CAMBRIDGE HEART INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

COMMISSION FILE NUMBER 0-20991

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CAMBRIDGE HEART, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE 13-3679946
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

1 OAK PARK DRIVE 01730
BEDFORD, MASSACHUSETTS (Zip Code)
(Address of principal executive
offices)

781-271-1200
(Registrant's telephone number, including area code)

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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

Number of shares outstanding of each of the issuer's classes of common stock
as of August 12, 2002:

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CAMBRIDGE HEART, INC.

INDEX

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PART I--FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

CAMBRIDGE HEART, INC.

BALANCE SHEET
(UNAUDITED)

See accompanying notes to condensed financial statements.

3

CAMBRIDGE HEART, INC.

STATEMENT OF OPERATIONS

(UNAUDITED)

See accompanying notes to condensed financial statements.

4

CAMBRIDGE HEART, INC.

STATEMENT OF CASH FLOWS

(UNAUDITED)

See accompanying notes to condensed financial statements.

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The Company paid $250 and $4,290 in interest expense for the three month
periods ended June 30, 2001 and June 30, 2002, respectively. The Company paid
$4,786 and $10,132 in interest expense for the six month periods ended June 30,
2001 and June 30, 2002, respectively.

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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 audited
financial statements dated December 31, 2001 and the notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
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, 2002, and the results of its operations and its cash
flows for the three and six month periods ended June 30, 2001 and 2002, 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. NET LOSS PER SHARE

Consistent with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," 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 4,377,297 and 4,298,345 of potential common stock
equivalents from the calculation of diluted weighted average share amounts for
the six month periods ended June 30, 2001 and 2002, respectively, as its
inclusion would have been anti-dilutive.

4. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

For the six months ended June 30, 2002, two customers of the Company
accounted for 10% and 18%, respectively, of total revenues. These customers
accounted for 9% and 14%, respectively, of the accounts receivable balance at
June 30, 2002. The Company does not anticipate any problems in collecting these
outstanding balances.

5. INVENTORY

Inventories consisted of the following at December 31, 2001 and June 30,
2002:

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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

We are engaged in the research, development and commercialization of
products for the non-invasive diagnosis of cardiac disease. Using innovative
technologies, we are addressing such key problems in cardiac diagnosis as the
identification of those at risk of sudden cardiac death. Our proprietary
technology and products are the only diagnostic tool approved by the U.S. Food
and Drug Administration to non-invasively measure microvolt levels of T-Wave
Alternans, an extremely subtle beat-to-beat fluctuation in a patient's heartbeat
and therefore be predictive of an individuals risk of sudden cardiac death.

Our second quarter is the first quarter in which we attained the important
$1 million revenue milestone. Sales from our core U.S. alternans business
increased 16% from the previous quarter and 120% over the same period of 2001.
Our information indicates that an installed Heartwave system in the U.S. is now
utilizing an average of approximately ten Micro-V Alternans Sensors per month.
As a result, our disposable sensor volume has increased over 240% during the
first half of 2002 compared to the same period last year. In addition, revenues
from sales to our two primary distribution partners, Philips Medical and
Spacelabs Medical have continued to show steady increases. Philips Medical is
the exclusive distributor in the U.S. of our CH 2000 stress test system and
Spacelabs Medical distributes our Microvolt T-Wave Alternans technology as an
available add on to their Burdick Quest-Registered Trademark- stress test
system.

At the present time, all but five states (Montana, Idaho, New Jersey, Rhode
Island and Utah) have either issued a formal coverage policy, or have indicated
a formal policy is not required, for the payment of Medicare claims for our
Microvolt T-Wave Alternans Test. This represents 90% of the states now covering
Medicare claims at a national average reimbursement of $266.79 per test. Payment
for a Microvolt T-Wave Alternans Test by private insurers is not as widespread.
We are continuing our efforts to establish Microvolt T-Wave Alternans as an
important, reimbursed modality with all of the private insurers as the benefits
can be significant to both the patient and the insurer. Our reimbursement
taskforce staffed by both company and outside reimbursement experts, continue to
find success in identifying and resolving coverage and payment issues across the
country. They work closely with our customers and third party insurers to
resolve payment and coverage issues in order to increase the probability of all
providers receiving payment for performance of a Microvolt T-Wave Alternans
Test.

During the quarter, we announced the clinical results of a presentation made
at the Cardiostim meeting in Nice, France that demonstrated that Microvolt
T-Wave Alternans testing can play a critical role in risk stratifying MADIT II
type patients (previous myocardial infarction and left ventricular ejection
fraction less than 0.30). Dr. Stephan Hohnloser, Director of Electrophysiology
at J.W. Gothe University, Frankfurt, Germany presented clinical data
demonstrating that MADIT II type patients who tested negative for Microvolt
T-Wave Alternans are at very low risk of dying suddenly from a cardiac event.
Dr. Hohnloser presented data on 120 MADIT II type patients drawn from two
previously published prospective clinical trials involving 957 patients.
Microvolt T-Wave Alternans testing successfully identified a subgroup of MADIT
II type patients who are at low risk of dying suddenly and therefore may not
require implantable cardioverter defibrillator (ICD) therapy. Conversely, MADIT
II type patients who do not test negative for Microvolt T-Wave Altenans would be
expected to have a greater mortality benefit from ICD therapy than that reported
in the original MADIT II study.

During the quarter, we completed an addendum to the distributor agreement
with our Japanese partner, Fukuda Denshi. This addendum covers the period
June 1, 2002 through May 31, 2003 and includes a commitment for the purchase of
a large number of Heartwave systems by the end of 2002.

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During the quarter, we engage the services of Consulting for Strategic
Growth to act as our investor and public relations firm.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to
incentives, product returns, bad debts, inventories, investments, intangible
assets, income taxes, financing operations, warranty obligations, and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.

REVENUE RECOGNITION

Our revenues are recognized upon shipment of goods provided that risk of
loss has passed to the customer, all of our obligations have been fulfilled,
persuasive evidence of an arrangement exists, the fee is fixed or determinable,
and collectibility is probable. Revenue from maintenance contracts and license
agreements is recorded over the term of the underlying agreement. Payments
received in advance of services being performed is recorded as deferred revenue.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.

INVENTORY OBSOLESCENCE

We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.

LONG-LIVED ASSETS

Property, plant and equipment are stated at cost less accumulated
depreciation. Major renewals and improvements are capitalized; minor
replacements, maintenance and repairs are charged to current operations.
Depreciation is computed by applying the straight-line method over the estimated
useful lives of machinery and equipment (three to seven years). Leasehold
improvements are amortized over the shorter of the useful life of the
improvement or the life of the related lease. We perform reviews for the
impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.

INTANGIBLE ASSETS

Intangible assets primarily relate to the value of capitalized software. The
cost of capitalized software is amortized on a straight-line basis over the
estimated lives of up to three years. Intangible

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assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.

RESULTS OF OPERATIONS

THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2002

Revenue for the three month periods ended June 30, 2001 and 2002 was
$739,000 and $1,050,700, respectively, an increase of 42%. Revenue for the six
month periods ended June 30, 2001 and June 30, 2002 was $1,416,900 and
$1,959,500, respectively, an increase of 38%. Revenue from our core business
(U.S. Microvolt T-Wave Alternans capable systems and Micro-V Alternans Sensors)
increased 120% and 130% respectively for the three and six month periods ended
June 30, 2002 over the comparable periods of 2001. The number of units of our
Microvolt T-Wave Alternans capable systems sold through our various U.S.
channels of distribution for the three and six month periods ended June 30,
2002, increased 170% and 180%, respectively. During the three and six month
periods ended June 30, 2002 U.S. unit sales of our Micro-V Alternans Sensors,
which are a primary indicator of equipment usage, increased 190% and 201%,
respectively, as compared to the same periods of 2001. We believe that our total
revenues will increase at an estimated rate of 17% to 25% per quarter for the
balance of 2002.

Gross margin on products sold for the three month periods ended June 30,
2001 and 2002 was 19% and 27% of revenue, respectively. The improvement in the
margin percentage to sales primarily reflects the effect of increased capital
equipment volume on the utilization of fixed labor and overhead costs and the
impact of continued material cost reduction efforts. Gross margin for the six
month periods ended June 30, 2001 and 2002 was 22% and 26%, respectively.

Research and development expenses decreased from $461,400 in the three month
period ended June 30, 2001 to $419,000 for the same period of 2002, a decrease
of 9%. Research and development costs for the six month periods ended June 30,
2001 and 2002 were $1,025,400 and $787,900, respectively, a decrease of 23%.
Expenses incurred during the six months ended June 30, 2001 included software
development costs for the Windows-Registered Trademark- 2000 version of our CH
2000 stress test system which was released to the market in the second half of
the year. In addition, 2001 included expenses associated with the development of
the version of our Microvolt T-Wave Alternans software currently distributed by
our strategic partner Spacelabs Medical on their stress test system. Expenses
incurred during the six month period ended June 30, 2002 were in support of
enhancements to our Heartwave and Micro-V Alternans Sensor products and ongoing
clinical studies. We anticipate that costs will remain stable over the next
several quarters of 2002 in support of these ongoing planned enhancements and
clinical studies.

Selling, general and administrative expenses increased from $1,488,300 in
the three month period ended June 30, 2001 to $1,541,900 in the same period in
2002, an increase of 4%. For the six month periods ended June 30, 2001 and 2002,
selling, general and administrative expenses were $2,986,400 and $3,032,600,
respectively, an increase of 2%. Included in the 2002 expenses are increased
costs incurred to support our expanded direct U.S. sales organization, in
addition, to expenses incurred in support of reimbursement and marketing
programs. We anticipate that expenses associated with expected increased
revenues in our U.S. core business will increase during the balance of 2002.

Net interest income was $105,000 for the three month period ended June 30,
2001, compared to $26,700 for the same period in 2002. The decline in both short
and long term interest rates during the last twelve month period along with the
decrease in invested cash account for the reduction in net interest income. For
the six month period ended June 30, 2001 and 2002, interest income was $289,500
and $59,000, respectively.

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LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2002, we had cash, cash equivalents and marketable securities
of $5,753,100. During the three month period ended June 30, 2002, our cash, cash
equivalents and marketable securities decreased by $1,596,600, or 22%,
consistent with our net loss for the three month period of $1,646,500 and
$52,573 of proceeds from the exercise of warrants.

We continue to utilize a $1,000,000 bank line of credit, of which $500,000
is available for financing the purchase of eligible capital equipment, including
computer hardware and manufacturing molds and tooling, and the balance is
available to borrow against eligible customer receivable balances as defined in
the agreement. The entire line is collateralized by all of our tangible assets
and select intangible assets as defined in the agreement. The amount of
utilization on the credit line at June 30, 2002 was approximately $563,600. We
are in the process of completing the renewal of a new bank line of credit for a
total of $1,200,000. Under the terms of the credit facility, we expect up to
$300,000 will be available for financing the purchase of eligible capital
equipment including the rollover of the unpaid balance of $179,000 from the
current credit facility. We expect collateral for the new credit facility to be
unchanged from the previous line. We anticipate that this new credit facility
will be executed by the end of the third quarter of 2002.

Inventory remained unchanged for the three month period ended June 30, 2002.
As of June 30, 2002, we had inventory of $646,100.

Fixed asset additions during the quarter primarily represent Heartwave
systems placed at additional sites participating in our ABCD clinical trial, the
purchase of computer equipment and the purchase of manufacturing equipment. We
do not expect capital expenditures to exceed an aggregate of $1,000,000 over the
next year.

Under the terms of certain license, consulting and technology agreements, we
are required to pay royalties on sales of our products. Minimum license
maintenance fees under the license agreement, which can be credited against
royalties otherwise payable for each year, are $10,000 per year through 2008. We
are committed to pay an aggregate of $60,000 of such minimum license maintenance
fees subsequent to June 30, 2002 as the technology is used. As part of these
agreements, we are also committed to meet certain development and sales
milestones, including a requirement to spend a minimum of $200,000 in any
two-year period for research and development, clinical trials, marketing, sales
and/or manufacturing of products related to certain technology covered by the
consulting and technology agreements.

We anticipate that our existing capital resources will be adequate to
satisfy our capital requirements through at least the next twelve months.

During the quarter ended June 30, 2002, Cambridge Heart did not engage in:

- material off-balance sheet activities, including the use of structured
finance or special purpose entities;

- material trading activities in non-exchange traded commodity contracts; or

- transactions with persons or entities that benefit from their
non-independent relationship with Cambridge Heart.

FACTORS WHICH MAY AFFECT FUTURE RESULTS

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS. FOR
THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING
THE FOREGOING, THE WORDS "BELIEVES", "ANTICIPATES", "PLANS", "EXPECTS",
"INTENDS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. THERE ARE A NUMBER OF

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IMPORTANT FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE,
WITHOUT LIMITATION, THOSE SET FORTH BELOW AND ELSEWHERE IN THIS QUARTERLY
REPORT.

RISKS RELATED TO OUR OPERATIONS

WE HAVE A HISTORY OF NET LOSSES, 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, 2002. We may
never generate substantial revenues or achieve profitability on a quarterly or
annual basis. We expect that our selling, general and administrative expenses
will increase significantly in connection with the expansion of our sales and
marketing activities. Revenues generated from the sale of our products will
depend upon numerous factors, including:

- the extent to which our products gain market acceptance;

- varying pricing promotions and volume discounts to customers;

- competition; and

- the availability and amount 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 three years
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.

IF WE ARE UNABLE TO COMPLY WITH NASDAQ'S CONTINUED LISTING REQUIREMENTS, OUR
COMMON STOCK COULD BE DELISTED FROM THE NASDAQ NATIONAL MARKET

Our common stock is listed on the Nasdaq National Market. The Nasdaq Stock
Market's Marketplace Rules impose requirements for companies listed on the
Nasdaq National Market to maintain their listing status, including minimum bid
price and net tangible assets or stockholders' equity requirements. Our common
stock has traded at levels lower than the minimum bid price threshold of $1.00
on several occasions recently. If our minimum bid price does not rise above the
threshold we could face delisting. Nasdaq also currently requires that an issuer
have either net tangible assets of at least $4 million or stockholders' equity
of at least $10 million to maintain listing on the National Market System. As of
June 30, 2002, we had tangible net assets of $6.2 million and stockholders'
equity of $6.8 million. We are currently subject to certain "grandfather"
provisions that allow us to maintain our listing based on the net tangible
assets test. This transitional rule will remain in effect until November 1,
2002, at which time we will be required to comply with the $10 million
stockholders' equity test. If we are unable to increase stockholders' equity to
the minimum Nasdaq requirement by generating profits or by an infusion of
additional capital, we will not meet the minimum listing

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requirements of the Nasdaq National Market as of November 2002. There can be no
assurance that we will satisfy all requirements for continued listing of our
common stock on the Nasdaq National Market. If we are unable to meet the
continued listing requirements in the future, our common stock will be subject
to delisting, which may have a material adverse effect on the price of our
common stock and the levels of liquidity currently available to our stockholders
and may restrict our ability to raise additional capital.

WE DEPEND ON OUR MICROVOLT T-WAVE ALTERNANS TECHNOLOGY FOR A SIGNIFICANT PORTION
OF OUR REVENUES AND IF IT DOES NOT ACHIEVE BROAD MARKET ACCEPTANCE, OUR GROWTH
WILL BE LIMITED

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.
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 and limit our growth. 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 Microvolt T-Wave Alternans technology and Micro-V Alternans Sensors to more
firmly 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 at 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 DEPEND EXCLUSIVELY ON THIRD PARTIES TO SUPPORT THE COMMERCIALIZATION OF OUR
PRODUCTS INTERNATIONALLY

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

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revenues we receive in those territories will depend upon the efforts of our
distributors. Furthermore, we cannot be sure that a distributor will market our
products successfully or that the terms of any future distribution arrangements
will be acceptable to us.

WE DEPEND HEAVILY ON A THIRD PARTIES, TO SUPPORT THE COMMERCIALIZATION OF OUR CH
2000 STRESS TEST SYSTEM

We rely solely on Philips Medical to commercialize our CH 2000 stress test
system in the United States. Third parties may not perform their obligations as
expected. The amount and timing of resources that third parties devote to
commercializing our products may not be within our control. The third parties on
which we rely may not be able to recruit and retain skilled sales
representatives. Furthermore, our interests may differ from those of third
parties that commercialize our products. Disagreements that may arise with third
parties could limit the commercialization of our products, or result in
litigation or arbitration, which would be time-consuming, distracting and
expensive. If any third party that supports the commercialization of our
products breaches or terminates its agreement with us, or fails to conduct its
activities in a timely manner, such breach, termination or failure could:

- limit the continued commercialization of our CH 2000 product,

- require us to undertake unforeseen additional responsibilities or devote
unforeseen additional resources to the commercialization of our products,
or

- result in the termination of the commercialization of our CH 2000 product,

and the resulting disruption of our business could have a material adverse
effect on our results of operations.

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.

WE OBTAIN CRITICAL COMPONENTS AND SUBASSEMBLIES FOR THE MANUFACTURE OF OUR
PRODUCTS FROM A LIMITED GROUP OF SUPPLIERS, AND IF OUR SUPPLIERS FAIL TO MEET
OUR REQUIREMENTS, WE MAY BE UNABLE TO MEET CUSTOMER DEMAND AND OUR CUSTOMER
RELATIONSHIPS WOULD SUFFER

We do not have long-term contracts with our suppliers. Our dependence on a
single supplier or limited group of smaller suppliers for critical components
and subassemblies exposes us to several risks, including:

- a potential for interruption, or inconsistency in the supply of components
or subassemblies, leading to backorders and product shortages,

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- a potential for inconsistent quality of components or subassemblies
supplied, leading to reduced customer satisfaction or increased product
costs and delays in shipments of our products to customers and
distributors, and

- inconsistent pricing.

Disruption or termination of the supply of these components and subassemblies
could cause delays in the shipment of our products, resulting in potential
damage to our customer relations and reduced revenue. From time to time in the
past, we have experienced temporary difficulties in receiving timely shipment of
key components from our suppliers. We can give no assurance that we would be
able to identify and qualify additional suppliers of critical components and
subassemblies in a timely manner. Further, a significant increase in the price
of one or more key components or subassemblies included in our products could
seriously harm our results of operations.

RISKS RELATED TO THE MARKET FOR CARDIAC DIAGNOSTIC EQUIPMENT

WE MAY NOT BE ABLE TO MAINTAIN ADEQUATE LEVELS OF THIRD-PARTY REIMBURSEMENT

Our revenues currently depend and will continue to depend, to a significant
extent, on sales of our Heartwave and CH 2000 systems and Micro-V Alternans
Sensors. Our ability to successfully commercialize these systems depends in part
on maintaining adequate levels of third-party reimbursement for use of these
systems. The amount of reimbursement in the United States that is available for
clinical use of the Microvolt T-Wave Alternans Test 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 payers 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 payer, or is experimental,
unnecessary or inappropriate. Our ability to commercialize the Heartwave and CH
2000 systems successfully will depend, in large part, on the extent to which
appropriate reimbursement levels for the cost of performing a Microvolt T-Wave
Alternans Test continue to be available from government authorities, private
health insurers and other organizations, such as health maintenance
organizations. We do not know whether the reimbursement level in the United
States for the Microvolt T-Wave Alternans Test will increase in the future or
that reimbursement amounts will not reduce the demand for, or the price of, the
Heartwave and CH 2000 systems. Difficulties in obtaining reimbursement, or the
inadequacy of the reimbursement obtained, for Microvolt T-Wave Alternans Tests
using the Heartwave and CH 2000 systems could have a material adverse effect on
our business.

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 and the Heartwave systems, 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.

14

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 Microvolt T-Wave Alternans licensed
from The Massachusetts Institute of Technology. Our license of patents and
patent applications impose various commercialization, sublicensing, insurance,
royalty and other obligations on our part. If we fail to comply with these
requirements, licenses could convert from being exclusive to nonexclusive in
nature or could terminate.

WE COULD BECOME INVOLVED IN LITIGATION OVER INTELLECTUAL PROPERTY RIGHTS

The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Litigation, which
would likely result in substantial cost to us, may be necessary to enforce any
patents issued or licensed to us and/or to determine the scope and validity of
others' proprietary rights. In particular, our competitors and other third
parties hold issued patents and are assumed to hold pending patent applications,
which may result in claims of infringement against us or other patent
litigation. We also may have to participate in interference proceedings declared
by the United States Patent and Trademark Office, which could result in
substantial cost, to determine the priority of inventions. Furthermore, we may
have to participate at substantial cost in International Trade Commission
proceedings to abate importation of products, which would compete unfairly with
our products.

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 us.

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ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We own financial instruments that are sensitive to market risk as part of
our investment portfolio. The investment portfolio is used to preserve our
capital until it is used to fund operations, including research and development
activities. None of these market-risk sensitive instruments is held for trading
purposes. We invest our cash primarily in money market mutual funds and U.S.
government and other investment grade debt securities. These investments are
evaluated quarterly to determine the fair value of the portfolio. Our investment
portfolio includes only marketable securities with active secondary or resale
markets to help assure liquidity. We have implemented policies regarding the
amount and credit ratings of investments. Due to the conservative nature of
these policies, we do not believe we have a material exposure due to market
risk. In addition, we do not believe that a 10% increase or decrease in interest
rates in effect at June 30, 2002 would have a material impact on our results of
operations or cash flows.

We carry the amounts reflected in the balance sheet of cash and cash
equivalents, trade receivables, trade payables, and line of credit at fair value
at June 30, 2002 due to the short maturities of these instruments.

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PART II--OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's Annual Meeting of Stockholders was held on June 4, 2002 (the
"Annual Meeting"). At the Annual Meeting, Jeffrey J. Langan and Daniel M.
Mulvena were elected as Class III Directors for a three year term. The other
directors whose terms of office continued after the meeting are as follows:
David A. Chazanovitz, Richard J. Cohen, M.D., Ph.D, and Robert P. Khederian.

The following is a summary of each matter voted at the meeting and the
number of votes cast for, against or withheld and abstentions as to each such
matter:

1. To elect the following Class III Directors to serve for the ensuing three
years.

Jeffrey J. Langan: For: 14,360,024 Withheld: 120,700
Abstain: N/A

Daniel M. Mulvena: For: 14,360,024 Withheld: 120,700
Abstain: N/A

2. To approve an amendment to the Company's 1996 Employee Stock Purchase Plan
increasing from 100,000 to 300,000 the number of shares of Common Stock
authorized for issuance under such plan.

For: 14,081,525 Against: 364,048 Abstain: 35,151

3. To ratify the appointment of PricewaterhouseCoopers, LLP as independent
auditors for the year ended December 31, 2002.

For: 14,374,724 Against: 55,000 Abstain: 51,000

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

The exhibits listed in the Exhibit Index filed as part of this report are
filed as part of or are included in this report.

EXHIBIT INDEX

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended June 30, 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

CAMBRIDGE HEART, INC.

Date: August 14, 2002 By: /s/ DAVID A. CHAZANOVITZ
-----------------------------------------
David A. Chazanovitz
PRESIDENT, CHIEF EXECUTIVE OFFICER