinical use of
our Alternans test, as well as, programs supporting obtaining reimbursement from
third-party payors for clinicians performing alternans tests
Administrative costs were $1,734,000 in 1999 compared to $1,575,200 in 1998,
an increase of 10% reflecting increased cost in support of our expanded
information systems infrastructure and employee education and training programs.
Interest income was $331,100 in 1999 compared to $562,500 in 1998, a
decrease of 41%. The reduction primarily reflects the impact of lower interest
rates during 1999 on our short-term cash investments partially offset by
increased cash and marketable securities balances from the private placement of
Common stock in June 1999 and October 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues were $2,096,900 in 1998 and $1,448,300 in 1997, an increase of 45%.
Sales of our CH 2000 Alternans System and accessories accounted for 97% of total
revenues in 1998 compared to 94% in 1997. The remainder of the revenues were
from the sale of our Micro-V Alternans Sensors.
Revenues from products sold outside the United States were $967,600 in 1998,
an increase of $66,700 or 7% over the previous fiscal year. Revenues from
products sold to Japan were $744,100 in 1998 compared to $674,600 in 1997, an
increase of 10%. Revenues from products sold to the remaining international
customers were $223,500 in 1998 compared to $242,600 in 1997, a decrease of 8%.
At the end of 1997, we changed distribution partners in Europe due to the former
distribution partner's 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 1998. Sales to all international customers accounted
for 46% of our total revenues in 1998 compared to 67% in 1997. Sales to U.S.
customers were $1,129,200 in 1998 compared to $547,400 in 1997, an increase of
106%. The increase in U.S. revenues results from improvement in the efficiency
and effectiveness of our sales organization, which was expanded during 1997. We
employed 5 direct sales managers in the U.S. and had 35 independent
manufacturers' sales representatives under contract at the end of 1998.
Cost of goods sold was $1,848,200, or 88% of total revenues, in 1998 and
$1,386,600, or 96% of total revenues, in 1997. The improved ratio of costs to
product sales during 1998 is 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 our Micro-V Alternans
Sensors will continue to favorably effect the overall gross margin.
Research and development costs were $3,594,900 in 1998 compared to
$3,587,000 in 1997. We incurred incremental costs totaling $266,700 during 1998
to complete its clinical studies supporting the 510(k) filed with FDA for
expansion of its labeling claims for its T-wave alternans technology. These
costs were partially offset by a reduction in 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 1998 over 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 $3,753,300 in 1998
compared to $3,391,700 in 1997, an increase of 11%. The increase is primarily
the result of the costs associated with compensation paid to U.S. sales
representatives' associated with the increase in revenues during 1998. We
continue to increase its marketing efforts targeted at the rapid adoption of
T-wave alternans testing by clinical cardiologists and other medical
professionals. Additionally, during 1997, we experienced several changes
15
<PAGE>
in management personnel. As a result, we recorded $230,500 of termination costs
associated with these changes.
Interest income for 1998 was $562,500 compared to $869,300 for 1997. The
decrease is primarily the result of the net reduction in our cash and marketable
securities balances by $6,265,900 during 1998.
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, 1999 or for the six month
period ended June 30, 2000.
We have not recorded a provision for income taxes for the years 1995, 1996,
1997, 1998 and 1999 or for the six month period ended June 30, 2000 because we
incurred net losses in each of these years and this period. At December 31,
1999, we had net operating loss carryforwards of $30,500,000, as well as
$910,000 federal tax credit carryforwards and $540,000 state tax credit
carryforwards available to offset future taxable income and income tax
liabilities. These carryforwards generally expire in the years 2007 through 2019
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 ($13,608,000 at December 31, 1999) for our deferred tax
assets since, in our opinion, realization of these future benefits is not
sufficiently assured (defined as a likelihood of slightly more than
50 percent).
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had cash, cash equivalents and marketable securities
of $7,244,803. During the six month period ended June 30, 2000, our cash, cash
equivalents and marketable securities decreased by $1,931,513, or 21%,
consistent with our net loss for the period of $3,975,490 net of proceeds from
the sale of common stock in January 2000 of $2,064,000.
Inventory levels increased from $460,913 as of December 31, 1999 to $571,915
as of June 30, 2000. The inventory build is mainly attributable to the planned
build of Heartwave-TM- components in preparation for its scheduled release
during the third quarter.
Fixed asset additions during the year primarily represent increased clinical
research units and the cost of capitalized production tooling and molds for the
Heartwave-TM- product. We expect capital expenditures increases associated with
the Heartwave-TM- will continue for the balance of Fiscal 2000. We do not expect
capital expenditures to exceed an aggregate of $1,000,000 over the next year.
We continue to utilize a $500,000 line of credit collateralized by selected
customer accounts receivable. The amount of utilization of the credit line as of
June 30, 2000 was approximately $117,000.
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 $10,000 to $40,000 per
year in total through 2008. We are committed to pay an aggregate of $320,000 of
such minimum license maintenance fees subsequent to June 30, 2000 as the
technology is used. As part of these agreements, we are also committed to meet
certan development and sales milestones, including a
16
<PAGE>
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 will be adequate to
satisfy our capital requirements through the next twelve months.
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. We do not use 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.
17
<PAGE>
BUSINESS
We are engaged in the research, development and commercialization of
products for the non-invasive diagnosis of cardiac disease, the leading cause of
death in the United States and many other developed countries. Using innovative
technologies, including proprietary disposable 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 products, the CH 2000 Alternans System, and the Heartwave-TM- System
incorporate our proprietary technology to non-invasively measure low levels 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 by
measuring T-wave alternans our systems 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.
Sudden cardiac arrest accounts for approximately one-half of all cardiac related
deaths, or about 300,000, in the United States each year.
Our CH 2000 Alternans System, Heartwave-TM- System, and Micro-V Alternans
Sensors have received 510(k) clearance from the U.S. Food and Drug
Administration for sale in the United States. The CH 2000 Alternans System and
Micro-VAlternans Sensors 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 Alternans System and the Heartwave-TM- System, include the claim
that they 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.
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 1997
cardiovascular disease accounted for 41% of all deaths in the United States.
Approximately 1.4 million people suffered heart attacks in the United States in
1997, resulting in approximately 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
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<PAGE>
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 1997, an estimated 600,000 coronary artery bypass grafting procedures and
450,000 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 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
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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 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, the following have been
reported to be associated with an increased risk of sudden cardiac death:
- the identification of short episodes of non-sustained ventricular
tachycardia, or VT, on a 24-hour Holter electrocardiogram recording,
- the presence of late potentials (delayed electrical activity in the
ventricles) on the signal average electrocardiogram,
- reduced beat-to-beat variability in heart rate, (iv) reduced response in
heart rate to black pressure changes (baroreceptor sensitivity), and
- 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
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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
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 exists for a more accurate and low cost non-invasive method
to identify patients with ischemic heart disease, particularly in the
asymptomatic population.
ACCURATE AND TIMELY DIAGNOSIS OF ACUTE MYOCARDIAL INFARCTION. With eight
million patients in the United States arriving at hospital emergency rooms each
year complaining of acute chest pain or other symptoms typical of acute
myocardial infarction, 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
Research using our T-wave alternans technology and Micro-V Alternans Sensors
to predict increased risk of ventricular tachyarrhythmias, indicates that our CH
2000 Alternans System and Heartwave-TM- System have 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 ventricular tachyarrhythmia or
sudden death. The predictive capabilities of our technology 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 and the Heartwave-TM-
System require only the placement of Micro-V Alternans Sensors on the
patient's chest.
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- 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 able to perform both of these tests
and to simultaneously assess the risk of sudden cardiac death due to
ventricular arrhythmias and with only a modest increase in the total cost
of the procedure. The Heartwave-TM- System performs alternans tests while
connected to any manufacturer's standard stress test system and the
Heartwave-TM- EP model performs alternans tests while connected to any
manufacturer's electrophysiology system.
- NON-HOSPITAL SETTING--Unlike electrophysiology studies and other tests
which require a hospital setting, our alternans systems can be used in a
physician's office.
- PROCEDURE COST ADVANTAGES--An alternans test with our alternans systems
cost $300 to $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 starting at approximately $29,000. Our Heartwave-TM-
System is priced at $14,900. We have established several financing
programs available to customers aimed at minimizing the amount of initial
upfront capital investment required to acquire our alternans systems in
return for a commitment to purchase Micro-V Alternans Sensors at a fixed
price.
We are also conducting research into the detection of ischemic heart disease
using our 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 provides for enhanced
detection and localization of coronary artery disease during a standard exercise
stress test.
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 electrodes and with our Hi-Resolution sensors for T-wave alternans
measurement. The CH 2000 Alternans System is capable of controlling both
treadmill and bicycle ergometers and is well suited for standard, nuclear or
echocardiogram stress tests. Revenues from the sale of the CH 2000 Alternans
System accounted for 94% of our total revenues in 1997, 96% of our total
revenues in 1998 and 86% of our total revenues in 1999.
The 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.
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- Exclusive pre-test impedance lead check and optimizing signal processing
that identifies problematic leads and minimizes noisy ECG waveforms to
ensure a good test before it starts.
- Patented diagnostic screen displays that provide the ability to view all
12 leads simultaneously throughout a test and make immediate on-screen
interpretations.
- Unique ST segment displays that superimpose waveforms for all 12 leads
over median beats for clear identification of dangerous ST depression or
elevation.
- Comprehensive review capability of every test, reducing the physician's
risk of missing a critical arrhythmia or losing an important record and
thereby freeing them to focus on the patient.
HEARTWAVE-TM- SYSTEM
In May 2000, at the annual meeting of the North American Society of Pacing
and Electrophysiology, we introduced our new Heartwave-TM- product for the
prediction of life threatening heart rhythm disturbances and sudden death via
the measurement of Microvolt T-wave Alternans. The device uses our previously
cleared proprietary T-wave Alternans technology and Micro-V Alternans Sensors to
allow cardiologists and electrophysiologists to conduct an Alternans test using
any manufacturer's' installed standard stress test and electrophysiology, or EP,
systems. We will offer two models of the product, the Heartwave-TM- System, to
be used in conjunction with a standard cardiology stress test system, and the
Heartwave-TM- EP System, to be used with an EP System. The stress model will
provide greater access to the market of potential customers who are interested
in performing Alternans tests but who are not in the market for a new stress
test system. The EP model will provide electrophysiologists the ability to
measure T-wave Alternans while performing an EP study. We anticipate that the
availability of this product will have a positive impact on our efforts to
accelerate the rate of clinical use of our Alternans technology. We received
clearance from the Food and Drug Administration in June, 2000 of our 510(k)
submitted in March, 2000 for our Heartwave-TM- product.
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 ECG
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 developed the technology to quantify this electrical
conduction pattern which has been exclusively licensed to us 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 The Massachusetts Institute of
Technology, 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 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.
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
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Electrophysiology In this study, 95 patients receiving an implantable
cardioverter-defibrillator underwent electrophysiology testing and most of the
other accepted non- invasive risk stratification tests, including T-wave
alternans testing utilizing the CH 2000 Alternans System. Professor Hohnloser
reported that the detection of the presence of T-wave alternans was found to be
the more accurate than all other 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 U.S. Food and Drug Administration in
August 1998 to obtain expansion of our labeling claim. 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. In 337 consecutive patients
referred for electrophysiology study to evaluate known, suspected or risk of
arrhythmias, T-wave alternans was a highly significant predictor of a
ventricular tachyarrhythmic event and was somewhat more predictive than
electrophysiology, with a relative risk of 10.92 for T-wave alternans versus
7.07 for electrophysiology. The secondary endpoint was a ventricualr
tachyarrhythmic event plus all death due to any cause. T-wave alternans was a
highly significant predictor of this endpoint and was also more predictive of
than electrophysiology, with a relative risk of 13.93 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 electrophsyiology
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
electropysiology with a sensitivity of 76%, a specificity of 65% and a relative
risk of 3.93.
MARKETING AND SALES
Prior to 1999, we had been engaged in selling and marketing our CH 2000
Alternans System as a standard stress test system in the U.S. and, as a result,
we were primarily dependent on the sale of standard stress test systems for the
majority of our U.S. revenue. The standard stress market is currently a capital
equipment market with limited annual unit growth, small gross profits and
selling prices that are subject to significant competitive pressure. During
1999, we received clearance from the FDA of our 510(k) application for expansion
of our labeling claims. This provided us with the opportunity to focus our U.S.
marketing and sales efforts on potential customers interested in the clinical
use of our Alternans test and Microvolt Alternans Sensors. We anticipate that
the percentage of revenue generated by the sale of Alternans products will
continue to increase while the percentage of revenue generated from the sale of
standard stress test equipment will decline.
We have expanded our product offering with the addition of our new
Heartwave-TM- product. The device uses our previously cleared proprietary T-wave
alternans technology and Microvolt Alternans Sensors to allow cardiologists and
electrophysiologists to conduct an Alternans test using any manufacturer's'
installed standard stress test and electrophysiology, or EP, systems. We will
offer two models of the product, the Heartwave-TM- System, to be used in
conjunction with a standard cardiology stress test system, and the Heartwave-TM-
EP System, to be used with an EP System. The stress model will provide greater
access to the market of potential customers who are interested in performing
alternans tests but who are not in the market for a new stress test system. The
EP model will provide electrophysiologists the ability to measure microvolt
T-wave alternans while performing an EP study. We received clearance from the
Food and Drug Administration in June, 2000 of our 510(k) submitted in
March 2000 for our Heartwave-TM- product. Both models are intended to increase
the installed base of systems capable of using our Microvolt Alternans Sensors.
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We believe that the keys to the adoption of our proprietary T-wave alternans
technology as the standard of care for the diagnosis of 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 Alternans System and the
Heartwave-TM- systems. 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 use 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 microvolt 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 microvolt T-wave
alternans testing and will continue to participate in industry trade shows and
academic conferences.
In May 2000, we entered into a strategic marketing alliance with Spacelabs
Medical, Inc. The alliance provides for Spacelabs to market and distribute our
Alternans software and Microvolt Alternans Sensors for our alternans test for
use with Spacelabs Burdicks' diagnostic cardiology systems. Spacelabs will be
required to file a 510(k) with the FDA before they can begin shipping the
product. We currently anticipate introduction of this product during the fourth
quarter of 2000.
Also in May 2000, we entered into an agreement with St. Jude Medical to
conduct a cooperative study on the accuracy of Microvolt T-wave alternans to
identify certain candidates for implantable cardioverter defibrillator, or ICD,
therapy. The multi-center study, called the Alternans Before
Cardioverter-Defibrillator trial, will follow asymptomatic patient ventricular
tachycardia for a year. Patients who test positive for increased risk of sudden
cardiac death will receive a St. Jude Medical Profile ICD. The trial will be
conducted at 25 leading medical centers in the United States under the direction
of Dr. David Rosenbaum and Dr. Otto Constantini of the Heart and Vascular
Research Center of Case Western Reserve University, in Cleveland, Ohio. We
expect the study to commence in the fourth quarter of 2001 and continue for
24 months.
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 currently employ
seven direct sales representatives. We are also represented by nine independent
manufacturers representatives in the United States. 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 eventually the
Heartwave-TM- System and to train health care professionals in their 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. Sales to international
distributors comprised 62% of our revenue in 1997, 46% of our revenue in 1998
and 49% of our revenue in 1999. 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 between us
and our distributor in Japan, Fukuda Denshi Co., Ltd. expires March 31, 2001 and
the agreements with our distributor in Germany and England, Reynolds
Medical, Ltd. and distributor in Italy, Oxford Instruments, expire March 31,
2001 and the agreement with our distributor in Australia, APS, expires June 30,
2001. Each of these agreements will automatically be renewed for a one year
period if neither party cancels the agreement.
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MANUFACTURING
We perform final assembly of hardware and software components, and testing
of our products, at our corporate headquarters in Bedford, Massachusetts. We
believe our 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
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 U.S. Food
and Drug Administration, in 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 Micro-V Alternans 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. The manufacture of the Heartwave-TM- System will be done primarily
by outside vendors. We will perform final assembly and testing in house.
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 development of
enhancements to our microvolt T-wave alternans technology. Our clinical research
is focused on gathering substantial clinical data demonstrating the efficacy of
the microvolt T-wave alternans technology and its results as a predictor of
patient risk of ventricular tachyarrhythmia or sudden death.
Our new Heartwave-TM- System may be combined with any standard stress test
system and will allow such system to measure T-wave alternans when utilizing our
Microvolt Alternans Sensors. We believe that this product will provide us with
increased access to the entire installed base of standard stress test systems
and increase the use of our disposable, higher margin sensors. We believe that
the introduction of the Heartwave-TM- EP System will have a similar effect in
the EP lab by increasing the use of our disposable, high margin sensors. The new
product will have a lower cost of manufacture than our CH 2000 Alternans System
and will carry a selling price below the current price of a standard stress test
system. We received clearance from the FDA in June 2000 of our 510(k)
application for our Heartwave-TM- product. We expect the product to be available
during the year 2000.
Our Heartwave-TM- System will open up the market to potential customers who
are interested in performing alternans tests but who are not in the market for a
new stress test system. There are approximately 23,000 stress test systems
installed in the U.S. but fewer than 2,300 new systems are sold each year. We
anticipate that the availability of this product will accelerate the rate of
clinical use of our alternans technology.
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, or CEI, 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.
We are evaluating the incorporation of our CEI technology into the CH 2000
Alternans System, and we are continuing to conduct clinical studies of this
technology.
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Our research and development expenses were $3,587,000 in 1997, $3,595,000 in
1998, and $2,850,400 in 1999. We expect research and development expenses in
2000 to be comparable to 1999. We expect these expenses to increase in the
future as we develop additional products and fund clinical trials on our
products. As of June 30, 2000 we had 5 employees engaged in research and
development activities.
PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
The computer algorithms that allow the CH 2000 Alternans System, the
Heartwave-TM- System to measure microvolt T-wave alternans and certain aspects
of our cardiac electrical imaging technology, including the Microvolt Alternans
Sensors, are covered by U.S. patents issued to The Massachusetts Institute of
Technology that are licensed exclusively to us. We hold 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 issued a U.S. patent covering additional
proprietary signal processing algorithms with our Microvolt Alternans Sensor 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 patents associated
therewith. Two of the MIT license agreements that cover the T-wave alternans
measurement technology incorporated in the CH 2000 Alternans System, the
Heartwave-TM- System and that relate to cardiac electrical imaging are of
material importance to us. These licenses are exclusive until 2007. Afterwards,
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.
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 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 the MIT license
agreements or the termination of either or both of such agreements would have a
material adverse effect on our business, financial condition and results of
operations.
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, we can give 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. However, our CH 2000
Alternans System, Heartwave-TM- System, and Micro-V Alternans Sensors are
currently the only FDA cleared systems for the non-invasive measurement of
microvolt T-wave alternans.
Competition from medical devices which help to diagnose cardiac disease is
intense and likely to increase. Our competitors include manufacturers of ECG
stress test equipment, including major
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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 effective 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. There can be 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 are subject to extensive governmental regulation in the United
States. Medical devices are regulated in the United States by the FDA and
generally require pre-market clearance or pre-market approval prior to
commercial distribution. In addition, certain material changes or modifications
to medical devices also are subject to FDA review and clearance or approval. The
FDA regulates the research, testing, manufacture, safety, labeling, storage,
record keeping, advertising and distribution of medical devices in the United
States. Noncompliance with applicable requirements can result in failure of the
government to grant pre-market clearance or approval for devices, withdrawal of
approval, total or partial suspension of production, fines, injunctions, civil
penalties, recall or seizure of products, and criminal prosecution.
Medical devices are classified into one of three classes, Class I, II or
III, on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness. Class I devices are subject to
general controls (e.g., labeling, pre-market notification and adherence to GMP
standards). Class II devices are subject to general controls and special
controls (e.g., performance standards, post-market surveillance, patient
registries and FDA guidelines). Generally, Class III devices are those that must
receive pre-market approval by the FDA to ensure their safety and effectiveness
(e.g., life-sustaining, life-supporting and implantable or new devices which
have not been found to be substantially equivalent to legally marketed devices),
and require clinical testing to ensure safety and effectiveness and FDA approval
prior to marketing and distribution. The FDA also has the authority to require
clinical testing of Class I and Class II devices. A Pre Market Approval, or PMA,
application must be filed if a proposed device is not substantially equivalent
to a legally marketed predicate device or if it is a Class III device for which
the FDA has called for such application.
Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
510(k) notification submission or approval of a PMA application. If a medical
device manufacturer or distributor can establish that a device is "substantially
equivalent" to a legally marketed Class I or Class II device, or to a Class III
device for which the FDA has not called for PMAs, the manufacturer or
distributor may seek clearance from the FDA to market the device by filing a
510(k) notification. 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
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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
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, the Heartwave-TM- System, and the Micro-V
Alternans Sensors have received 510(k) clearances from the FDA for sale in the
United States. The 510(k) clearances for the systems include the claim that
these systems can measure microvolt 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 tachyarrhythmmia or
sudden death.
Internationally, the CH 2000 Alternans System and Microvolt Alternans
Sensors have received the CE mark for sale in Europe and is approved for sale by
the Ministry of Health in Japan.
EMPLOYEES
As of June 30, 2000, we had 27 full-time employees, of whom one holds a
Ph.D. degree and three 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.
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REIMBURSEMENT
We believe that the availability and level of third party reimbursement
influences the decision of physicians, clinics, and hospitals to purchase and
use our products clinically and has an effect on the pricing of our products. We
are addressing the issue of reimbursement from third party payers for the
performance of an alternans test by healthcare providers. Obtaining
reimbursement for a new medical procedure is a multi-year process that we are
pursuing at both the local and national levels. We are engaged in efforts to:
- Seek coverage and reimbursement from individual public and private third
party payers for the Alternans test through provider advocacy and top-down
payer lobbying, and
- Obtain a unique national procedure code and payment amount from the
American Medical Association for the Alternans test.
At the local level, we have targeted regional Medicare policymakers where
concentrations of alternans users exist and seek coverage through the
development of local advocates. Private payers also will be approached both at
national and local levels with requests for review of the alternans technology
for coverage. As of June 30, 2000, a total of thirteen private third-party
insurers had reimbursed healthcare providers for performance of our Alternans
Tests. A representative list of the major payers includes:
- Aetna/US Healthcare,
- Kemper of California,
- United Healthcare Insurance Company,
- Blue Cross/Blue Shield of Texas,
- Perscare (California),
- Blue Cross (California),
- Delta Health Systems (California),
- Blue Shield (California),
- Connecticut General Life Insurance, and
- Prudential HMO (California).
The total list of current payers represents over 57 million covered lives.
These private insurers are paying for valid claims submitted to them but they
have not yet established coverage policies that would codify their reimbursement
amounts throughout their health plans. The amount of reimbursement received by
providers for the performance of an alternans test averages $280.00 per test.
This payment is in addition to amounts that may be billed for an associated
stress test.
On August 1, 2000, Medicare began to reimburse our alternans test under the
new Prospective Payment System created by the Health Care Financing
Administration for hospital outpatients. Hospitals will be able to submit bills
electronically for the alternans test under Ambulatory Payment Classification,
or APC, code 0096. The APC will pay $99.88 to the provider for the technical
component of the Alternans Test. This payment is in addition to amounts that may
be billed for an associates stress test.
At the national level, we are continuing our efforts to obtain a unique
national procedure code and payment level with the American Medical Association
with a submission of a coding application in October 2000. We will seek support
from the American College of Cardiology and North American Society of Pacing and
Electrophysiology's Coding and Nomenclature Committees in the second half of
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2000. The earliest possible decision date for approval of a unique code by the
American Medical Association would be early 2001 with an effective date for the
code in January 2002. We can give no assurance that these efforts will be
successful.
We continue to support providers with claims submissions and appeals through
the development of billing guidelines and a reimbursement guarantee program 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 the third party payer has initiated coverage for the
alternans test, the $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. We can give no
assurance that any of these efforts will gain reimbursement for the alternans
test or increase the number of alternans test performed.
PROPERTIES
Our facilities consist of approximately 11,000 square feet of office,
research and manufacturing space located at 1 Oak Park Drive, Bedford,
Massachusetts. We have a lease for a total of 11,000 square feet which expires
in November 2003. We believe that suitable additional space will be available to
us when needed on commercially reasonable terms.
LEGAL PROCEEDINGS
We are not 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......................... 51 President, Chief Executive Officer and Director
Robert B. Palardy......................... 51 Vice President, Finance and Administration and
Chief Financial Officer
Eric Dufford.............................. 42 Vice President, Sales and Marketing and Secretary
James Shepphard........................... 41 Vice President, Operations
Kevin S. Librett.......................... 35 Vice President, Research and Development
Maren D. Anderson......................... 47 Director
Richard J. Cohen, M.D., Ph.D.............. 49 Director
Harris A. Berman, M.D..................... 62 Director
Jeffrey J. Langan......................... 55 Director
Daniel M. Mulvena......................... 52 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 formerly
the president and Chief Executive Officer and a director of Molecular
Simulations, Inc., a supplier of software for rational drug design. Formerly
Vice President of Operations for Datascope Corporation's Instrumentation
Products, Mr. Arnold held senior marketing, research and development positions
for Becton Dickinson and Co. 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.
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,
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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KEVIN S. LIBRETT. Mr. Librett was promoted to Vice President, Research and
Development in March 2000. From August 1993 to March 2000, Mr. Librett has held
several positions with Cambridge Heart in the Research and Development area
including serving as our Director of Research and Development from August 1997
to March 2000. From May 1990 to August 1993, Mr. Librett was Founder and
Principal Software Engineer of MedUsr Corporation, a developer of distributed
database systems for use in the hospital environment. Mr. Librett holds a B.S.
degree in Biophysics from the University of Connecticut and an M.S. degree in
Electrical Engineering and Computer Science from MIT.
MAREN D. ANDERSON. Ms. Anderson was a Founding Partner, Vice President and
a Director of Covance Health Economics and Outcomes Services, Inc., from 1988 to
March 1999. Covance is a consulting firm specializing in strategic reimbursement
planning and market research for new medical technologies. She left the firm in
1999 to pursue other business interests. From 1981 to 1988 she was a Consultant
with Lewin and Associates, Inc. specializing in market research and strategic
planning for the development and launch of biotechnology, medical device and
pharmaceutical products. Ms. Anderson has six years of government service
experience, from 1974 to 1981, including three years at the Health Care
Financing Administration. Ms. Anderson holds a BA from the University of
Michigan and a Masters in Public Policy from the University of California.
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. Dr. Berman has been Chief Executive Officer of Tufts Health
Plan, a managed healthcare organization of over 1,000,000 members, since 1986.
He is also the immediate past chairman of the Massachusetts Association of
HMO's, co-chairman of Affiliated Health Information Networks of New England, a
director of the American Association of Health Plans, and of the BankBoston
Celebrity Series. Dr. Berman is a fellow of the American College of Physicians
and a Clinical Professor of Medicine and of Community Health at Tufts University
School of Medicine.
JEFFREY J. LANGAN. Mr. Langan was elected to our board of directors on
December 21, 1999 to fill the vacancy created by the resignation of Laurence
Blumberg. Mr. Langan served as President and CEO of Idexx Laboratories, Inc.
from 1997 to 1999 and as President and CEO of Thermedics Detection, Inc. from
1996 to 1997. Mr. Langan was also General Manager of the Healthcare Information
Management Division and General Manager of the Clinical Systems Business Unit
for Hewlett-Packard Medical Systems from 1985 to 1996. Mr. Langan currently
works as an independent consultant. Mr. Langan holds a BS in Mechanical
Engineering from Villanova University, an MS in Engineering Mechanics from
Rensselaer Polytechnic Institute, and an MBA from the Harvard University
Graduate School of Business Administration.
DANIEL M. MULVENA. Mr. Mulvena was elected to our board of directors on
December 21, 1999 to fill the vacancy created by the death of Rolf S. Stutz.
Mr. Mulvena is the founding partner of Commodore Associates, a consulting firm
for medical device and services companies, of which he has served as a partner
since 1995. He served as Group Vice-President, Cardiology, Boston Scientific
Corporation from 1992 to 1995. From 1989 to 1991, Mr. Mulvena served as Chairman
and CEO of Lithox Systems, Inc. Prior to joining Lithox Systems, Mr. Mulvena was
President of C. R. Bard's Cardiosurgery Division. Mr. Mulvena holds a BA from
Vanderbilt University. Mr. Mulvena is also a director of Echo-Cath, Inc.,
Magna-Lab, Inc., Zoll Medical Corp. and Thoratec Laboratories Corp.
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
On September 14, 2000, we sold 2,390,000 shares of common stock to a group
of investors introduced to Cambridge Heart by Sunrise Securities Corp., which
acted as placement agent, for gross proceeds of $8,365,000. We also issued
warrants for the purchase of 717,000 shares of common stock at an exercise price
of $3.50 per share to the investors. As part of the compensation for its
services as placement agent, we issued warrants for the purchase of 143,400
shares of common stock at an exercise price of $4.20 per share to Sunrise
Securities Corp.
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DESCRIPTION OF OUR SECURITIES
COMMON STOCK
We are authorized to issue 25,000,000 shares of common stock, $.001 par
value per share. As of September 15, 2000, there were 17,046,310 shares of
common stock outstanding, held of record by approximately 124 stockholders. Our
common stock is traded on the Nasdaq National Market under the symbol CAMH.
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,
October 25, 1999 and January 11, 2000 between Cambridge Heart and each of the
several investors introduced to us by Sunrise Securities Corp., we sold an
aggregate of 2,116,347 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. In October 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 September 15, 2000,
warrants for the purchase of 17,850 shares of common stock issued to the Tail
Wind investors have 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, October 25, 1999 and January 11, 2000 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,
October 25, 2004 and January 11, 2005 for the purchase of 290,412, 12,857 and
120,000 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, 2004, October 25, 2004 and January 11, 2005
for the purchase of an aggregate of 151,305 shares of our common stock at a per
share price of $4.20. As of September 15, 2000, none of the warrants issued to
the Sunrise investors has been exercised.
As part of the subscription agreements dated September 9, 2000 between
Cambridge Heart and each of several additional investors introduced to us by
Sunrise Securities Corp., and the sales agency agreement dated September 6, 2000
between Cambridge Heart and Sunrise Securities Corp., we issued warrants that
expire on September 14, 2005 for the purchase of 717,000 shares of our common
stock 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 September 14, 2005 for the
purchase of 143,400 shares of our common stock at a per share exercise price of
$4.20. As of September 15, 2000, none of the warrants issued to the additional
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, of which there are currently no shares outstanding.
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
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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.
As part of our issuances of common stock and warrants to the Sunrise
investors on October 5, 1999, October 25, 1999 and January 11, 2000 we agreed to
register the 2,116,347 shares of common stock purchased by the Sunrise investors
and the 571,413 shares of common stock issuable upon exercise of the warrants
issued to the Sunrise investors and to Sunrise Securities Corp. In
December 1999 we registered (i) the 1,516,347 shares of common stock purchased
by the Sunrise investors in October 1999, (ii) the 409,413 shares of common
stock issuable to the Sunrise investors and Sunrise Securities Corp. upon the
exercise of the warrants issued in October 1999 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. With this registration statement and prospectus, we are
reregistering 17,850 shares issued in the October 1999 private placement. In
February 2000, we registered (i) the 600,000 shares of our common stock
purchased by a Sunrise investor in January 2000 and (ii) the 165,161 shares of
our common stock issuable to the Sunrise investor and Sunrise Securities Corp.
upon the exercise of warrants issued in January 2000.
As part of our issuances of common stock and warrants to the additional
Sunrise investors on September 14, 2000, we agreed to register the 2,390,000
shares of common stock purchased by the additional Sunrise investors and the
860,400 shares of common stock issuable upon the exercise of warrants issued to
the additional Sunrise investors and to Sunrise Securities Corp. With this
registration statement and prospectus, we are fulfilling our obligations to
register these shares.
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
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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.
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, 1999 and 1998 and for each of
the three years in the period ended December 31, 1999 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.
38
<PAGE>
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, 1999, as
filed with the SEC on March 30, 2000, as amended by Form 10-K/A filed with
the SEC on April 5, 2000.
- Our definitive proxy statement for the 2000 Annual Meeting of
Stockholders, as filed with the SEC on April 20, 2000.
- Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, as
filed with the SEC on May 15, 2000.
- Our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, as
filed with the SEC on August 11, 2000.
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]
39
<PAGE>
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 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.
40
<PAGE>
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.
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheet at December 31, 1998 and 1999................. F-3
Statement of Operations for the three years ended
December 31, 1999......................................... F-4
Statement of Changes in Stockholders' Equity for the three
years ended December 31, 1999............................. F-5
Statement of Cash Flows for the three years ended
December 31, 1999......................................... F-6
Notes to Financial Statements............................... F-7
Balance Sheet at December 31, 1999 and June 30, 2000
(unaudited)............................................... F-19
Statement of Operations for the three and six month periods
ended June 30, 1999 and 2000 (unaudited).................. F-20
Statements of Cash Flows for the six month periods ended
June 30, 1999 and 2000 (unaudited)........................ F-21
Notes to Condensed Financial Statements..................... F-22
</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 sheets 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, 1998 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States 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 14, 2000
F-2
<PAGE>
CAMBRIDGE HEART, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 2,426,032 $ 2,657,392
Marketable securities..................................... 4,064,321 6,518,924
Accounts receivable, net of allowance for doubtful
accounts of $32,000 and $7,725 at December 31, 1998 and
1999 respectively....................................... 555,991 577,156
Inventory................................................. 426,489 460,913
Prepaid expenses and other current assets................. 190,667 140,197
------------ ------------
Total current assets.................................... 7,663,500 10,354,582
Fixed assets, net........................................... 647,629 645,931
Other assets................................................ 403,000 453,097
------------ ------------
$ 8,714,733 $ 11,453,610
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 415,842 $ 679,660
Accrued expenses.......................................... 485,949 517,936
Short term debt........................................... 206,727
------------ ------------
Total current liabilities............................... 901,791 1,404,323
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred Stock, $0.001 par value; 2,000,000 shares
authorized; 0 shares issued and outstanding at
December 31, 1998 and 1999.............................. -- --
Common Stock, $0.001 par value; 25,000,000 shares
authorized; 10,906,174 and 13,921,357 shares issued and
outstanding at December 31, 1998 and 1999,
respectively............................................ 10,906 13,921
Additional paid-in capital................................ 29,603,435 39,120,605
Accumulated deficit....................................... (21,700,389) (29,035,803)
------------ ------------
7,913,952 10,098,723
Less: deferred compensation................................. (101,010) (49,436)
------------ ------------
7,812,942 10,049,287
------------ ------------
$ 8,714,733 $ 11,453,610
============ ============
</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,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue............................................... $ 1,448,319 $ 2,096,853 $ 2,135,981
Cost of goods sold.................................... 1,386,627 1,848,155 2,006,567
----------- ----------- -----------
Gross Profit.......................................... 61,692 248,698 129,424
Costs and expenses:
Research and development............................ 3,586,965 3,594,941 2,850,423
Selling general and administrative.................. 3,391,664 3,753,296 4,945,499
----------- ----------- -----------
Loss from operations.............................. (6,916,937) (7,099,539) (7,666,498)
Interest income....................................... 869,318 562,454 331,084
----------- ----------- -----------
Net loss.............................................. $(6,047,619) $(6,537,085) $(7,335,414)
=========== =========== ===========
Net loss per share--basic and diluted................. $ (.0.58) $ (0.61) $ (0.61)
=========== =========== ===========
Weighted average shares outstanding--basic and
diluted............................................. 10,451,560 10,746,844 11,933,261
=========== =========== ===========
</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>
COMMON STOCK
--------------------- ADDITIONAL TOTAL
NUMBER OF PAR PAID-IN ACCUMULATED DEFERRED STOCKHOLDERS'
SHARES VALUE CAPITAL DEFICIT COMPENSATION EQUITY
---------- -------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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)
Amortization of deferred compensation....... (24,792) 36,021 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
Issuance of common stock through exercise of
stock options, and employee stock purchase
plan...................................... 16,707 17 56,770 56,787
Compensation related to non-employee stock
options granted........................... 20,428 20,428
Amortization of deferred compensation....... (29,800) 51,574 21,774
Sale of common stock through a private
placement net of fees..................... 2,998,476 2,998 9,469,772 9,472,770
Net loss.................................... (7,335,414) (7,335,414)
---------- ------- ----------- ------------ --------- -----------
Balance at December 31, 1999................ 13,921,357 $13,921 $39,120,605 $(29,035,803) $ (49,436) $10,049,287
========== ======= =========== ============ ========= ===========
</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,
----------------------------------------
1997 1998 1999
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (6,047,619) $(6,537,085) $(7,335,414)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization..................... 226,074 297,575 573,518
Loss on disposal of fixed assets.................. 20,241 -- 9,518
Compensation expense on stock options............. 257,876 26,220 42,202
Changes in operating assets and liabilities:
Accounts receivable............................. (88,934) (46,073) (21,165)
Inventory....................................... (164,436) (10,265) (34,424)
Prepaid expenses and other current assets....... 83,296 110,460 50,470
Other assets.................................... 40,964 97,360 2,037
Accounts payable and accrued expenses........... 27,416 374,654 295,804
------------ ----------- -----------
Net cash used for operating activities........ (5,645,122) (5,687,154) (6,417,454)
------------ ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets........................... (357,698) (369,817) (376,659)
Capitalization of software development costs........ (110,727) (310,796) (256,208)
Purchases of marketable securities.................. (7,090,605) -- (2,454,603)
Liquidation of marketable securities................ -- 3,026,284 --
------------ ----------- -----------
Net cash (used in)/provided by investing
activities.................................. (7,559,030) 2,345,671 (3,087,470)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs.................................... 281,305 101,779 9,529,557
Proceeds from utilization of bank credit line....... -- -- 206,727
------------ ----------- -----------
Net cash provided by financing activities..... 281,305 101,779 9,736,284
------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... (12,922,847) (3,239,704) 231,360
Cash and cash equivalents, beginning of year.......... 18,588,583 5,665,736 2,426,032
------------ ----------- -----------
Cash and cash equivalents, end of year................ $ 5,665,736 $ 2,426,032 $ 2,657,392
============ =========== ===========
</TABLE>
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 anticipates that its existing capital resources, including the
amounts raised in the January 2000 financing offering (see note 6), will be
adequate to satisfy its capital requirements through December 2000. 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 $4,064,300 and $6,518,924 at December 31,
1998 and 1999, respectively, are classified as held to maturity, and mature
within one year. The securities of state government agencies, totaling
$2,447,700 and $2,150,000 at December 31, 1998 and 1999, respectively, are
classified as available for sale. All of these investments have been recorded at
amortized cost, which approximates fair market value. No realized or unrealized
gains or losses have been recognized.
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, which include
cash and cash equivalents, marketable securities, accounts receivable, accounts
payable, and accrued expenses approximate their fair values at December 31, 1998
and 1999.
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)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT
The Company is engaged principally in one industry segment that represents
all of the revenues. 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.
RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Research, engineering and product development costs, except for certain
software development costs, are expensed as incurred. Capitalization of software
development costs begins upon the establishment of technological feasibility of
both the software and related hardware as defined by Statement of Financial
Accounting Standards No. 86, "Accounting for the Cost of Computer Software to be
Sold, Leased, or Otherwise Marketed," and ceases upon the general release of the
products to the public. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized software development costs
requires considerable judgment by management with respect to certain external
factors, including, but not limited to, technological feasibility, anticipated
future gross revenues, estimated economic life and changes in software and
hardware technologies.
The Company amortizes software development costs on a straight-line basis
over the estimated economic life of the product.
Costs capitalized at December 31, 1999, which are included in other assets
in the accompanying balance sheet, totaled $395,000 ($343,000 at December 31,
1998), net of $283,000 of accumulated amortization ($78,500 at December 31,
1998).
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, 1999
totaled $110,000 ($100,000 at December 31, 1998), net of $58,000 of accumulated
amortization ($39,000 at December 31, 1998), 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).
F-8
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingencies at December 31, 1998 and 1999, and the reported
amounts of revenues and expenses during the three years in the period ended
December 31, 1999. Actual results could differ from these estimates.
NET LOSS PER SHARE
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share," 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).
As a result of the Company's net loss both basic and diluted earnings per
share are computed by dividing the net loss available to common shareholders by
the weighted average number of shares of common stock outstanding.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. We are required to
adopt SFAS No.133, as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Dates of FASB
Statement 133," on a prospective basis for interim periods and fiscal years
beginning January 1, 2001. Had we implemented SFAS No. 133 in the current
period, financial position and results of operations would not have been
affected.
SEC Staff Accounting Bulletin No. 100, "Restructuring and Impairment
Charges," issued in November 1999, expresses views of the Staff regarding the
accounting for and disclosure of certain expenses commonly reported in
connection with exit activities and business combinations. This includes accrual
of exit and employee termination costs pursuant to Emerging Issues Task Force
(EITF) Issues No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring), and No. 95-3, Recognition of Liabilities in Connection with
a Purchase Business Combination, and the recognition of impairment charges
pursuant to Accounting Principles Board (APB) Opinion No. 17, Intangible Assets
and Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's views in applying generally accepted
accounting principles to selected revenue recognition issues.
F-9
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES -----------------------
(YEARS) 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
Computer equipment........................ 3-5 $ 333,177 $ 549,731
Manufacturing equipment................... 5 158,544 157,888
Office furniture.......................... 7 81,444 85,552
Sales display and clinical equipment...... 3 588,126 728,914
Leasehold Improvements.................... 2 17,275 17,275
---------- ----------
1,178,566 1,539,360
Less--accumulated depreciation............ 530,937 893,429
---------- ----------
$ 647,629 $ 645,931
========== ==========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Accrued bonus........................................... $149,900 $148,684
Accrued clinical trial costs............................ 5,950 72,850
Accrued employee severance.............................. -- 67,555
Accrued professional fees............................... 99,425 64,000
Accrued vacation........................................ 53,931 29,921
Accrued other........................................... 176,743 134.924
-------- --------
$485,949 $517,934
======== ========
</TABLE>
5. LINE OF CREDIT
The Company has a line of credit facility in place which provides a
borrowing base of 80% of eligible accounts receivable as defined, up to a
maximum borrowing of $500,000, payable on demand. Interest is payable monthly in
arrears at the bank's prime rate plus .5% (9% at December 31, 1999). The line of
credit is collateralized by all of the eligible accounts receivable as defined.
This line of credit is scheduled to expire on March 31, 2000. The Company is
negotiating an extension.
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company's Board of Directors has authorized 2,000,000 shares of the
Company's $0.001 par value preferred stock. 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,
F-10
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
liquidation, redemption, conversion, voting or other rights which may be more
expansive than the rights of the holders of the common stock.
COMMON STOCK
In private placement transactions completed in June 1999 and October 1999,
the Company raised gross proceeds totaling $10.4 million ($9.5 million net of
issuance costs) from the sale of 2,468,759 shares of Common Stock. Both
transactions include provisions stipulating that if the Company sells Common
Stock in a capital raising transaction at a lower price per share over the next
24 months and 12 months respectively, the investors have the right to receive
additional shares to adjust the price of their transaction. As a result of the
October 1999 transaction, the Company issued 529,817 of additional shares of
Common Stock to investors that participated in the June 1999 sale of Common
Stock. These shares are in addition to the total number of shares above. In
January 2000, the Company completed an additional private placement transaction
in which it raised an additional $2.1 million from the sale of 600,000 shares of
Common Stock. This transaction contained all of the same terms included in the
October 1999 transaction.
WARRANTS
During 1999, warrants to purchase a total of 504,652 shares of common stock
were issued in connection with the sale of 2,998,576 of common stock. Investors
received warrants to purchase 95,238 shares of common stock at $3.71 per share,
and warrants to purchase 303,269 shares of common stock at $3.50 per share. In
addition, the Company's selling agent received warrants to purchase 106,144
shares of common stock at $4.20 per share.
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.
Warrants outstanding at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE PER
SHARES SHARE EXPIRATION DATE
--------- --------- ----------------
<S> <C> <C> <C>
Common stock............................ 95,238 $3.373 June 9, 2003
Common stock............................ 290,412 $3.500 October 5, 2004
Common stock............................ 12,857 $3.500 October 25, 2004
Common stock............................ 101,644 $4.200 October 5, 2004
Common stock............................ 4,500 $4.200 October 25, 2004
</TABLE>
7. STOCK PLANS
1993 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
During 1993, the Company adopted the 1993 Incentive and Non-Qualified Stock
Option Plan (the "1993 Plan"). The 1993 Plan provides for the granting of
incentive and non-qualified stock options to management, other key employees,
consultants and directors of the Company. The total number of shares of common
stock that may be issued pursuant to the exercise of options granted under the
1993 Plan is 1,688,663. Incentive stock options may not be granted at less than
fair market value of the
F-11
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK PLANS (CONTINUED)
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"), providing 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
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.
In December 1999, at a Special Shareholders' Meeting, the Stockholders voted
to increase the number of shares authorized under the plan to 1,300,000 shares.
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).
F-12
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK PLANS (CONTINUED)
All options granted during 1997, 1998 and 1999 have exercise prices equal to
the fair market value of the common stock at the date of grant. Transactions
under the Company's stock option plans during the years ended December 31, 1997,
1998 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
-------------------- -------------------- --------------------
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..... 1,354,249 $1.54 1,372,750 $3.57 1,341,500 $3.55
Granted.............................. 514,700 7.85 653,000 5.92 616,700 3.47
Exercised............................ (218,549) 0.42 (147,750) 0.23 (1,750) 1.20
Canceled............................. (277,650) 3.83 (536,500) 7.80 (252,250) 6.22
--------- ----- --------- ----- --------- -----
Outstanding at end of year........... 1,372,750 $3.57 1,341,500 $3.55 1,705,450 $3.53
========= ===== ========= ===== ========= =====
Exercisable at end of year........... 539,034 $0.49 560,467 $0.74 785,128 $2.07
========= ===== ========= ===== ========= =====
Weighted average fair value of
options granted during the year.... $5.29 $1.71 $0.96
===== ===== =====
</TABLE>
In October 1998, the Company repriced unexercised options to purchase a
total of 396,250 shares of Common stock previously granted to employees and
options to purchase a total of 40,000 shares of Common stock previously granted
to members of the Company's Scientific Advisory Board ("SAB"). All vesting in
the surrendered options was forfeited. The new employee options vest at a rate
of 25% per year and the SAB options vest at a rate of 33% per year. The Company
recorded $6,584 and $21,775 of deferred compensation in 1998 and 1999
respectively relating to this repricing.
During 1999, the Board of Directors granted non qualified options to
purchase a total of 85,000 shares of Common stock to advisors to the Company not
covered by an existing plan (50,000 shares and 35,000 shares). These options
have exercise prices equal to the fair market value of the common stock at the
date of grant. They are not included in the chart above.
The following table summarizes information about stock options outstanding
under the Company's stock option plans at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED WEIGHED AVERAGE
REMAINING AVERAGE NUMBER OF EXERCISE PRICE
NUMBER CONTRACTUAL LIFE EXERCISE OPTIONS OF OPTIONS
RANGE OF EXERCISE PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE EXERCISABLE
------------------------ ----------- ---------------- -------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$.002 - $.019.................... 32,070 4.33 $0.02 32,070 $0.02
$ .20 - $ .50.................... 503,267 6.29 0.32 462,968 0.30
$1.00 - $2.00.................... 97,663 8.15 1.93 96,563 1.94
$2.56 - $3.13.................... 488,700 9.84 2.75 --
$4.00 - $5.00.................... 364,000 8.83 4.97 91,000 4.97
$7.00 - $9.38.................... 219,750 8.21 8.19 102,528 8.26
--------- -------
1,705,450 8.17 $3.11 785,128 $2.07
========= =======
</TABLE>
F-13
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK PLANS (CONTINUED)
At December 31, 1999, 1,705,450 shares of common stock are reserved for
issuance upon exercise of the options issued under the Company's stock option
plans and there are 327,550 options available for future grant. Outstanding
options generally vest on a pro rata basis over a period of two to five years.
The Company has recorded compensation expense related to options granted to
non-employee consultants for services rendered totalling $100,000 in 1997,
$6,584 in 1998 and $20,428 in 1999. In addition, the Company recorded
compensation expense of $91,875 related to the cashless exercise of 15,000
options by an employee 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, 11,929 and 14,857 shares of
common stock at an average price of $8.02, $5.72 and $3.68 during 1997, 1998 and
1999 respectively. At December 31, 1999, the Company had 64,654 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
1997, 1998 and 1999 the Company's net loss and net loss per share would have
been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net loss:
As reported............................ $6,047,619 $6,537,085 $7,335,414
Pro forma.............................. $6,511,042 $6,900,661 $7,537,124
Net loss per share:
As reported--basic and diluted......... $ 0.58 $ 0.61 $ 0.61
Pro forma--basic and diluted........... $ 0.62 $ 0.65 $ 0.63
</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 1997, 1998 and 1999, respectively: (i) dividend
yield of 0% for all periods; (ii) expected volatility of 0%, 0% - 50%; and 60%;
(iii) risk free interest rates of 5.8% - 6.8%, 6.1% - 6.9% and 4.58%; and
(iv) expected option terms of 4 to 7 years for 1997, 5 years for 1998 and xxxxxx
for 1999. SFAS 123 requires that volatility be considered in the calculation of
the fair value of an option grant only for grants made when an entity has
publicly traded securities or has filed a registration statement to do so.
Accordingly, a
F-14
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK PLANS (CONTINUED)
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 net income
(loss) for future years.
7. INCOME TAXES
The income tax benefit consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Income tax benefit:
Federal.............................. $ 2,146,000 $ 2,344,000 $ 2,272,772
State................................ 402,000 513,000 796,063
----------- ----------- -----------
2,548,000 2,857,000 3,523,835
Deferred tax asset valuation
allowance............................ (2,548,000) (2,857,000) (3,523,835)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net operating loss carryforwards...... $ 6,435,000 $ 9,164,000 $ 12,307,604
Research and development tax credit
carryforwards....................... 598,000 856,000 1,451,927
Deferred start up and organization
expenses............................ 9,000 -- --
Other................................. 11,000 43,000 58,292
----------- ----------- ------------
Gross deferred tax assets........... 7,053,000 10,063,000 13,817,823
Capitalized software.................. -- (137,000) (138,142)
Fixed assets.......................... (29,000) (48,000) (46,261)
Patent costs.......................... (23,000) (16,000) (24,453)
----------- ----------- ------------
Net deferred tax assets............. 7,001,000 9,862,000 13,608,967
Deferred tax asset valuation
allowance......................... (7,001,000) (9,862,000) (13,608,967)
----------- ----------- ------------
$ -- $ -- $ --
=========== =========== ============
</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
F-15
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
including approval of the Company's products and labeling claims by the U.S.
Food and Drug Administration and market acceptance of the Company's products by
customers. Based upon the weight of all available evidence, the Company has
provided a full valuation allowance for its deferred tax assets since, in the
opinion of management, realization of these future benefits is not sufficiently
assured (defined as a likelihood of slightly more than 50 percent).
Approximately $1,080,000 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,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Statutory U.S. federal tax rate.................... (35.0)% (35.0)% (35.0)%
State taxes, net of federal tax benefit............ (6.7) (6.4) (10.85)
Non-deductible expenses............................ 1.6 0.2 0.24
Federal research and development credits........... (2.6) (2.7) (3.37)
Other.............................................. 0.6 0.2 (0.94)
Valuation allowance on deferred tax assets......... 42.1 43.7 48.04
----- ----- ------
--% --% --%
===== ===== ======
</TABLE>
As of December 31, 1999, the Company has approximately $30,500,000 of net
operating loss carryforwards and $910,000 and $540,000 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 2019.
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
F-16
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SAVINGS PLAN (CONTINUED)
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 1997, 1998 or 1999.
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 $159,700, $178,600 and $202,500 for the years
ended December 31, 1997, 1998 and 1999, respectively.
At December 31, 1999, future minimum rental payments under the noncancelable
leases are as follows:
<TABLE>
<S> <C>
2000........................................................ $263,230
2001........................................................ 33,117
--------
$296,347
</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 1997,
1998 and 1999 amounted to $20,000 in each year. The future minimum license
maintenance fee commitments at December 31, 1999 are approximately as follows:
<TABLE>
<S> <C>
2000........................................................ $ 40,000
2001........................................................ 40,000
2002........................................................ 40,000
2003........................................................ 40,000
Thereafter.................................................. 200,000
--------
$360,000
</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.
10. RELATED PARTY TRANSACTIONS, INCLUDING ROYALTY OBLIGATIONS
LICENSE AGREEMENT/CONSULTING AND TECHNOLOGY AGREEMENT
In February 1993, the Company entered into a license agreement with a member
of the Company's Board of Directors. This individual is also Chairman of the
Company's Scientific Advisory Board and a
F-17
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS, INCLUDING ROYALTY OBLIGATIONS (CONTINUED)
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.
Also in February 1993, the Company 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 a monthly consulting fee of $10,000,
as stipulated in the agreement. Total payments made during 1997, 1998 and 1999
were approximately $112,600, $118,000 and $121,300 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. This warrant was exercised during 1998, and 85,510
shares of common stock were issued.
Operations through December 31, 1999 did not result in the recognition of
any material royalty expense in connection with these agreements.
12. MAJOR CUSTOMERS, EXPORT SALES AND CONCENTRATION OF CREDIT RISK
Revenues from the Company's Japanse distributor accounted for 47%, 36% and
27% of total revenues during 1997, 1998 and 1999 respectively and 40%, 37% and
16% of the accounts receivable balance at December 31, 1997, 1998 and 1999
respectively. Company policy does not require collateral on accounts receivable
balances.
F-18
<PAGE>
CAMBRIDGE HEART, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 2,657,392 $ 786,401
Marketable securities....................................... 6,518,924 6,458,402
Accounts receivable, (net of allowance for doubtful accounts
of $7,725 and $27,937 at December 31, 1999 and June 30,
2000)..................................................... 577,156 538,136
Inventory................................................... 460,913 571,915
Prepaid expenses and other current assets................... 140,197 148,957
------------ ------------
Total current assets.................................... 10,354,582 8,503,811
Fixed assets, net........................................... 645,931 798,943
Other assets................................................ 453,097 442,751
------------ ------------
$ 11,453,610 $ 9,745,505
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 679,660 $ 596,491
Accrued expenses............................................ 517,936 540,362
Short term debt............................................. 206,727 116,874
------------ ------------
Total current liabilities................................... 1,404,323 1,253,727
------------ ------------
Stockholder's equity:
Common stock, $.001 par value; 20,000,000 shares authorized;
13,921,357 and 14,656,311 shares issued and outstanding at
December 31, 1999 and June 30, 2000, respectively......... 13,921 14,656
Additional paid-in capital.................................. 39,120,605 41,522,218
Accumulated deficit......................................... (29,035,803) (33,011,293)
------------ ------------
10,098,723 8,525,581
Less: deferred compensation................................. (49,436) (33,803)
------------ ------------
Total stockholders' equity.............................. 10,049,287 8,491,778
------------ ------------
$ 11,453,610 $ 9,745,505
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
F-19
<PAGE>
CAMBRIDGE HEART, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 2000 1999 2000
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenue................................... $ 562,080 $ 457,580 $ 1,094,823 $ 870,484
Cost of goods sold........................ 514,193 454,923 979,515 890,228
----------- ----------- ----------- -----------
47,887 2,657 115,308 (19,744)
Cost and expenses:
Research and development.................. 644,647 661,828 1,387,183 1,585,977
Selling, general and administrative....... 1,249,245 1,350,115 2,324,667 2,618,491
----------- ----------- ----------- -----------
Loss from operations.................... (1,846,005) (2,009,286) (3,596,542) (4,224,212)
Interest income........................... 59,253 119,819 131,188 248,722
----------- ----------- ----------- -----------
Net loss.................................. $(1,786,752) $(1,889,467) $(3,465,354) $(3,975,490)
=========== =========== =========== ===========
Net loss per share basic and diluted...... $ (0.16) $ (0.13) $ (.31) $ (.27)
=========== =========== =========== ===========
Weighted average common shares outstanding
basic and diluted....................... 11,135,318 14,655,855 11,021,184 14,575,745
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-20
<PAGE>
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,464,354) $(3,975,490)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization............................. 244,142 242,818
Loss on Disposal of fixed assets.......................... 6,787
Compensation expense on stock options..................... 29,383 68,913
Changes in operating assets and liabilities:
Accounts receivable..................................... (17,060) 39,020
Inventory............................................... 85,057 (111,002)
Prepaid expenses and other current assets............... 28,582 (8,760)
Other assets............................................ (3,701) 7,968
Accounts payable and accrued expenses................... (20,473) (60,743)
----------- -----------
Net cash used for operating activities................ (3,118,424) (3,790,489)
----------- -----------
Cash flows from investing activities:
Net maturity of marketable securities..................... 975,719 60,522
Purchase of fixed assets.................................. (211,478) (278,115)
Capitalization of software development costs.............. (109,742) (122,124)
----------- -----------
Net cash (used in) provided by investing activity....... 654,499 (339,717)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance
costs................................................... 4,760,513 2,349,068
Net payment of bank credit line........................... -- (89,853)
----------- -----------
Net cash provided by financing activities............... 4,760,513 2,259,215
Net increase (decrease) in cash and cash equivalents........ 2,296,588 (1,870,991)
Cash and cash equivalents, beginning of year................ 2,426,032 2,657,392
----------- -----------
Cash and cash equivalents, end of period.................... $ 4,722,620 $ 786,401
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-21
<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, 1999 and the notes thereto included in the
Company's 1999 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 June 30, 2000, and
the results of its operations and its cash flows for the six month periods ended
June 30, 1999 and 2000, 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 1,504,738 and 1,372,750 of potential common stock
equivalents from the calculation of diluted weighted average share amounts for
the three and six month periods ended June 30, 1999 and 2000 respectively, as
its inclusion would have been anti-dilutive.
5. FINANCINGS
In January 2000 the Company raised gross proceeds of $2.1 million in equity
capital less approximately $36,000 in issuance costs from the sale of 600,000
shares of Common Stock through a private placement with a single investor at a
10% discount to the final trading price of the Company's stock on the NASDAQ on
January 11, 2000. In addition, warrants with a four year term for the purchase
of 120,000 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 investor has the right to receive additional shares
to adjust the price of the transaction. The sales agent, Sunrise
Securities, Inc. received 45,160 shares of common stock as commission and
warrants with a four year term for the purchase of 45,161 shares of Common Stock
at $4.20 per share. The proceeds of the sale will be used to fund operations.
F-22
<PAGE>
CAMBRIDGE HEART, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. We are required to
adopt SFAS No. 133, as amended by SFAS NO. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Dates of FASB
Statement 133," on a prospective basis for interim periods and fiscal years
beginning January 1, 2001. Had we implemented SFAS No. 133 in the current
period, financial position and results of operations would not have been
affected.
SEC Staff Accounting Bulletin No. 100, "Restructuring and Impairment
Charges," issued in November 1999, expresses views of the Staff regarding the
accounting for and disclosure of certain expenses commonly reported in
connection with exit activities and business combinations. This includes accrual
of exit and employee termination costs pursuant to Emerging Issues Task Force
(EITF) Issues No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring), and No. 95-3, Recognition of Liabilities in Connection with
a Purchase Business Combination, and the recognition of impairment charges
pursuant to Accounting Principles Board (APB) Opinion No. 17, Intangible Assets
and Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
which addresses accounting policies to be applied in the recognition,
presentation and disclosure of revenues from contract partnerships in financial
statements filed with the SEC. On June 26, 2000, the SEC issued SAB 101B which
delays the implementation of SAB 101 until no later than the fiscal quarter
ending December 31, 2000, in order to provide companies with additional time to
determine the effect that a change in accounting policy under SAB 101 will have
on their revenue recognition practices. Together with our independent
accountants, we are continuing to review the potential effect that the
implementation of SAB 101 would have on our net financial results.
During June 2000, the Financial Accounting Standards Board issued Financial
Accounting Standard ("FAS") No. 138, "Accounting for Certain Derivative
Instruments--An amendment of FAS 133 "Accounting for Derivative Instruments and
Hedging Activities". FAS 138 shall be effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. We do not expect this to have a
material impact on our financial position and results of operations.
F-23
