<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1997
REGISTRATION NO. 333-23209
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CARDIMA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 3845 94-3177883
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
47266 BENICIA STREET
FREMONT, CA 94538
(510) 354-0300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
PHILLIP C. RADLICK, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CARDIMA, INC.
47266 BENICIA STREET
FREMONT, CA 94538
(510) 354-0300
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
JOSHUA L. GREEN ROBERT V. GUNDERSON, JR.
ROBERT V. W. ZIPP BENNETT L. YEE
ARNOLD E. BROWN II BRETT A. PLETCHER
VENTURE LAW GROUP GUNDERSON DETTMER STOUGH
A PROFESSIONAL CORPORATION VILLENEUVE FRANKLIN & HACHIGIAN, LLP
2800 SAND HILL ROAD 155 CONSTITUTION DRIVE
MENLO PARK, CALIFORNIA 94025 MENLO PARK, CALIFORNIA 94025
(415) 854-4488 (415) 321-2400
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 29, 1997
PROSPECTUS
2,275,000 SHARES
[LOGO OF CARDIMA]
COMMON STOCK
-----------
All of the 2,275,000 shares of Common Stock, $0.001 par value per share (the
"Common Stock"), offered hereby are being sold by Cardima, Inc. ("Cardima" or
the "Company"). Prior to this offering (the "Offering"), there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $10.00 and $12.00. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The Company has applied for listing of its
Common Stock on the Nasdaq National Market under the symbol "CRDM."
-----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
</TABLE>
================================================================================
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $950,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 341,250 additional shares at the Price to Public, less Underwriting
Discounts and Commissions, solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
-----------
The shares of Common Stock are being offered severally by the Underwriters,
subject to prior sale, when, as and if accepted by the Underwriters and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the shares will be made at the offices of Bear, Stearns & Co. Inc.,
245 Park Avenue, New York, New York 10167, on or about , 1997.
-----------
BEAR, STEARNS & CO. INC. DAIN BOSWORTH
INCORPORATED
-----------
The date of this Prospectus is , 1997
<PAGE>
[CARDIMA LOGO]
CARDIMA MICROCATHETER SYSTEMS
The Company's proprietary microcatheter systems are designed to map
(diagnose) and ablate (treat) atrial fibrillation (AF) and ventricular
tachycardia (VT), the two most common forms of abnormal heart rhythms, in a
minimally invasive procedure using a single catheter.
[Graphic A] CARDIMA'S MICROCATHETER SYSTEMS FOR AF
[DEPICTION OF CROSS
SECTION OF HUMAN Cardima's microcatheter systems for
HEART WITH CARDIMA AF are designed to be placed
MICROCATHETER securely against the wall of the
SYSTEMS FOR AF] upper chamber of the heart (the
atrium) in order to deliver
radiofrequency (RF) energy to the
atrial tissue to create long, thin,
continuous, linear, transmural
(across the heart wall) lesions
that restore the heart's normal
electrical function.
[Graphic B] CARDIMA'S MICROCATHETER SYSTEMS FOR VT
[DEPICTION OF
CARDIAC VEINS WITH Cardima's microcatheter systems for
CARDIMA VT are designed to safely locate
MICROCATHETER and ablate the VT causing tissue
SYSTEMS FOR VT] with RF energy from within the
cardiac veins.
Cardima's microcatheter system for
mapping of VT has received 510(k)
clearance from the FDA for sale in
the United States and includes the
Cardima Pathfinder microcatheter
and Venaport guiding catheter.
Cardima's other microcatheter
systems are under development and
have not been approved by the FDA
for sale in the United States.
Approval by the FDA could take
several years, and there can be no
assurance that such approval will
ever be obtained or, if obtained,
that the Company's microcatheter
systems will achieve market
acceptance. See "Risk Factors--No
Assurance of Obtaining Required
Regulatory Approvals; Government
Regulation."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT AND OTHER STABILIZING TRANSACTIONS. SEE
"UNDERWRITING."
Cardima(R) and the Company's logo are registered trademarks of the Company.
This Prospectus also contains the trademarks of other companies.
2
<PAGE>
CARDIMA MICROCATHETER SYSTEMS FOR AF
AF, the most common irregular electrical problem in the heart, is
characterized by chaotic electrical activity throughout both upper chambers of
the heart (right and left atria) that results in disorganized and quivering
spasms of atrial tissue that can lead to blood clots, stroke and even death.
CARDIMA PATHFINDER AF MICROCATHETER
[Picture of the Cardima Pathfinder AF Microcatheter Held in a Human Hand]
[Picture of Right Atrial Ablation] [Picture of Left Atrial Ablation]
RIGHT ATRIAL ABLATION LEFT ATRIAL ABLATION
CARDIMA PATHFINDER AF MICROCATHETER DESIGN BENEFITS:
. Single catheter for mapping and ablation
. Thin profile for right and left atrial access
. Variable stiffness design for high flexibility and maximum
surface contact
. Multiple, flexible electrodes for optimal effect
. Compatible with existing signal display systems for low cost
of use
<PAGE>
CARDIMA MICROCATHETER SYSTEMS FOR VT
VT is a potentially fatal, abnormally fast heartbeat originating from within
the walls of the lower chambers of the heart (right and left ventricles). It is
caused by electrical changes in the tissue of the ventricular wall, typically
resulting from coronary artery disease or prior heart attack.
CARDIMA PATHFINDER 1.5 FR. INTRAVASCULAR MICROCATHETER
PASSING THROUGH EYE OF NEEDLE (PICTURE MAGNIFIED)
[Picture of Cardima Pathfinder 1.5 Fr. Intravascular Microcatheter Passing
Through Eye of Needle (picture magnified)]
CARDIMA TRACER VT INTRAVASCULAR OVER-THE-WIRE MICROCATHETER
[Picture of Cardima Tracer VT Intravascular Over-The-Wire Microcatheter]
MAPPING AND ABLATING VT
Cardima VT microcatheters are [Depiction of Mapping
designed to access the veins of the and Ablating Veins of
ventricular wall and safely and Ventricular Wall]
accurately locate and ablate the VT
causing tissue.
CARDIMA VT MICROCATHETERS DESIGN BENEFITS:
. Single catheter for mapping and ablation
. Varying degrees of flexibility to enhance access to the vasculature of
the heart
. Multiple configurations of electrodes to facilitate accurate mapping and
focused ablation
. Intravascular, curative approach
. Compatible with existing signal display systems for low cost of use
Cardima's microcatheter system for mapping of VT has received 510(k)
clearance from the FDA for sale in the United States and includes the
Cardima Pathfinder microcatheter and Venaport guiding catheter. Cardima's
other microcatheter systems are under development and have not been approved
by the FDA for sale in the United States. Approval by the FDA could take
several years, and there can be no assurance that such approval will ever be
obtained or, if obtained, that the Company's microcatheter systems will
achieve market acceptance. See "Risk Factors--No Assurance of Obtaining
Required Regulatory Approvals; Government Regulation."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the Financial Statements and Notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise indicated, all information contained in this
Prospectus (i) assumes that the Underwriters' over-allotment option is not
exercised and (ii) assumes the conversion of the Company's Preferred Stock into
Common Stock upon the closing of the Offering.
THE COMPANY
Cardima, Inc. designs, develops, manufactures and markets minimally invasive,
single-use, microcatheter-based systems for the mapping and ablation of the two
most common forms of cardiac arrhythmias: atrial fibrillation ("AF") and
ventricular tachycardia ("VT"). Arrhythmias are abnormal electrical heart
rhythms that adversely affect the mechanical activities of the heart and can
potentially be fatal. The Company is developing microcatheter systems designed
to provide enhanced access to arrhythmia causing tissue, to diagnose the
arrhythmia by locating its origin ("mapping") and to restore normal heart
rhythms by isolating and destroying the arrhythmia causing sites ("ablation")
using radiofrequency ("RF") energy. The Company's microcatheters incorporate
multiple electrodes in the catheter tip that are designed to receive electrical
signals for mapping and to emit RF energy for ablation, allowing physicians to
both map and ablate using a single catheter. Cardima's microcatheters are
designed with variable stiffness and a highly flexible distal tip to allow
enhanced access to the vasculature of the heart. In addition, they are designed
to be compatible with existing signal display systems and RF generators,
eliminating the need for significant new investment in capital equipment. The
Company's microcatheter technology was originally conceived at Advanced
Cardiovascular Systems, Inc. ("ACS," now a division of Guidant Corporation),
from 1979 to 1982. Target Therapeutics, Inc. ("Target," now a division of
Boston Scientific Corporation ("Boston Scientific")) purchased this technology
in 1985 from ACS for use in neurological applications. In 1993, Target granted
Cardima an exclusive, royalty-free license to use the microcatheter technology
in the treatment of electrophysiological diseases affecting areas other than
the central nervous system.
AF is characterized by the irregular and very rapid beating of the heart's
atrial chambers and results when the normal electrical conduction malfunctions,
leading to irregular, disorganized and quivering spasms of atrial tissue. These
spasms may lead to reduced blood flow, blood clots, stroke and even death. AF
affects an estimated two million people in the United States alone, with
160,000 new cases being diagnosed each year. Drug therapy is the most common
treatment for AF, but is often associated with severe side effects and becomes
less effective over time, with approximately 50% of patients eventually
developing resistance to drug therapy. The Company believes that the only
curative therapy for AF in use today is an open heart operation, often referred
to as the "maze" procedure, which is used infrequently because of the high
risks and costs associated with open heart surgery. The Company is developing
the Cardima Pathfinder AF microcatheter system to provide a minimally invasive
ablation procedure that mimics the results of the maze procedure by isolating
and containing the arrhythmia causing tissue. The Company believes this
procedure will restore the normal electrical function of the heart by
controlling and reorganizing the random, chaotic electrical activity that
characterizes AF. Cardima's microcatheter systems have been designed to deliver
a small amount of RF energy and to create thin lesions, thus preserving a
greater amount of atrial tissue for improved atrial and heart function
following the procedure. The Company believes this approach has the potential
to be as effective as the open heart surgical cure for AF, but with
significantly less trauma, fewer complications, reduced pain, shorter hospital
stays and lower procedure costs.
VT is a life-threatening condition in which heartbeats are improperly
initiated from within the ventricular wall, thus bypassing the heart's normal
conduction system. VT affects an estimated 450,000 people in the United States.
Similar to AF, current treatments for VT are primarily supportive and are
intended to alleviate the symptoms rather than to cure the condition
("palliative"). Antiarrhythmic drugs are the most common treatment, although
these drugs have been shown to have a number of unwanted side effects, and in
some circumstances may actually induce VT. A recent study has demonstrated that
the implantable cardiac defibrillator is a more
3
<PAGE>
effective treatment for VT than antiarrythmic drugs, but it also is a
palliative treatment and is associated with a number of undesirable
characteristics, including the high cost of the implantation procedure.
Existing catheter technology is also being tested for the treatment of VT;
however, the Company believes that this endocardial approach (i.e., applied
from within the heart's chamber) is suboptimal because the normal ventricular
wall is up to 20 millimeters thick, requiring the use of large amounts of RF
energy which increases the amount of ventricular tissue destroyed in the
procedure. The Company's intravascular approach (i.e., accessed from within the
veins of the heart wall) for the treatment of VT is designed to allow the
microcatheters to be positioned in close proximity to the arrhythmia causing
tissue, permitting accurate and precise mapping, and the creation of small,
focused lesions using RF energy. Once positioned, the Cardima Pathfinder AF and
Tracer VT microcatheter systems have the ability to map and ablate using the
same catheter, which the Company believes should result in a short, cost-
effective procedure.
The Company's microcatheter systems are being developed to offer the
following advantages: (i) a minimally invasive curative approach to AF and VT;
(ii) the ability to map and ablate arrhythmias using a single catheter; (iii)
smaller diameter catheters incorporating Target variable stiffness technology
and a highly flexible distal tip to allow enhanced access to the vasculature of
the heart; (iv) microcatheters designed with large numbers of electrodes to
gather more information; (v) compatibility with existing electrophysiology
signal display systems and RF ablation generators; and (vi) shorter procedure
times resulting in reduced exposure to fluoroscopy and more cost effective
treatment.
In January 1997, the Cardima Pathfinder microcatheter system received 510(k)
clearance from the United States Food and Drug Administration ("FDA") for use
in mapping VT, and it is currently being marketed for this application in the
United States, Europe, Japan, Australia and Canada. Also in January 1997, the
Company filed an Investigational Device Exemption ("IDE") for clinical testing
of the Cardima Pathfinder AF microcatheter system for the mapping and ablation
of AF and subsequently received conditional approval from the FDA to begin the
mapping phase of the feasibility study. In March 1997, the Company submitted a
510(k) premarket notification for the Cardima Pathfinder AF for atrial mapping.
The Company expects to file an IDE for its Tracer VT microcatheter system for
the ablation of VT in late 1997.
THE OFFERING
Common Stock offered by
the Company........................ 2,275,000 shares
Common Stock to be outstanding
after the Offering (1)............. 8,076,541 shares
Use of proceeds..................... To fund preclinical and clinical trials
of its microcatheter systems, research
and new product development, to continue
to expand its marketing and sales force,
to fund capital equipment investment to
increase manufacturing capabilities and
for working capital. See "Use of
Proceeds."
Proposed Nasdaq National
Market symbol...................... CRDM
- --------
(1) Excludes (i) 877,570 shares of Common Stock issuable upon exercise of
outstanding options with a weighted average price of $1.28 per share, (ii)
513,745 shares of Common Stock issuable upon exercise of outstanding
warrants with a weighted average exercise price of $1.62 per share, and
(iii) 564,091 shares of Common Stock reserved for future issuance under the
Company's equity incentive plans. See "Management--Stock Option and
Incentive Plans" and "Description of Capital Stock."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 12, THREE MONTHS
1992 ENDED
(INCEPTION) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------- ----------------
1993(1) 1994 1995 1996 1996 1997
-------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales............... $ -- $ 86 $ 362 $ 593 $132 $217
Cost of goods sold...... -- 211 830 1,413 384 374
------- ------- ------- ------- ------- -------
Gross profit.......... -- (125) (468) (820) (252) (157)
Operating expenses:
Research and
development.......... 1,083 2,205 2,581 3,319 596 810
Selling, general and
administrative....... 491 1,309 2,046 3,690 734 1,331
------- ------- ------- ------- ------- -------
Total operating
expenses........... 1,574 3,514 4,627 7,009 1,330 2,141
------- ------- ------- ------- ------- -------
Operating loss.......... (1,574) (3,639) (5,095) (7,829) (1,582) (2,298)
Interest and other
income (expense), net.. 33 (16) (105) 75 62 (28)
------- ------- ------- ------- ------- -------
Net loss................ $(1,541) $(3,655) $(5,200) $(7,754) $(1,520) $(2,326)
======= ======= ======= ======= ======= =======
Pro forma net loss per
share(2)............... $ (1.22) $ (0.25) $ (0.36)
======= ======= =======
Shares used in computing
pro forma net loss per
share(2)............... 6,372 6,195 6,434
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------
PRO
FORMA(3) AS ADJUSTED(4)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $9,008 $31,331
Working capital......................................... 8,729 31,052
Total assets............................................ 12,746 35,069
Capital lease obligation, noncurrent portion............ 660 660
Total stockholders' equity.............................. 10,526 32,849
</TABLE>
- --------
(1) The Company's financial data for 1992 and 1993 is not presented separately
as the Company's operations from November 12, 1992 (inception) to December
31, 1992 were immaterial.
(2) See Note 1 of Notes to Financial Statements for information concerning
calculation of the pro forma net loss per share.
(3) Reflects the conversion of outstanding Preferred Stock into Common Stock
upon the completion of the Offering.
(4) Adjusted to reflect the sale of the 2,275,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $11.00 per
share and the use of the estimated net proceeds therefrom. See "Use of
Proceeds."
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the risk factors set forth
below in evaluating an investment in the shares of Common Stock offered
hereby.
DEVELOPMENT STAGE COMPANY; HISTORY OF LOSSES AND EXPECTATION OF SUBSTANTIAL
FUTURE LOSSES
The Company is a development stage company and, since inception in November
1992, has engaged primarily in research and development of microcatheter
systems for the mapping and ablation of AF and VT. To date, sales of its
Cardima Pathfinder, Cardima Pathfinder AF and Tracer microcatheter systems
have been limited. The Company had net losses of approximately $5.2 million
and $7.8 million for 1995 and 1996, respectively, and $2.3 million for the
three months ended March 31, 1997. As of March 31, 1997, the Company had an
accumulated deficit of approximately $20.5 million. The Company expects to
incur substantial net losses for the foreseeable future as a result of
research and product development, clinical trials, manufacturing, sales,
marketing and other expenses expected to be incurred as the Company further
develops, tests and distributes its microcatheter systems. The Company's
limited operating history makes accurate prediction of future operating
results difficult or impossible. There can be no assurance that the Company
will ever generate substantial net sales or achieve profitability. Failure by
the Company to generate substantial revenues or to reduce the research and
development, marketing, and manufacturing expenses below net sales would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
NO ASSURANCE OF SAFETY AND EFFECTIVENESS; EARLY STAGE OF PRODUCT DEVELOPMENT
The Company is currently developing versions of its Cardima Pathfinder and
Tracer microcatheter systems for mapping AF and VT. To date, the Company has
completed only one clinical trial and has received 510(k) premarket clearance
only with respect to its Cardima Pathfinder microcatheter system for venous
mapping of VT, including the Cardima Pathfinder microcatheter and Venaport
guiding catheter. While the Cardima Pathfinder AF microcatheter system for
mapping AF is currently being sold in certain foreign markets, the Company has
not received 510(k) clearance for sale of this product in the United States.
There can be no assurance that 510(k) clearance for the Cardima Pathfinder AF
mapping system will be obtained in a timely manner, or at all. Failure to
obtain such clearance on a timely basis would have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company is in the early stage of developing, testing and obtaining
regulatory approval for its microcatheter systems designed for ablation of AF
and VT. The Company is currently developing the Cardima Pathfinder AF
microcatheter system for ablation of AF and the Tracer VT microcatheter system
for ablation of VT. The Company has not conducted any human clinical studies
using its microcatheter systems for the ablation of AF or VT. The Company is
required to obtain an Investigational Device Exemption ("IDE") from the FDA
prior to conducting human clinical trials of its microcatheter systems for
ablation. The Company recently filed an IDE for the Cardima Pathfinder AF
microcatheter system for mapping and ablation, which was conditionally
approved by the FDA for Phase I, which will consist of a feasibility study for
AF mapping. The FDA has not approved any studies for ablation, and the Company
will be required to submit the results of the Phase I mapping study prior to
conducting clinical studies for ablation. There is no assurance that the
Company will successfully complete its Phase I study, that the results will
permit the Company to file an IDE for the ablation of AF or that the FDA will
approve any filed IDE for the ablation of AF. Except for the IDE the Company
filed for the Cardima Pathfinder AF microcatheter system for mapping and
ablation, the Company has not filed IDEs or begun clinical trials for its
microcatheter systems under development for ablation. The Company must
complete these clinical trials, if initiated, prior to the filing of a
Premarket Approval Application ("PMA"), and must receive PMA approval prior to
marketing such products for ablation in the United States. Clinical trials of
the Company's microcatheter systems will require substantial financial and
management resources of the Company and the completion of such trials will
take several years. There can be no assurance that necessary IDEs will be
granted by the FDA, that human clinical trials, if initiated, will be
completed or that these clinical studies will validate
6
<PAGE>
the results of the Company's preclinical animal studies or demonstrate that
such products are safe and effective. In addition, the clinical trials may
identify significant technical or other obstacles to be overcome prior to
obtaining necessary regulatory approvals or market acceptance. The failure of
the Company to initiate and complete clinical trials, demonstrate product
safety and clinical effectiveness, or obtain regulatory approval for the
Cardima Pathfinder AF for AF ablation or the Tracer VT for VT ablation would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "--No Assurance of Obtaining Required
Regulatory Approvals; Government Regulation" and "Business--Government
Regulation."
UNCERTAINTY OF PRODUCT AND PROCEDURE ACCEPTANCE
The Company's microcatheter systems represent a novel approach to the
mapping and ablation of AF and VT. Acceptance of the Company's products and
procedures by physicians, patients and health care payors will be necessary in
order for the Company to be successful. The Company's microcatheter systems
for the mapping and ablation of AF and VT are new technologies that must
compete with more established treatments such as drugs, external electrical
cardioversion and defibrillation, implantable defibrillation, purposeful
destruction of the Atrio-Ventricular ("AV") node followed by implantation of a
pacemaker, and open heart surgery. It is likely that physicians will not
recommend the use of the Company's microcatheter systems unless they conclude,
based on clinical data and other factors, that these systems provide a safe,
effective and cost-efficient alternative to established or emerging approaches
to the mapping and ablation of AF and VT. Except for the Cardima Pathfinder
microcatheter system for mapping VT, none of the products currently being
developed by Cardima for the mapping and ablation of AF and VT has obtained
regulatory clearance or approval in the United States. Even if the Company's
products are successfully developed and the required regulatory clearance or
approval is obtained, there can be no assurance that such products and the
associated procedures will ultimately gain any significant degree of market
acceptance. Since the Company's sole product focus is to design and market
microcatheter systems to map and ablate AF and VT, the failure to successfully
commercialize these systems would materially and adversely affect the
Company's business, financial condition and results of operations.
Risks Regarding Products and Procedures Designed for Mapping and Ablation of
AF. Cardima is developing its Cardima Pathfinder AF microcatheter system for
mapping and ablation of AF. Currently, there is considerable clinical debate
about the need for mapping AF prior to ablation, and no mapping is performed
during the open heart surgical maze procedure. However, the Company believes
that mapping prior to ablation may be useful to identify different segments of
the AF population, each of which could require slightly different mapping and
ablation procedures. For example, some electrophysiologists believe most AF
patients will need to be mapped and ablated in both the left and right atria,
while others believe only the right atrial intervention is warranted. Market
acceptance of this product for mapping will depend largely on a determination
that there is a clinical need for diagnostic mapping prior to ablation of AF.
The Cardima Pathfinder AF ablation procedure requires the use of RF energy in
the right and left atria to produce lesions. In general, the use of RF energy
in the left atrium has the potential to create blood clots, which could travel
through the vasculature to the brain and cause a stroke. Consequently,
physicians may not recommend this procedure, in which event the Cardima
Pathfinder AF would be unlikely to gain market acceptance. The failure of the
Company to complete development of the Cardima Pathfinder AF or to gain
regulatory approval, demonstrate safety, clinical effectiveness or cost
effectiveness, gain wide market acceptance or successfully commercialize the
Cardima Pathfinder AF for the mapping and ablation of AF would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Risks Regarding Products and Procedures Designed for Mapping and Ablation of
VT. The Cardima Pathfinder and Tracer microcatheter systems for VT mapping are
designed for use inside the vasculature of the heart wall and to provide
access to the vasculature of the heart through the venous system.
Microcatheters are not currently used inside the vasculature of the heart wall
for diagnostic purposes. To achieve market acceptance, the Company will need
to demonstrate the safety, clinical effectiveness and cost effectiveness of
the Cardima Pathfinder and Tracer microcatheter systems for VT mapping, of
which there can be no assurance. In addition, electrophysiologists will need
to be specially trained to perform this procedure, which may further impede
market acceptance. There can be no assurance that the Cardima Pathfinder or
Tracer microcatheter systems for VT
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mapping will ever achieve market acceptance, or in the case of the Tracer
microcatheter system, be cleared for marketing by U.S. regulatory authorities,
or be successfully commercialized in the United States or internationally. The
inability of the Company to gain wide market acceptance or successfully
commercialize the Cardima Pathfinder and Tracer microcatheter systems for VT
mapping would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's Tracer VT microcatheter system is being developed for ablation
of VT using RF energy, which could cause damage to the arteries and veins of
the heart, potentially leading to myocardial infarction and even death.
Consequently, physicians may not recommend this procedure, in which event the
Tracer VT would be unlikely to gain market acceptance. Failure of the Company
to gain market acceptance or successfully commercialize the Tracer VT would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "--Early Stage of Product Development; No
Assurance of Safety and Effectiveness," "--No Assurance of Obtaining Required
Regulatory Approvals; Government Regulation," "--Rapid Technological Change;
Significant Competition" and "--Limited Sales, Marketing and Distribution
Experience."
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations may fluctuate significantly from quarter
to quarter or year to year depending upon a number of factors, including
actions relating to regulatory matters, progress of preclinical and clinical
trials, the extent to which the Company's products gain market acceptance, the
scale-up of manufacturing capabilities, the expansion of sales and marketing
activities, competition, the timing of new product introductions by the
Company or its competitors and the ability of the Company to market its
products successfully in the United States and internationally. Although the
Cardima Pathfinder and Tracer microcatheter systems are labeled for single use
only, the Company is aware that some physicians in international markets are
reusing these products. Reuse of the Company's microcatheter systems would
reduce revenues from product sales and could have a material adverse effect on
future performance and periodic operating results. Due to such fluctuations in
operating results, period to period comparisons of the Company's revenues and
operating results are not necessarily meaningful and should not be relied upon
as indicators of likely future performance or annual operating results.
NO ASSURANCE OF OBTAINING REQUIRED REGULATORY APPROVALS; GOVERNMENT REGULATION
The preclinical and clinical testing, manufacturing, labeling, distribution
and promotion of the Company's products are subject to extensive and rigorous
government regulation in the United States and other countries. Noncompliance
with applicable requirements can result in enforcement actions by the FDA
including, among other things, fines, injunctions, civil penalties, recall or
seizure of products, refusal of the FDA to grant premarket clearances or
approvals, withdrawal of marketing approvals and criminal prosecution. Any
such action would have a material adverse affect on the Company's business,
financial condition and results of operations.
The Company is prohibited from marketing its products in the United States
unless it obtains 510(k) clearance or PMA approval from the FDA. The Company
believes that it usually takes from four to 12 months from submission to
obtain 510(k) clearance, but that it can take longer. The Cardima Pathfinder
microcatheter system for mapping VT has received 510(k) clearance. The Company
believes that its current mapping products will also be eligible for 510(k)
clearance, and has submitted a 510(k) premarket notification for the Cardima
Pathfinder AF and intends to seek 510(k) clearance for the Cardima Pathfinder
1.5 Fr. and Tracer products. These submissions may need to include clinical
trial data. There can be no assurance, however, that any of these products
will receive 510(k) clearance in a timely fashion, if at all. Delays in market
introduction resulting from the 510(k) clearance process could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company will be required to seek PMA approval for its ablation products,
including the Cardima Pathfinder AF and the Tracer VT microcatheters for
ablation. The process of obtaining PMA approval is much more costly, lengthy
and uncertain than the 510(k) clearance process. The Company believes that the
FDA's review of a PMA application after filing can last from one to three
years, or even longer. In order to prepare a PMA application, the Company will
be required to complete clinical trials to demonstrate the safety and
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effectiveness of these products. To date, the Company has not conducted any
human clinical studies using its microcatheter systems for the ablation of AF
or VT. In January 1997, the Company submitted an IDE for the Cardima
Pathfinder AF microcatheter system for mapping and ablation of AF and received
conditional approval from the FDA to begin its Phase I feasibility study for
mapping AF. The FDA has not approved any clinical studies for ablation, and
the Company will be required to submit the results of the Phase I mapping
study prior to conducting clinical studies for ablation. The Company expects
to begin Phase I clinical trials for the Cardima Pathfinder AF microcatheter
system in the first half of 1997 and to file an additional IDE and begin its
clinical trials for the Tracer VT microcatheter system in the second half of
1997. There can be no assurance that any clinical study that the Company
proposes will be permitted by the FDA, will be completed or, if completed,
will provide data and information that supports additional clinical
investigations of the type necessary to obtain PMA approval. The Company
expects that a PMA application will not be submitted for at least two years,
if at all. No assurance can be given that the Company will ever be able to
obtain PMA approval for any of its ablation products. Failure of the Company
to obtain timely PMA approval would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is subject to periodic inspection by the FDA and the California
Department of Health Services, and must comply with various other regulatory
requirements that apply to medical devices marketed in the United States,
including labeling regulations, the Quality System Regulation ("QSR"), the
Medical Device Reporting regulation (which requires that a manufacturer report
to the FDA certain types of adverse events involving its products), and the
FDA's prohibitions against promoting approved products for unapproved ("off-
label") uses. The Company's failure to comply with applicable regulatory
requirements could result in enforcement action by the FDA, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Sales of medical devices outside the United States are subject to
international regulatory requirements that vary from country to country. The
time required for approval varies from country to country and may be longer or
shorter than the time required in the United States. The Company has obtained
the requisite approvals by means of the CE mark to sell the Cardima
Pathfinder, Cardima Pathfinder 1.5 Fr., Cardima Pathfinder AF, Tracer and
Venaport for mapping in the European Union ("EU") and Australia, to sell the
Cardima Pathfinder, Cardima Pathfinder 1.5 Fr., Cardima Pathfinder AF and
Tracer in Japan and to sell the Cardima Pathfinder, Tracer and Venaport in
Canada. The Company plans to commence clinical trials in the EU, Canada and
Japan for its ablation products, including certification to enable CE marking.
There can be no assurance the Company will be successful in obtaining such
approvals. Failure to receive approval to affix the CE mark would prohibit the
Company from selling these products in member countries of the EU, and would
require significant delays in obtaining individual country approvals. No
assurance can be given that such approvals will ever be obtained. In such
event, the Company's business, financial condition and results of operations
would be materially and adversely affected. See "Business--Government
Regulation."
RAPID TECHNOLOGICAL CHANGE; SIGNIFICANT COMPETITION
The medical device industry is characterized by rapid and significant
technological change. Accordingly, the Company's success will depend in part
on its ability to respond quickly to medical and technological changes,
including changes in the capital equipment with which the Company's
microcatheter systems are designed to be compatible. Product development
involves a high degree of risk, and there can be no assurance that the
Company's new product development efforts will result in any commercially
successful products. Failure by the Company to respond to and develop new
technologies could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Research and New
Product Development."
The Company's microcatheter systems for the mapping and ablation of AF and
VT are new technologies that must compete with more established treatments
such as drugs, external electrical cardioversion and defibrillation,
implantable defibrillation, purposeful destruction of the AV node followed by
implantation of a pacemaker, and open heart surgery. In the market for cardiac
mapping and ablation devices, the Company believes that the primary
competitive factors are safety, effectiveness, ease of use and overall system
cost. In
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addition, the length of time required for products to be developed and to
receive regulatory and, in some cases, reimbursement approval are important
competitive factors. Several of the Company's competitors are currently
marketing and selling catheters in the United States and internationally that
map and ablate a type of arrhythmia known as supraventricular tachycardia
("SVT"). In addition, several competitors are also developing new approaches
and new products for the mapping and/or ablation of AF and VT. These
approaches include mapping systems using contact mapping, single-point spatial
mapping and non-contact, multisite electrical mapping technologies, and
ablation systems using RF, ultrasound, microwave, laser and cryoablation
technologies. In addition, companies are developing surgical procedures that
could potentially be used by physicians to perform the open heart surgical
maze procedure for the treatment of AF in a minimally invasive manner. If any
of these new approaches or new products prove to be safe and effective, the
Company's products could be rendered uncompetitive or obsolete, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Many of the Company's competitors have an established presence in the field
of interventional cardiology and electrophysiology, including Boston
Scientific, C.R. Bard, Inc., Johnson & Johnson, through its Cordis division,
St. Jude Medical, Inc., through its Daig division, and Medtronic, Inc. These
competitors have substantially greater financial and other resources than the
Company, including larger research and development staffs and more experience
and capabilities in conducting research and development activities, testing
products in clinical trials, obtaining regulatory approvals, and
manufacturing, marketing and distributing products. In addition, other
companies are developing proprietary systems for the diagnosis and/or
treatment of cardiac arrhythmias, including Biosense, Inc., Cardiac Pathways,
Inc. and Endocardial Solutions, Inc. Other companies develop, market and sell
alternative approaches to the treatment of AF and VT, including Guidant
Corporation, Medtronic, Inc., and Ventritex, Inc., the leading manufacturers
of implantable defibrillators. There can be no assurance that the Company will
succeed in developing and marketing technologies and products that are more
clinically effective and cost-effective than the more established treatments
or the new approaches and products being developed and marketed by its
competitors. Furthermore, there can be no assurance that the Company will
succeed in developing new technologies and products that are available prior
to its competitors' products. Failure of the Company to demonstrate the
competitive advantages of its products would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Competition."
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE
AVAILABLE
The Company's future liquidity and capital requirements will depend on
numerous factors, including the progress of the Company's clinical research
and product development programs; the receipt of, and the time required to
obtain, regulatory clearances and approvals; the costs and timing of expansion
of product development, manufacturing and sales and marketing activities; the
extent to which the Company's products gain market acceptance; competitive
developments; and other factors. The timing and amount of such capital
requirements cannot be accurately predicted. In addition, if unforeseen
difficulties arise in the course of developing its products, performing
clinical trials, obtaining necessary regulatory clearances and approvals or
other aspects of the Company's business, the Company may be required to invest
greater-than-anticipated funds. Consequently, although the Company believes
that the proceeds of this Offering, together with available cash and cash
generated from operations, will be sufficient to meet the Company's operating
expenses and capital requirements through at least the end of 1998, the
Company may be required to raise additional funds through public or private
debt or equity financings, collaborative relationships, bank facilities or
other arrangements. If additional financing is needed, there can be no
assurance that it will be available on terms acceptable to the Company, if at
all. Any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
DEPENDENCE ON PATENTS AND PROPRIETARY AND LICENSED TECHNOLOGY; RISK OF PATENT
INFRINGEMENT
The Company's success will depend in part on its ability to obtain patent
protection for its products and processes, to preserve its trade secrets,
trademarks and copyrights and to operate without infringing or violating the
proprietary rights of others. The Company's strategy is to actively pursue
patent protection in the United
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States and foreign jurisdictions for technology that it believes to be
proprietary and that offers a potential competitive advantage for its
products. The patent positions of medical device companies, including the
Company, are uncertain and involve complex and evolving legal and factual
questions. The coverage sought in a patent application either can be denied or
significantly reduced before or after the patent is issued. In addition, the
U.S. patent laws were recently amended to exempt physicians, other health care
professionals and affiliated entities from infringement liability for medical
and surgical procedures performed on patients. The Company cannot predict
whether this amendment might have a material adverse effect on the Company's
ability to protect its proprietary methods and procedures.
In addition, there can be no assurance that competitors will not seek to
apply for and obtain patents that will prevent, limit or interfere with the
Company's ability to make, use or sell its products either in the
United States or internationally. Further, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the
same extent as do the laws of the United States. In addition to patents,
trademarks and copyrights, the Company relies on trade secrets and proprietary
know-how to compete, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known to, or independently developed by,
competitors. The Company also relies on certain license agreements through
which it licenses certain technology from others, including technology of
Target that is integrated into the Company's microcatheter systems for mapping
and ablation. The Company has also licensed a proprietary surface coating
material used on certain of its catheters. There can be no assurance that
these licenses will continue to be available to the Company. The loss of or
inability to maintain any of these licenses could result in delays in
commercial shipments by the Company until equivalent technology could be
developed internally or identified, licensed and integrated, which would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "--Influence of Boston Scientific
Corporation/Target Therapeutics, Inc." and "--Risks Associated with
International Sales."
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain
a competitive advantage. While the Company's patents have not been the subject
of any litigation or reexamination, the Target patent that relates to the
variable stiffness design of Target's Tracker microcatheters (the "Tracker
Patent") has been the subject of four reexamination proceedings in the
United States Patent and Trademark Office ("USPTO"). Following the completion
of the first such proceeding, the USPTO issued a reexamination certificate and
confirmed the patentability of the patent claims set forth in the certificate.
Requests for second, third and fourth reexamination of the Tracker Patent were
initiated by one of Target's competitors, SciMed Life Systems, Inc.
("SciMed"), a subsidiary of Boston Scientific, and after the USPTO's review of
such petitions, Target received notice from the USPTO that it had reaffirmed
the patentability of the claims of the Tracker Patent.
In addition, the Company is aware that in 1994 Target filed a lawsuit
against SciMed and Cordis Endovascular Systems, Inc. (now a division of
Johnson & Johnson) in the U.S. District Court, seeking damages and preliminary
and permanent injunctive relief against further infringing sales. After
various court actions, the Court of Appeals has temporarily stayed the
preliminary injunction, which had been granted prohibiting Cordis and SciMed
from infringing on the Tracker Patent, while it considers a motion opposing
the injunction filed by Cordis and SciMed. In April 1997, Target merged with a
wholly-owned subsidiary of Boston Scientific. It is expected that this merger
will result in the termination of the lawsuit between Target and SciMed. Some
of the Company's products are based upon patents and proprietary rights that
include variable stiffness technology. If the lawsuit is not terminated and if
the Tracker Patent is ultimately determined to be invalid, the Company's
proprietary rights in the variable stiffness technology could be compromised,
and the Company's competitors could have the ability to incorporate such
technology in their products. The erosion of this competitive advantage could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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Although the Company has not received any significant letters from others
threatening to enforce intellectual property rights against the Company, there
can be no assurance that the Company will not become subject to patent
infringement claims or litigation, to interference proceedings in the USPTO to
determine the priority of inventions or to oppositions to patent grants in
foreign jurisdictions. An adverse determination in litigation, interference or
opposition proceedings to which the Company may become a party could subject
the Company to significant liabilities to third parties, require disputed
rights to be licensed from third parties or require the Company to cease using
such technology. Under the Company's license agreement with Target, the
Company is not indemnified against claims brought by third parties alleging
infringement of patent rights. Consequently, the Company could bear the
liability resulting from such claims. There can be no assurance that the
Company will have the financial resources to protect and defend its
intellectual property, as such defense is often costly and time consuming.
Failure of the Company to protect its patent rights, trade secrets, know-how
or other intellectual property could have a material adverse effect on the
Company's business, financial condition and results of operations.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain.
There can be no assurance that any issued patent or patents based on pending
patent applications or any future patent application will exclude competitors
or provide competitive advantages to the Company, that any of the Company's
patents or patents in which it has licensed rights will be held valid if
subsequently challenged or that others will not claim rights in or ownership
of the patents and other proprietary rights held or licensed by the Company.
There can be no assurance that others have not developed or will not develop
similar products, duplicate any of the Company's products or design around any
patents issued to or licensed by the Company or that may be issued in the
future to the Company. Since patent applications in the United States are
maintained in secrecy until patents issue, the Company cannot be certain that
others were not the first to file applications for inventions covered by the
Company's pending patent applications, nor can the Company be certain that it
will not infringe any patents that may issue to others on such applications.
The Company periodically reviews the scope of patents of which it is aware.
Although Cardima does not believe that it infringes patents known to the
Company, the question of patent infringement involves complex legal and
factual issues and there can be no assurance that any conclusion reached by
the Company regarding infringement will be consistent with the resolution of
any such issues by a court. See "Business--Patents and Proprietary Rights."
INFLUENCE OF BOSTON SCIENTIFIC CORPORATION/TARGET THERAPEUTICS, INC.
Upon completion of this Offering, Target will beneficially own approximately
9.7% of the Company's outstanding Common Stock. In addition, Target currently
has a representative on the Company's Board of Directors, as it has since the
Company's inception. In April 1997, Boston Scientific completed the
acquisition of Target, by merging Target with a wholly-owned subsidiary. As a
result of the acquisition, Boston Scientific will exercise control over a
significant portion of the Company's outstanding Common Stock. Accordingly,
Boston Scientific may be able to exercise influence over the business and
financial affairs of the Company. Boston Scientific develops, markets and
sells cardiac electrophysiology products that compete directly with the
microcatheter products being developed by the Company. There can be no
assurance that Boston Scientific will not take actions or engage in activities
that could have a material adverse effect on the Company's business, financial
condition or results of operations. In April 1997, the former directors of
Target formed a group to explore its rights and remedies following an
announcement by Boston Scientific of its first quarter financial and operating
results, which were below analysts' expectations. The group of former Target
directors denies that Boston Scientific shared this information with any
member of the group prior to its public release, which occurred shortly
following the closing of the merger. There can be no assurance that a dispute
arising out of the merger of Target and Boston Scientific would not have a
material adverse effect on the Company.
The Company and Target have entered into a license agreement (the "Target
License Agreement"), pursuant to which Target has granted the Company an
exclusive license (the "Target License") under certain issued United States
patents to certain technologies upon which the Company's products are based.
The Target License covers the diagnosis and treatment of electrophysiological
disorders in areas other than the central nervous system. The Target License
will terminate upon the expiration or invalidation of all claims under the
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underlying patents. In addition, the Company has obtained a non-exclusive
license to use Target's technology, provided it has made a substantial
improvement of such technology, for the diagnosis or treatment of diseases of
the heart, other than using balloon angioplasty. Under the Target License
Agreement, Cardima has granted Target an exclusive, royalty-free license to
use any technology developed by Cardima prior to May 1996 in the fields of
neurology, interventional neuroradiology, interventional radiology, diagnosis
and treatment of male and female reproductive disorders and vascular
prostheses. The Target License Agreement imposes various commercialization,
sublicensing, insurance, royalty, product liability, indemnification, non-
competition and other obligations on the Company. Failure by the Company to
comply with certain of these requirements could result in a termination of the
Target License. The loss of the Company's exclusive rights to the Target-based
microcatheter technology would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Patents and Proprietary Rights" and "Certain Transactions."
RISKS ASSOCIATED WITH INTERNATIONAL SALES
International sales have accounted for virtually all of the Company's
revenues to date and will continue to account for a substantial portion of the
Company's revenues for the foreseeable future. A number of risks are inherent
in international transactions. International sales may be limited or disrupted
by the imposition of government controls, export license requirements,
economic or political instability, trade restrictions, changes in tariffs or
difficulties in staffing and management. Additionally, although the Company's
sales are denominated in U.S. dollars, Cardima's business, financial condition
and results of operations may be adversely affected by fluctuations in
currency exchange rates as well as increases in duty rates and difficulties in
obtaining export licenses. The financial condition, expertise and performance
of the Company's international distributors and any future international
distributors could affect sales of the Company's products internationally and
could have a material adverse effect on the Company's business, financial
condition and results of operations. The international nature of the Company's
business also subjects it and its representatives, agents and distributors to
laws and regulations of the international jurisdictions in which they operate
or in which the Company's products may be sold. The regulation of medical
devices in a number of such jurisdictions, particularly in the EU, continues
to develop, and there can be no assurance that new laws or regulations will
not have an adverse effect on the Company's business, financial condition and
results of operations. Foreign regulatory agencies often establish product
standards different from those in the United States and any inability to
obtain foreign regulatory approvals on a timely basis could have a material
adverse effect on the Company's international business and its financial
condition and results of operations. In addition, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the
same extent as do the laws of the United States. There can be no assurance
that the Company will be able to successfully commercialize any of its current
microcatheter products, including the Cardima Pathfinder and Tracer
microcatheter systems, or any future product in any foreign market. See
"Business--Marketing and Distribution."
UNCERTAINTY RELATED TO THIRD-PARTY REIMBURSEMENT
U.S. health care providers, including hospitals and physicians, that
purchase medical devices generally rely on third-party payors, principally
federal Medicare, state Medicaid and private health insurance plans, to
reimburse all or a part of the costs and fees associated with the procedures
performed using these devices. The Company's success will depend upon, among
other things, the ability of health care providers to obtain satisfactory
reimbursement from third-party payors for medical procedures in which the
Company's microcatheter systems are used. Third-party payors may deny
reimbursement if they determine that a prescribed device has not received
appropriate regulatory clearances or approvals, is not used in accordance with
cost-effective treatment methods as determined by the payor, or is
experimental, unnecessary or inappropriate. If FDA clearance or approval is
received, third-party reimbursement would also depend upon decisions by the
United States Health Care Financing Administration for Medicare, as well as by
individual health maintenance organizations, private insurers and other
payors. Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals may
be obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
devices and procedures. In most markets, there are private insurance systems
as well as government managed systems. There can be no assurance that
reimbursement for the Company's products will be available or, if available,
that such reimbursement will be available in sufficient amounts in the
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United States or in international markets under either government or private
reimbursement systems, or that physicians will support and advocate
reimbursement for procedures using the Company's products. Failure by
hospitals and other users of the Company's products to obtain reimbursement
from third-party payors or changes in government and private third-party payor
policies toward reimbursement for procedures employing the Company products
would have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, the Company is unable to
predict what additional legislation or regulation, if any, relating to the
heath care industry or third-party coverage and reimbursement may be enacted
in the future, or what effect such legislation or regulation would have on the
Company. See "Business--Third-Party Reimbursement."
LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK; NEED TO COMPLY WITH UNITED
STATES MANUFACTURING STANDARDS; DEPENDENCE ON KEY SUPPLIERS
The Company has only limited experience in manufacturing its microcatheter
systems. The Company currently manufactures its microcatheter systems in
limited quantities for U.S. and international sales and preclinical and
clinical trials. The Company has no experience manufacturing its products in
the volumes that will be necessary for the Company to achieve significant
commercial sales, and there can be no assurance that reliable, high-volume
manufacturing capacity can be established or maintained at commercially
reasonable costs. The Company has recently increased the number of
microcatheters manufactured and expects that, if U.S. sales for the Cardima
Pathfinder microcatheter system increase or if the Company receives FDA
clearance or approvals for other products, it will need to expend significant
capital resources and develop manufacturing expertise to establish large-scale
manufacturing capabilities. Manufacturers often encounter difficulties in
scaling up production of new products, including problems involving production
yields, quality control and assurance, component supply shortages, shortages
of qualified personnel, compliance with FDA regulations, and the need for
further FDA approval of new manufacturing processes. In addition, the Company
believes that substantial cost reductions in its manufacturing operations will
be required for it to commercialize its microcatheter systems on a profitable
basis. Any inability of the Company to establish and maintain large-scale
manufacturing capabilities would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's manufacturing facilities are subject to periodic inspection by
regulatory authorities, and its operations must either undergo QSR compliance
inspections conducted by the FDA or receive an FDA exemption from such
compliance inspections in order for the Company to be permitted to produce
products for sale in the United States. The Company's facilities and
manufacturing processes have recently successfully undergone a combined
inspection by the FDA and by the State of California and an annual
reinspection by TUV. The Company has demonstrated compliance with ISO 9001 (EN
46001) quality standards, as well as compliance with 93/42/EEC, the Medical
Device Directive and is in compliance with procedures to produce products for
sale in Europe. Any failure by the Company to comply with QSR requirements or
to maintain its compliance with ISO 9001 (EN 46001) standards may result in
the Company being required to take corrective actions, such as modification of
its policies and procedures. In addition, the Company may be required to cease
all or part of its operations for some period of time until it can demonstrate
that appropriate steps have been taken to comply with QSR or ISO 9001 (EN
46001) standards. There can be no assurance that the Company will be found in
compliance with QSR by regulatory authorities, or that it will continue to
comply with ISO 9001 (EN 46001) standards in future audits or that the Company
will not experience difficulties in the course of developing its manufacturing
capability. Any failure of the Company to comply with state or FDA QSR
requirements or to maintain compliance with ISO 9001 (EN 46001) standards, or
to develop its manufacturing capability in compliance with such standards,
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company purchases certain key components of its products, including the
hydrophilic coating for certain of its microcatheters, from sole, single or
limited source suppliers. For certain of these components there are relatively
few alternative sources of supply. Establishing additional or replacement
suppliers for any of the numerous components used in the Company's products,
if required, may not be accomplished quickly and could involve significant
additional costs. Any supply interruption from vendors or failure of the
Company to obtain alternative vendors for any of the numerous components used
to manufacture the Company's products would
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limit the Company's ability to manufacture its products and would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Manufacturing."
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE
The Company has only limited experience marketing and selling its products
in commercial quantities. Expanding the Company's marketing and sales
capability to adequately support sales in commercial quantities will require
substantial effort and require significant management and financial resources.
There can be no assurance that the Company will be able to continue to build a
marketing staff or sales force, that expanding such a marketing staff or sales
force will be cost-effective or that the Company's sales and marketing efforts
will be successful. The Company's Cardima Pathfinder, Cardima Pathfinder AF
and Tracer microcatheter systems for mapping of AF and VT have obtained
regulatory approval in certain international markets, and sales and marketing
of these products is conducted primarily through distributors. The Company
currently has a number of exclusive distributors that cover certain European
countries and Japan and has sold only a limited number of Cardima Pathfinder,
Cardima Pathfinder AF and Tracer microcatheter systems through these
distributors. The Company does not have written agreements with certain of its
exclusive distributors. Consequently, the terms of such arrangements, such as
length of arrangements and minimum purchase obligations are uncertain. In
addition, the laws in certain international jurisdictions may make it
difficult for the Company to terminate such distribution arrangements absent
specific written termination terms. There can be no assurance that these
distributors will be able to market and sell the Company's products in these
markets. There can be no assurance that the Company will be able to enter into
additional agreements with desired distributors on a timely basis or at all,
or that such distributors will devote adequate resources to selling the
Company's products. Failure to establish an adequate sales force or to
establish and maintain appropriate distribution relationships would have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Business--Marketing and Distribution."
DEPENDENCE UPON KEY PERSONNEL
The Company's ability to operate successfully depends in significant part
upon the continued service of certain key scientific, technical, clinical,
regulatory and managerial personnel, and its continuing ability to attract and
retain additional highly qualified personnel in these areas. Competition for
such personnel is intense, especially in the San Francisco Bay Area, and there
can be no assurance that the Company can retain such personnel or that it can
attract or retain other highly qualified scientific, technical, clinical,
regulatory and managerial personnel in the future, including key sales and
marketing personnel. See "Management--Limitation of Liability and
Indemnification Matters."
RISK OF PRODUCT LIABILITY; ADEQUACY OF INSURANCE COVERAGE
The development, manufacture and sale of the Company's microcatheter systems
may expose the Company to product liability claims. Although the Company has
not experienced any claims to date, there can be no assurance that the Company
will not experience losses due to product liability claims in the future.
Although the Company currently has general liability insurance with coverage
in the amount of $1.0 million per occurrence, subject to a $2.0 million annual
limitation, and product liability insurance with coverage in the amount of
$5.0 million per occurrence, subject to a $5.0 million annual limitation,
there can be no assurance that such coverage will continue to be available to
the Company on reasonable terms, if at all. In addition, there can be no
assurance that all of the activities encompassed within the Company's business
are or will be covered under the Company's policies. Although the Cardima
Pathfinder and Tracer products are labeled for single use only, the Company is
aware that some physicians are reusing such products. Moreover despite
labeling of the Company's microcatheters for diagnostic use only, the Company
believes that physicians are using such mapping microcatheters for ablation.
Multiple use or "off-label" use of the Company's microcatheters could subject
the Company to increased exposure to product liability claims, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company may require additional product
liability coverage if the Company significantly expands commercialization of
its products. Such additional
15
<PAGE>
coverage is expensive, difficult to obtain and may not be available in the
future on acceptable terms, if at all. Any claims or series of claims against
the Company, regardless of their merit or eventual outcome, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Product Liability and Insurance."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market for the
Common Stock will develop or be sustained. The initial public offering price
of the Common Stock will be determined by negotiations between the Company and
the representatives of the Underwriters. The factors considered in making such
determination will include the prevailing market conditions, the Company's
financial and operating history and condition, its prospects and the prospects
for its industry in general, the management of the Company and the market
price of securities for companies in businesses similar to that of the
Company. The securities markets have, from time to time, experienced
significant price and volume fluctuations that may be unrelated to the
operating performance of particular companies. These fluctuations often
substantially affect the market price of a company's common stock. The market
prices for securities of medical device companies have in the past been, and
can in the future be expected to be, particularly volatile. The market price
of the Common Stock may be subject to volatility from quarter to quarter
depending upon announcements regarding the results of regulatory approval
filings, clinical studies or other testing, technological innovations or new
commercial products by the Company or its competitors, government regulations,
developments or disputes concerning proprietary rights, changes in
reimbursement levels, public concern as to the safety of products developed by
the Company or others, changes in health care policy in the United States and
internationally, the issuance of stock market analyst reports and
recommendations, and economic and other external factors, as well as continued
operating losses by the Company and fluctuations in the Company's financial
results. See "--Fluctuations in Operating Results" and "Underwriting."
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of this Offering, officers and directors of the Company,
together with entities affiliated with them, will beneficially own
approximately 48.1% of the Common Stock (approximately 46.3% if the
Underwriters' over-allotment option is exercised in full). These stockholders,
acting as a group, will continue to be able to control the election of all
members of the Company's Board of Directors and to determine all corporate
actions after the sale of the shares offered hereby. The voting power of these
stockholders either as a group or, for certain stockholders, individually
could also have the effect of delaying or preventing a change in control of
the Company. See "-- Influence of Boston Scientific Corporation/Target
Therapeutics, Inc.," "Principal Stockholders" and "Description of Capital
Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering and based on the shares outstanding as of
March 31, 1997, there will be 8,076,541 shares of Common Stock outstanding. Of
these shares, the 2,275,000 shares sold in this Offering (assuming no exercise
of the Underwriters' over-allotment option) will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), unless purchased by "affiliates" of the
Company, as that term is defined in Rule 144 of the Securities Act. The
remaining 5,801,541 shares will be "restricted securities" as that term is
defined under Rule 144 (the "Restricted Shares").
Of the Restricted Shares, an aggregate of 3,953,712 shares of Common Stock
(including 508,912 shares issuable upon exercise of vested stock options) will
be eligible for sale in the public market subject to Rule 144 and Rule 701
under the Securities Act after expiration of a contractual lock-up beginning
180 days after the date of the Prospectus, unless earlier released, in whole,
or in part, by Bear, Stearns & Co. Inc. In addition, an aggregate of 2,356,741
shares of Common Stock will become eligible for resale in the public market,
upon expiration of a one-year holding period, subject to certain volume and
resale restrictions set forth in Rule 144, in the first quarter of 1998.
16
<PAGE>
The Company intends to register on a Form S-8 registration statement under
the Securities Act, during the 180-day lockup period, the resale of 1,344,846
shares of Common Stock reserved for issuance under its equity incentive plans
or currently subject to outstanding options. See "Shares Eligible For Future
Sale."
After the Offering, the holders of 5,793,208 shares of Common Stock and the
holders of warrants to acquire 489,968 additional shares of Common Stock are
entitled to certain rights with respect to registration of such shares under
the Securities Act. Registration of such shares under the Securities Act would
result in such shares becoming freely tradeable without restriction under the
Securities Act (except for shares purchased by affiliates of the Company)
immediately upon the effectiveness of such registration. If such holders, by
exercising their demand registration rights, cause a large number of
securities to be registered and sold in the public market, such sales could
have an adverse effect on the market price for the Common Stock. If the
Company were to include in a Company-initiated registration, any registrable
securities pursuant to the exercise of piggyback registration rights, such
sales may have an adverse effect on the Company's ability to raise needed
capital. See "Description of Capital Stock--Registration Rights."
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from attempting to acquire, control of the
Company. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of the Common Stock. Certain of these
provisions allow the Company to issue Preferred Stock without any vote or
further action by the stockholders, and eliminate the right of stockholders to
act by written consent without a meeting. Certain provisions of Delaware law
applicable to the Company could also delay or make more difficult a merger,
tender offer or proxy contest involving the Company, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for
a period of three years unless certain conditions are met. See "Description of
Capital Stock."
SUBSTANTIAL DILUTION AND ABSENCE OF DIVIDENDS
Purchasers of shares of Common Stock in the Offering will experience
immediate and substantial dilution of $6.96 in the net tangible book value per
share of Common Stock from the initial public offering price. In addition, the
exercise of outstanding options and warrants will result in further dilution.
The Company has never paid any cash dividends and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. See "Dilution"
and "Dividend Policy."
17
<PAGE>
THE COMPANY
The Company was incorporated in November 1992 in the State of Delaware. The
Company's principal executive offices are located at 47266 Benicia Street,
Fremont, California 94538, and its telephone number is (510) 354-0300.
USE OF PROCEEDS
The net proceeds from the sale of the 2,275,000 shares of Common Stock
offered hereby, assuming an initial public offering price of $11.00 per share,
are estimated to be approximately $22.3 million ($25.8 million if the
overallotment option is exercised in full), after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company.
The Company currently intends to use approximately 25% of the net proceeds
from this Offering to fund preclinical and clinical trials of its
microcatheter systems, approximately 25% to fund research and new product
development, approximately 10% to continue to expand its marketing and sales
force in the United States, and approximately five percent to fund capital
equipment investment to increase manufacturing capabilities. The balance of
the net proceeds will be added to working capital and used for general
corporate purposes. The portion of the net proceeds actually expended for each
purpose may vary depending upon a number of factors, including the progress of
the Company's research and clinical development programs, the time required to
obtain regulatory clearances and approvals, the extent to which the Company's
products achieve market acceptance, the resources the Company devotes to
developing, manufacturing and marketing its products, the ability to continue
to establish a sales force and other factors.
The Company estimates the net proceeds of this Offering, together with its
existing capital resources, will be sufficient to fund the Company's
requirements at least through the end of 1998. The Company may also use a
portion of the net proceeds to acquire or invest in businesses, products and
technologies that are complementary to those of the Company, although no such
acquisitions or investments are planned or being negotiated as of the date of
this Prospectus, and no portion of the net proceeds has been allocated for any
specific acquisition or investment. Pending such uses, the Company intends to
invest the net proceeds from this Offering in short-term, government
securities and other investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does not
anticipate paying cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition,
results of operations, capital requirements and such other factors as the
Board of Directors deems relevant.
18
<PAGE>
DILUTION
The pro forma net tangible book value of the Common Stock as of March 31,
1997, was $10.3 million, or approximately $1.78 per share. Pro forma net
tangible book value per share represents the amount of the Company's
stockholders' equity, less intangible assets, divided by 5,801,541 shares of
Common Stock outstanding after giving effect to the conversion of all
outstanding shares of Preferred Stock into Common Stock.
Pro forma net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in this Offering and the pro forma net tangible book value per share of
Common Stock immediately after this Offering. After giving effect to the sale
of the 2,275,000 shares of Common Stock in this Offering at an assumed initial
public offering price of $11.00 per share, and after deducting underwriting
discounts and commission and estimated offering expenses payable by the
Company, the Company's pro forma net tangible book value at March 31, 1997,
would have been $32.6 million, or $4.04 per share. This represents an
immediate increase in pro forma net tangible book value of $2.26 per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $6.96 per share to new investors purchasing Common Stock in this
Offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $11.00
Pro forma net tangible book value per share at March 31, 1997... $1.78
Increase per share attributable to new investors................ 2.26
-----
Pro forma net tangible book value after the Offering.............. 4.04
------
Pro forma net tangible book value dilution to new investors....... $ 6.96
======
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1997,
after giving effect to the conversion of all outstanding shares of Preferred
Stock into Common Stock, the number of shares purchased from the Company, the
total consideration paid and the average price per share paid by existing
stockholders and by new investors (at an assumed initial public offering price
of $11.00 per share before deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 5,801,541 71.8% $31,166,000 55.5% $ 5.37
--------- ----- ----------- ----- ------
New investors............... 2,275,000 28.2 25,025,000 44.5 11.00
--------- ----- ----------- ----- ------
Total..................... 8,076,541 100.0% $56,191,000 100.0%
========= ===== =========== =====
</TABLE>
The foregoing computations assume no exercise of outstanding options or
warrants. At March 31, 1997, 877,570 shares of Common Stock were issuable upon
exercise of outstanding options at a weighted average exercise price of $1.28,
and 513,745 shares of Common Stock were issuable upon exercise of outstanding
warrants at a weighted average exercise price of $1.62. If all options and
warrants outstanding at March 31, 1997 were exercised for cash, the pro forma
net tangible book value per share immediately after completion of the Offering
would be $3.67. See "Management--Executive Compensation," "Certain
Transactions" and "Description of Capital Stock."
19
<PAGE>
CAPITALIZATION
The following table sets forth at March 31, 1997 (i) actual capitalization
of the Company, (ii) such capitalization on a pro forma basis to reflect the
conversion of all outstanding shares of the Company's Preferred Stock into
Common Stock, and (iii) such pro forma capitalization as adjusted to reflect
the sale of the 2,275,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $11.00 per share, after deducting
underwriting discounts and commissions and estimated offering expenses, and
the application of the estimated net proceeds therefrom. This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and related
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligation-current portion....... $ 349 $ 349 $ 349
Capital lease obligation-noncurrent portion.... 660 660 660
Series D redeemable Convertible Preferred
Stock, 1,919,052 shares issued and
outstanding; no shares issued and outstanding,
pro forma and as adjusted..................... 9,740 -- --
Series E redeemable Convertible Preferred
Stock, 2,356,741 shares issued and
outstanding; no shares issued and outstanding,
pro forma and as adjusted..................... 13,442 -- --
Stockholders' equity:
Convertible Preferred Stock, $0.001 par value,
6,263,966 shares authorized, issuable in
series, of which Series D and Series E are
redeemable convertible preferred stock;
5,000,000 shares authorized, pro forma and as
adjusted; 1,220,145 shares issued and
outstanding, no shares issued and
outstanding, pro forma or as adjusted........ 7,713 -- --
Common Stock, $0.001 par value, 8,500,000
shares authorized, 74,999 issued and
outstanding; 25,000,000 shares authorized,
pro forma and as adjusted, 5,801,541 shares
issued and outstanding, pro forma and
8,076,541 shares issued and outstanding, as
adjusted(1).................................. 995 31,890 54,213
Deferred compensation......................... (888) (888) (888)
Deficit accumulated during development stage.. (20,476) (20,476) (20,476)
-------- -------- --------
Total stockholders' equity (net capital
deficiency)................................. (12,656) 10,526 32,849
-------- -------- --------
Total capitalization......................... $ 11,535 $ 11,535 $ 33,858
======== ======== ========
</TABLE>
- --------
(1) Excludes, as of March 31, 1997, (i) 877,570 shares of Common Stock
issuable upon exercise of outstanding options with a weighted average
price of $1.28 per share, (ii) 513,745 shares of Common Stock issuable
upon exercise of outstanding warrants with a weighted average exercise
price of $1.62 per share, and (iii) 467,276 shares reserved for future
issuance under the Company's equity incentive plans (250,000, 200,000 and
17,276 shares reserved for issuance under the Company's Employee Stock
Purchase Plan, Directors' Stock Option Plan and 1993 Stock Option Plan,
respectively). In April 1997, the Company increased the shares reserved
for future issuance under the Company stock option plan to 114,091 shares.
See "Management--Stock Option Plans" and "Description of Capital Stock."
20
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements
and Notes thereto included elsewhere in this Prospectus. The statements of
operations data set forth below for each of the years ended December 31, 1994,
1995 and 1996 and the balance sheet data at December 31, 1995 and 1996 are
derived from, and are qualified by reference to, the Financial Statements,
which have been audited by Ernst & Young LLP, independent auditors, included
elsewhere in this Prospectus and should be read in conjunction with those
Financial Statements and the Notes thereto. The statement of operations data
set forth below for the period from November 12, 1992 (inception) to December
31, 1993 and the balance sheet data at December 31, 1993 and 1994 are derived
from the Company's audited financial statements not included in this
Prospectus. The statements of operations data for the three months ended
March 31, 1996 and 1997 and for the period from November 12, 1992 (inception)
to March 31, 1997 and the balance sheet data at March 31, 1997 are derived
from the Company's unaudited financial statements included elsewhere in this
Prospectus, and include, in the opinion of the Company, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's financial position at that date and results of
operations for those periods. The results for the three months ended March 31,
1997 are not necessarily indicative of the results for any future periods.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 12, THREE MONTHS PERIOD FROM
1992 ENDED NOVEMBER 12,
(INCEPTION) TO YEAR ENDED DECEMBER 31, MARCH 31, 1992 (INCEPTION)
DECEMBER 31, ------------------------- ---------------- TO MARCH 31,
1993(1) 1994 1995 1996 1996 1997 1997
-------------- ------- ------- ------- ------- ------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales............... $ -- $ 86 $ 362 $ 593 $ 132 $ 217 $ 1,258
Cost of goods sold...... -- 211 830 1,413 384 374 2,828
------- ------- ------- ------- ------- ------- --------
Gross profit........... -- (125) (468) (820) (252) (157) (1,570)
Operating expenses:
Research and
development........... 1,083 2,205 2,581 3,319 596 810 9,998
Selling, general and
administrative........ 491 1,309 2,046 3,690 734 1,331 8,867
------- ------- ------- ------- ------- ------- --------
Total operating
expenses............. 1,574 3,514 4,627 7,009 1,330 2,141 18,865
------- ------- ------- ------- ------- ------- --------
Operating loss.......... (1,574) (3,639) (5,095) (7,829) (1,582) (2,298) (20,435)
Interest and other
income (expense), net.. 33 (16) (105) 75 62 (28) (41)
------- ------- ------- ------- ------- ------- --------
Net loss................ $(1,541) $(3,655) $(5,200) $(7,754) $(1,520) $(2,326) $(20,476)
======= ======= ======= ======= ======= ======= ========
Pro forma net loss per
share(2)............... $ (1.22) $ (0.25) $ (0.36)
======= ======= =======
Shares used in computing
pro forma net loss per
share(2)............... 6,372 6,195 6,434
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------ MARCH 31,
1993 1994 1995 1996 1997(3)
------- ------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..... $ 1,472 $ 713 $ 2,993 $ 907 $ 9,008
Working capital (deficit)..... 1,318 571 2,647 (2,150) 8,729
Total assets.................. 1,701 2,284 4,735 3,964 12,746
Capital lease obligation,
noncurrent portion........... 50 308 317 722 660
Deficit accumulated during the
development stage............ (1,541) (5,196) (10,396) (18,150) (20,476)
Total stockholders' equity
(net capital deficiency)..... 1,412 1,316 (2,675) (10,368) 10,526
</TABLE>
- -------
(1) The Company's financial data for 1992 and 1993 is not presented separately
as the Company's operations from November 12, 1992 (inception) to December
31, 1992 were immaterial.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
computation of pro forma net loss per share.
(3) Reflects the conversion of outstanding Preferred Stock into Common Stock
upon the completion of the Offering.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis contains certain statements of a forward-
looking nature relating to future events or the future financial performance
of the Company. Such statements are only predictions and the actual events or
results may differ materially from the results discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Risk Factors" as well as
those discussed elsewhere in this Prospectus. The historical results set forth
in this discussion and analysis are not necessarily indicative of trends with
respect to any actual or projected future financial performance of the
Company. This discussion and analysis should be read in conjunction with the
Financial Statements and the related Notes thereto included elsewhere in this
Prospectus.
OVERVIEW
Since its incorporation in November 1992, Cardima has been engaged in the
design, research and development, manufacturing and testing of microcatheter
systems for the mapping and ablation of cardiac arrhythmias. The Company has a
limited history of operations and has experienced significant operating losses
since inception. The Company has never been profitable and, as of March 31,
1997, had an accumulated deficit of $20.5 million. Cardima expects that its
operating losses will continue for the foreseeable future as the Company
continues to invest substantial resources in product development, preclinical
and clinical trials, obtaining regulatory approval, sales and marketing and
manufacturing.
To date, Cardima has generated limited revenues, substantially all of which
have been in Europe and Japan, from sales of the Cardima Pathfinder and Tracer
for VT mapping and the Cardima Pathfinder AF for AF mapping. The Company has
obtained the right to affix the CE mark to its Cardima Pathfinder, Tracer and
Cardima Pathfinder AF microcatheter systems, permitting the Company to market
these products in the member countries of the EU. The Company's international
sales are made through distributors who sell the Company's products to
physicians and hospitals. In January 1997, the Company received a 510(k)
clearance in the United States and began to market and sell the Cardima
Pathfinder system for VT mapping. In order to begin shipping the Tracer
microcatheter systems for VT mapping or the Cardima Pathfinder AF for AF
mapping in the United States, the Company will need to receive 510(k)
clearance for these products from the FDA. The Company has submitted a 510(k)
premarket notification for the Cardima Pathfinder AF and intends to seek
510(k) clearance for its other mapping products, including the Cardima
Pathfinder 1.5 Fr. and Tracer products. The Company will be required to
conduct clinical trials, demonstrate safety and effectiveness, and obtain PMA
approval from the FDA for any of the Company's products designed for ablation
of AF or VT. Specifically, PMA approval will be required prior to the
introduction in the United States of the Cardima Pathfinder AF microcatheter
system for ablation of AF or Tracer VT microcatheter system for ablation of
VT. In January 1997, the Company submitted an IDE for the Cardima Pathfinder
AF microcatheter system for mapping and ablation of AF and received
conditional approval from the FDA to begin a Phase I feasibility study for
mapping AF. The Company expects to begin Phase I clinical trials for its
Cardima Pathfinder AF microcatheter system in the first half of 1997 and to
file an additional IDE and begin clinical trials for its Tracer VT
microcatheter system in the second half of 1997.
There can be no assurance that the Company's research and development
efforts will be successful. Given that testing is at an early stage, there can
be no assurance that any of the Company's microcatheter systems will be shown
to be safe or effective. Accordingly, the Company is unable to predict the
likelihood that its products, other than the Cardima Pathfinder microcatheter
system for venous mapping of VT, including the Cardima Pathfinder
microcatheter and Venaport guiding catheter, which has received 510(k)
clearance, will be cleared or approved for marketing by the FDA and there can
be no assurance that such approvals will be obtained or that any of the
Company's microcatheter systems or any other product developed by the Company
will be successfully introduced or achieve any significant degree of market
acceptance. There can be no assurance that the Company will ever achieve
either significant revenues from sales of any of its microcatheter systems or
ever achieve or sustain profitability.
22
<PAGE>
Future revenues and results of operations may fluctuate significantly from
quarter to quarter or year to year and will depend upon numerous factors,
including actions relating to regulatory approvals, the progress of
preclinical and clinical trials, the extent to which the Company's products
gain market acceptance, the scale-up of manufacturing capabilities, the
expansion of sales and marketing activities, competition, the timing and
success of new product introductions by the Company or its competitors and the
ability of the Company to market its products successfully in the United
States and internationally. Due to fluctuations in operating results, quarter
to quarter comparisons of the Company's operating results are not necessarily
meaningful and should not be relied upon as indicators of likely future
performance or annual operating results. The Company expects to increase its
research and development activities in connection with the need for additional
clinical evaluations and supervision during clinical trials. The Company also
expects to increase its sales and marketing capacity and continue to expand
its direct sales force in the United States in order to support future sales
of its microcatheter systems. In addition, the Company expects to increase
manufacturing operations in order to meet future product demand, control
product costs and increase gross margins. The Company's limited operating
history makes accurate prediction of future operating results difficult or
impossible.
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Net Sales
Product sales increased to $217,000 for the three months ended March 31,
1997, from $132,000 for the same period in 1996. This increase was due
primarily to sales of products in the United States, which did not begin until
February 1997 upon receipt of 510(k) clearance from the FDA for the Cardima
Pathfinder microcatheter system for mapping VT, and to a lesser extent to
continued sales of the Cardima Pathfinder AF microcatheter systems for mapping
AF in Europe and Japan.
Research and Development Expenses
Research and development expenses consist primarily of personnel costs,
consulting costs, costs related to preclinical studies and facilities costs.
The Company's research and development expenses increased to $810,000 for the
three months ended March 31, 1997, from $596,000 for the same period in 1996,
primarily due to increases in engineering and regulatory personnel and to a
lesser extent to an increase in expenses associated with initiation of
clinical studies and ongoing preclinical studies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $1.3 million for
the three months ended March 31, 1997, from $734,000 for the same period in
1997 due primarily to expenses associated with increased sales, marketing
activities and administration including the hiring of additional personnel.
Loss from Operations
For the reasons stated above, loss from operations increased to $2.3 million
for the three months ended March 31, 1997, from $1.6 million for the same
period in 1996.
Interest and Other Income, Interest Expense
Interest and other income decreased to $25,000 for the three months ended
March 31, 1997 from $65,000 for the same period in 1996. The decrease in
interest and other income was primarily due to a decrease in the average
investment balances. Interest expense increased to $53,000 from $2,000,
primarily as a result of increased borrowing.
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YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Net Sales
Net sales increased to $593,000 for 1996, from $362,000 in 1995 and $86,000
in 1994. The increase in net sales in 1996 compared with 1995 was primarily
due to increased international sales of the Cardima Pathfinder and Tracer
microcatheter systems and reflects a growing user base for the Company's
microcatheter systems in Europe and Japan. The increase in product sales in
1995 compared with 1994 was due primarily to the fact that product sales did
not begin until July 1994, and was also attributable to an increase in the
average selling price of the Company's products in 1995, resulting from the
introduction of the Cardima Pathfinder AF, and the growing market for and
increased sales of the Company's products in Europe and Japan.
Research and Development Expenses
The Company's research and development expenses increased to $3.3 million in
1996, from $2.6 million and $2.2 million in 1995 and 1994, respectively. The
increase in research and development expenses in 1996 compared with 1995 was
primarily due to increases in regulatory and quality systems' personnel and,
to a lesser extent, to an increase in expenses associated with preclinical
studies. The increase in 1995 compared with 1994 was primarily due to the
hiring of additional engineering personnel, expenses associated with the
development of product prototypes and expenses associated with preclinical and
clinical studies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $3.7 million in
1996, from $2.0 million and $1.3 million in 1995 and 1994, respectively. The
increase in selling, general and administrative expenses in 1996 compared with
1995 was primarily due to expenses associated with increased sales and
marketing activities, including the hiring of additional personnel to support
growth of the Company's sales and marketing efforts. The increase in selling,
general and administrative expenses in 1995 compared with 1994 was primarily
due to the addition of personnel.
Loss from Operations
For the reasons stated above, loss from operations increased to $7.8 million
in 1996 from $5.1 million and $3.6 million in 1995 and 1994, respectively.
Interest and Other Income, Interest Expense
Interest and other income increased to $132,000 in 1996 from $12,000 and
$15,000 in 1995 and 1994, respectively. The increase in interest and other
income was primarily due to an increase in the average investment balances as
a result of the Series D Preferred Stock financing in December 1995 and
February 1996. Interest expense decreased to $57,000 in 1996 from $117,000 in
1995, primarily as a result of decreased borrowing in 1996. Interest expense
was $31,000 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date principally through private
placements of equity securities which had yielded net proceeds of $30.9
million as of March 31, 1997, together with interest income on proceeds from
such financings, and equipment leases (which have totalled $1.3 million to
acquire certain capital equipment). As of March 31, 1997, the Company had
approximately $9.3 million in cash and cash equivalents, of which $255,000 was
restricted in order to secure letters of credit issued in connection with the
Company's facilities lease.
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Net cash used in operating activities was approximately $6.7 million, $4.5
million and $4.1 million for the years ended December 31, 1996, 1995 and 1994,
respectively, and $3.3 million for the three months ended March 31, 1997,
resulting primarily from losses incurred during such periods. Net cash used in
investing activities was approximately $388,000, $78,000 and $184,000 for the
years ended December 31, 1996, 1995 and 1994, respectively, and $243,000 for
the three months ended March 31, 1997, attributable primarily to capital
expenditures during such periods. Net cash provided by financing activities
was approximately $5.0 million, $6.9 million and $3.5 million during the years
ended December 31, 1996, 1995 and 1994, respectively, and $11.7 million for
the three months ended March 31, 1997, attributable primarily to the sale of
equity securities in private placement transactions and proceeds from bridge
loans during such periods.
The Company records and amortizes over the related vesting periods deferred
compensation representing the difference between the exercise price of options
granted and the deemed fair market value of its Common Stock at the time of
grant. Options generally vest over four years. Deferred compensation of
approximately $980,000, primarily associated with option grants in May and
September 1996, and January and March 1997, was recorded by the Company. The
Company amortized deferred compensation expenses of approximately $54,000 for
the year ended December 31, 1996 and $38,000 for the three months ended March
31, 1997.
The Company believes that the net proceeds from this Offering, together with
available cash and cash generated from operations, will be sufficient to meet
the Company's operating expenses and capital requirements at least through the
end of 1998. There can be no assurance, however, that the Company will not
require additional financing during that period, or that if required, such
additional financing will be available on terms acceptable to the Company, if
at all. In any event, the Company may in the future seek to raise additional
funds through bank facilities, debt or equity offerings or other sources of
capital. The Company's future liquidity and capital requirements will depend
upon numerous factors, including the progress of the Company's product
development efforts, the progress of the Company's clinical trials, actions
relating to regulatory matters, the costs and timing of expansion of product
development, manufacturing, sales and marketing activities, the extent to
which the Company's products gain market acceptance, and competitive
developments. The Company may be required to raise additional funds through
public or private financing, collaborative relationships or other
arrangements. There can be no assurance that such additional funding, if
needed, will be available on terms acceptable to the Company, if at all.
Furthermore, any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may involve restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may
require the Company to relinquish its rights to certain of its technologies,
products or marketing territories. The failure of the Company to raise capital
when needed would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Development
Stage Company; History of Losses and Expectation of Substantial Future
Losses," "--Uncertainty of Product and Procedure Acceptance," "--Fluctuations
in Operating Results" and "--No Assurance of Obtaining Required Regulatory
Approvals; Government Regulation."
At December 31, 1996, the net operating losses available to offset future
taxable income for federal income tax purposes were approximately $17.5
million. Utilization of the net operating losses and credits may be subject to
a substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
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BUSINESS
OVERVIEW
Cardima, Inc. designs, develops, manufactures and markets minimally
invasive, single-use, microcatheter-based systems for the mapping and ablation
of the two most common forms of cardiac arrhythmias: atrial fibrillation
("AF") and ventricular tachycardia ("VT"). Arrhythmias are abnormal electrical
heart rhythms that adversely affect the mechanical activities of the heart and
can potentially be fatal. The Company is developing microcatheter systems
designed to provide enhanced access to arrhythmia causing tissue, to diagnose
the arrhythmia by locating its origin ("mapping") and to restore normal heart
rhythms by isolating and destroying the arrhythmia causing sites ("ablation")
using radiofrequency ("RF") energy. The Company's microcatheters incorporate
multiple electrodes in the catheter tip that are designed to both receive
electrical signals for mapping and to emit RF energy for ablation, allowing
physicians to both map and ablate using a single catheter. Cardima's
microcatheters are designed with variable stiffness and a highly flexible
distal tip to allow enhanced access to the vasculature of the heart. In
addition, they are designed to be compatible with existing signal display
systems and RF generators, eliminating the need for significant new investment
in capital equipment. The Company's microcatheter technology was originally
conceived at Advanced Cardiovascular Systems, Inc. ("ACS," now a division of
Guidant Corporation), from 1979 to 1982. Target Therapeutics, Inc. ("Target,"
now a division of Boston Scientific Corporation ("Boston Scientific"))
purchased this technology in 1985 from ACS for use in neurological
applications. In 1993, Target granted Cardima an exclusive, royalty-free
license to use the microcatheter technology in the treatment of
electrophysiological diseases affecting areas other than the central nervous
system.
In January 1997, the Cardima Pathfinder microcatheter system received 510(k)
clearance from the United States Food and Drug Administration ("FDA") for use
in mapping VT, and it is currently being marketed for this application in the
United States, Europe, Japan, Australia and Canada. Also in January 1997, the
Company filed an Investigational Device Exemption ("IDE") for clinical testing
of the Cardima Pathfinder AF microcatheter system for the mapping and ablation
of AF and subsequently received conditional approval from the FDA to begin the
mapping phase of the feasibility study. In March 1997, the Company submitted a
510(k) premarket notification for the Cardima Pathfinder AF for atrial
mapping. The Company expects to file an IDE for its Tracer VT microcatheter
system for the ablation of VT in late 1997.
DISCUSSION OF THE HEART AND ARRHYTHMIC DISORDERS
The heart is an electro-mechanical pump that relies on self-generated
electrical signals to contract its muscle fibers and pump blood throughout the
body. It is divided into four chambers: the two upper chambers called the
atria, and the two lower chambers called the ventricles. The heart consists of
two pumps working side by side, each with its own atrium and ventricle. The
pump on the right side collects venous blood from the body and sends it to the
lungs for oxygenation. The pump on the left side receives the oxygenated blood
from the lungs and pumps it through the body. The process is repeated as
venous blood returns to the right side of the heart.
The heart, as with any other organ, requires oxygen and nutrients to
function. Because the heart has large oxygen and nutrient demands, it requires
an extensive, well developed vascular network to bring blood to and carry
blood away from its tissue. This coronary vascular network is located
throughout the majority of the heart's walls to nourish the heart tissue
directly. This network is comprised of an arterial system and a venous system,
both of which originate on the epicardium, or outer surface, of the ventricles
and penetrate into the tissues of the ventricular walls. Thus, the anatomy of
the ventricular walls consists of a thick mass of contracting muscle cells
with a framework of coronary blood vessels.
The heart's pumping action is controlled by an electrical conduction system
comprised of a specialized network of cells within the heart muscle tissue
(see Figure 1 below). This conduction system allows electrical signals to
propagate through the heart in a systematic and organized way. These
specialized conduction cells are placed throughout the walls of the chambers,
from just underneath the inner, or endocardial, surface of the heart to the
outer, or epicardial, surface. This conduction system carries electrical
signals, in a properly timed sequence, to the muscle cells throughout the
heart. The electrical conduction cycle that results in a normal heart beat
starts in the right atrium, which contains a specialized group of cells called
the Sino-Atrial ("SA") node.
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The SA node is the heart's "natural pacemaker," regularly discharging an
electrical signal that, under normal circumstances, is responsible for setting
the heart rate, usually 60 to 100 beats per minute. The signal generated in
the SA node is propagated through the atria until it is delayed in the Atrio-
Ventricular ("AV") node. This delay provides enough time for the atria to fill
the ventricles with blood before they contract.
FIGURE 1: THE NORMAL HUMAN CARDIAC CONDUCTION SYSTEM
(ARROWS REPRESENT FLOW OF ELECTRICAL CONDUCTION)
Once the electrical signal exits the AV node, it is rapidly conducted down
the His Bundle, and is distributed widely throughout both ventricles via the
Purkinje Fibers, delivering the electrical signal to both ventricles at the
same time, causing them to contract in unison. Since the ventricles pump blood
to the lungs and the body (while the atria only pump blood to the ventricles),
the ventricles are composed of a larger amount of muscle tissue than the
atria. The left ventricle, in particular, is the stronger of the two
ventricles, generating higher pressure and working harder in order to pump
oxygenated blood through the entire body against a high vascular resistance.
In the normal heart, the four chambers work in rhythm with each other to
ensure that properly oxygenated blood is delivered throughout the body.
ARRHYTHMIAS
Arrhythmias are abnormal electrical heart rhythms that adversely affect the
mechanical activities of the heart. Arrhythmias result in insufficient blood
flow, which may cause dizziness, inadequate function of important organs in
the body, stroke or even death. Arrhythmias have numerous causes, including
congenital defects, tissue damage from heart attacks or arteriosclerosis and
other conditions that accelerate, delay or redirect the normal transmission of
electrical activity, thereby disrupting the normal coordinated contractions of
heart muscle cells. There are two general types of arrhythmias: tachycardia, a
fast resting heart rate, typically more than 100 beats per minute, and
bradycardia, a slow resting heart rate, typically less than 60 beats per
minute. Tachycardias fall into one of two major categories: supraventricular
tachycardia ("SVT"), which has its origin above the ventricles (typically in
the atria) with AF being the most common form of SVT, and VT, which has its
origin in the wall of the ventricles. Generally, arrhythmias degenerate and
worsen over time.
Atrial Fibrillation
AF is characterized by the irregular and very rapid beating of the heart and
results when the normal electrical conduction system of the atria
malfunctions, leading to irregular and chaotic electrical signals. During
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AF, the regular pumping action of the atria is replaced by irregular,
disorganized and quivering spasms of atrial tissue. Symptoms of AF typically
include a rapid and irregular heartbeat, palpitations, discomfort and
dizziness. This malfunction results in the failure of the atria to fill the
ventricles completely and, consequently, the failure of the heart to pump
adequate amounts of blood to the body. Once AF becomes symptomatic, it is
typically associated with significant morbidity related to reduced blood flow.
Often, the greatest concern is that the reduced cardiac output can lead to
blood pooling in the atria and the formation of blood clots. Blood clots in
the left atrium can dislodge and travel through the bloodstream to the brain,
resulting in stroke and even death.
In the United States, AF affects an estimated two million people, with
approximately 160,000 new cases being diagnosed each year. It is estimated
that about 1.5 million outpatient visits per year in the United States are
associated with AF and there are more than 200,000 admissions to hospitals for
AF each year. The American Heart Association estimates that AF is responsible
for over 70,000 strokes each year in the United States. The Company estimates
that the cost of treating these patients is more than $3.6 billion annually.
The cost of drug treatment for AF alone is estimated to be in excess of $400
million worldwide each year.
AF is routinely diagnosed using an electrocardiogram, in which electrodes
are placed on the skin to record the irregular beating of the heart. However,
electrocardiograms are unable to locate the origin, or focus, of the AF.
Another diagnostic method, called mapping, involves placing catheters with
electrodes on their tips inside the chambers of the heart to record the
electrical signals generated by the heart in order to locate the focus of the
arrhythmia. Since AF is an arrhythmia that typically affects both the right
and left atria at the same time, the Company believes that optimal mapping of
AF requires the simultaneous evaluation of electrophysiological information
from both atria. The Company believes electrophysiologists do not routinely
map AF because currently available catheters are inadequate to map either the
entire right or left atrium, or both simultaneously.
Current AF treatments are directed at trying to reestablish a normal
heartbeat and prevent stroke, and are primarily supportive and palliative,
rather than curative. Antiarrhythmic and anticoagulant drugs, the most common
treatment for AF, are typically used to attempt to control AF by restoring the
heart's natural rhythm and limiting the natural clotting mechanism of the
blood. However, antiarrhythmic drug therapy often becomes less effective over
time, with approximately half of the patients eventually developing
resistance. In addition, antiarrhythmic drugs can have severe side effects,
including pulmonary fibrosis and impaired liver function. Another palliative
procedure for AF is external cardioversion, or the application of strong
electrical current under general anesthesia. This treatment is usually
effective for a limited period of time as well. Implantable atrial
defibrillators are being investigated to detect the onset of AF internally and
then deliver an electrical shock to convert the heart back to normal rhythm.
Although the preliminary results of clinical studies indicate that this
approach may be feasible, AF is not cured with this approach. There are
significant problems including pain tolerance, reversion to AF and creation of
VT as a result of the electrical shock. Purposeful destruction of the AV node
followed by implantation of a pacemaker is typically a treatment of last
resort for AF patients, but does not cure or treat the AF itself. Since atrial
function remains poor following the procedure, chronic anticoagulant therapy
is generally required.
The Company believes that the only curative therapy for AF used today is an
open heart operation. The most common procedure is the "maze" procedure, in
which a surgeon makes several slices through the wall of the atrium with a
scalpel and then sews the cuts back together creating a scar pattern. The
scars isolate and contain the chaotic electrical impulses to control and
channel the electrical signal emanating from the SA node. This open heart
operation is expensive and associated with long hospital stays and high
morbidity and mortality. Although this approach is not commonly used because
it is highly invasive, containing the movement of the chaotic impulses in the
atrium through scar creation is generally considered effective in controlling
AF.
Electrophysiologists are also experimenting with less invasive, catheter-
based ablation procedures that attempt to mimic the results of the maze
procedure. Although these procedures offer the benefit of a minimally invasive
approach, they are difficult to perform because of the shortcomings of
existing catheter technology and appear unable to create lesions that
effectively isolate portions of the atria where the arrhythmia causing tissue
is located.
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Ventricular Tachycardia
VT is a life-threatening condition in which heartbeats are improperly
initiated from within the ventricular wall, rather than from the SA node, thus
bypassing the heart's normal conduction system. The typical VT patient has
experienced a myocardial infarction, or heart disease, which leads to the
formation of a scar or electrical barrier inside the ventricular wall,
resulting in improper electrical conduction in the cells immediately bordering
the scar. During episodes of VT, the ventricles beat at such an abnormally
rapid rate that they are unable to fill completely with blood, thus impairing
the ventricles' ability to pump oxygenated blood throughout the body. The
resulting reduction in the amount of oxygen transported to the tissues and
organs of the body can cause dizziness and loss of consciousness. VT can often
progress into ventricular fibrillation ("VF"), which is an irregular, chaotic
and ineffective spasming of the ventricles. VF is fatal within a few minutes
of its occurrence, unless orderly contractions of the ventricles are restored.
It is estimated that more than 300,000 people in the United States suffer
from sudden cardiac death each year. Of these, approximately 50,000 people
survive, primarily through emergency defibrillation. These survivors are at
risk of developing VT or subsequently VF. The Company estimates that each year
over 100,000 people in the United States who have never suffered VF are
diagnosed with symptomatic VT. The American Heart Association estimates that
approximately 1.5 million people in the United States suffer myocardial
infarctions each year, of which approximately one million survive.
Approximately 30% of the survivors of a myocardial infarction suffer an
episode of VT within the following year. The Company believes all of these
individuals are potential candidates for a safe and cost-effective mapping and
ablation procedure.
VT may be diagnosed using a standard electrocardiogram in a manner similar
to the diagnosis of AF. The cardiac electrophysiologist typically attempts to
map VT to locate the focus of the arrhythmia within the heart's structure.
However, locating the arrhythmia causing tissue, which can occur at any point
in the thickness of the ventricular wall (see Figure 2 below), from the
endocardium, or inner surface of the heart wall, to the intramyocardium,
inside of the heart wall itself, to the epicardium, or outer surface of the
heart wall, can be difficult.
FIGURE 2: CROSS SECTION OF THE HEART SHOWING THE VENTRICULAR WALL
[FIGURE 2: DEPICTION OF CROSS SECTION OF THE HEART SHOWING THE VENTRICULAR
WALL AND ISOLATION OF ARRYTHMIA CAUSING TISSUE]
Similar to AF, current treatments for VT are primarily supportive and
palliative. Antiarrhythmic drugs are the most common treatment, although these
drugs have been shown to have a number of unwanted side effects,
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and in some circumstances may actually induce VT. A recent study has
demonstrated that the implantable cardiac defibrillator is a more effective
treatment for VT than antiarrythmic drugs, but it also is a palliative
treatment and is associated with a number of undesirable characteristics, such
as patient reliance on an implantable device with a limited battery life, the
high cost of the implantation procedure and the risks associated with
implanting foreign objects. In addition, the implantable cardioverter is only
palliative and does not cure the VT or destroy the arrhythmia causing tissue.
Similar to the treatment of AF, electrophysiologists are also experimenting
with less invasive, catheter-based ablation procedures for the treatment of
VT. However, access limitations and shortcomings of existing endocardial
catheter technology for ablation have limited the use of catheter technology
to treat VT.
Limitations of Current Catheter-Based Diagnosis and Therapy
The demonstrated medical benefits and cost efficiency of minimally invasive
surgical procedures have encouraged electrophysiologists to seek a means of
employing new, minimally invasive techniques for the diagnosis and treatment
of arrythmias. In the case of AF, electrophysiologists are experimenting with
a treatment technique, often referred to as the "drag and burn procedure," in
which conventional RF ablation catheters are dragged along the inside surface
of an atrium while applying RF energy. However, creating continuous, linear,
transmural lesions to isolate portions of the atria using this experimental
procedure with standard catheters has proven time consuming and difficult.
Endocardial catheter technology is also being tested for the treatment of VT.
The Company believes that an endocardial approach is suboptimal because the
muscle tissue of the ventricles is significantly thicker than the muscle
tissue in the atria, requiring the use of large amounts of RF energy. As a
consequence, the endocardial approach generates larger, less focused lesions,
increasing the amount of ventricular tissue destroyed in the procedure.
The Company believes that the disadvantages of existing catheter based
approaches for AF and VT are attributable not to the minimally invasive
approach of the procedure, but instead to existing catheter technology. The
catheters currently used are relatively large (typically six to seven French
in diameter) and stiff, increasing the risk of trauma to the heart during the
procedure, and restricting access primarily to the chambers of the heart. When
attempting to diagnose and treat VT using standard electrophysiology
catheters, the electrophysiologist is unable to access smaller blood vessels
within the ventricular wall. As a result, generally only signals generated
within one to two millimeters of the inner wall can be recorded. The current
technology is inadequate because the normal ventricular wall is five to 20
millimeters thick, and arrhythmia causing tissue, especially tissue causing
VT, can reside anywhere within that thickness. In addition, the information
generated by the endocardial diagnostic procedure is limited, as the
electrophysiologist can observe and evaluate only a limited number of signals
in a confined area. In order to observe more signals, the user must
mechanically manipulate the catheter to change its location. As a result, the
standard endocardial electrophysiology procedure is extremely laborious and
time consuming, in some cases requiring up to 15 or more RF energy deliveries
per treatment. Although there are endocardial basket-type catheters in
development that enable the electrophysiologist to record information from
multiple points in the ventricle at once, the Company believes that these
catheters suffer the same access limitations to arrhythmia causing tissue
located in the intramyocardium and epicardium as standard endocardial
catheters and often require additional investments in capital equipment.
Based on experience with standard endocardial catheters,
electrophysiologists recognize the need to record and evaluate a greater
amount of electrical information from various areas in the heart
simultaneously during AF or VT procedures. In the case of AF, the Company
believes there is a need for catheters that are able to map both right and
left atria at the same time, if warranted, and then immediately and
appropriately ablate the AF causing tissue. In the case of VT, the Company
believes there is a need for catheters that are able to map safely the entire
thickness of the ventricular wall, not just the endocardial surface, and
appropriately ablate the VT causing tissue with minimal trauma to normal
conducting heart tissue.
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THE CARDIMA MICROCATHETER SYSTEM SOLUTION
The primary clinical goal in the diagnosis and treatment of AF and VT is
precise mapping and effective, less destructive ablation. To achieve this, the
electrophysiologist must be able to access areas of the heart that are
currently inaccessible, using techniques that are easy to perform and that do
not increase the trauma to the patient. The Company's microcatheter systems
are designed to achieve this goal by providing enhanced access to the
arrhythmia causing tissue, by mapping the location of the arrhythmia and then
ablating the arrhythmia causing tissue using RF energy to cure the patient,
all in one procedure using the same catheter. The Company's microcatheter
systems are designed to offer the following advantages:
. MINIMALLY INVASIVE APPROACH. The Cardima microcatheter systems are
designed to provide a minimally invasive approach to the treatment of
both AF and VT, resulting in decreased procedure time, shorter hospital
stays, lower procedure costs and fewer complications than the surgical
procedures currently in use.
. SINGLE CATHETER FOR RAPID MAPPING AND ABLATION. By using microcatheters
that can map, as well as ablate, the Company believes the
electrophysiologist need only access the arrhythmia causing tissue once
in order to map it, verify that it is causing the arrhythmia and then,
using the same device, ablate the tissue to cure the patient. The
Company believes this single catheter, dual function characteristic of
its microcatheter systems will decrease procedure times and improve
treatment of both AF and VT.
. ENHANCED ACCESS TO THE VASCULATURE OF THE HEART. Cardima's
microcatheters feature a significantly smaller diameter than standard
electrophysiology catheters, and incorporate Target variable stiffness
technology and a highly flexible distal tip. As a result, the Company's
microcatheters are more flexible and torqueable than standard
electrophysiology catheters and have varying degrees of flexibility at
the distal end to allow enhanced access to the vasculature of the heart,
to conform easily to the contours of the heart wall and to maintain
controlled, regular contact even in a fast beating heart.
. ABILITY TO GATHER MORE INFORMATION. The Company's microcatheter system
designs include a large number (up to 16) of narrow electrodes, while
maintaining a high degree of flexibility. The Company believes that this
design permits the electrophysiologist to acquire and evaluate far more
information in a mapping procedure than is available using standard
electrophysiology catheters, which typically incorporate fewer
electrodes. The increased amount of information recorded using the
microcatheter approach should enable the electrophysiologist to target
the arrhythmia causing tissue with greater precision, in order to permit
effective ablation.
. CURATIVE TREATMENT FOR AF. The Cardima Pathfinder AF microcatheter
system is designed to treat AF by creating long, thin, continuous,
linear, transmural lesions in both the right and left atria to isolate
and contain the arrhythmia causing tissue, thereby restoring normal
electrical function by controlling and reorganizing the random, chaotic
electrical activity that characterizes AF. In animal studies, the
Company's microcatheter systems have required less RF energy and created
significantly thinner lesions than standard electrophysiology catheters,
preserving a greater amount of atrial tissue following the procedure.
The Company believes this will result in a significant improvement in
atrial function and a reduction in the risk of blood clotting, reducing
or eliminating the need for chronic anticoagulant therapy. The Company
believes this approach has the potential to offer the effectiveness of
the open heart surgical cure for AF, but with significantly less trauma,
fewer complications, reduced pain, shorter hospital stays and lower
procedure costs.
. CURATIVE APPROACH FOR VT. The Company's microcatheter systems for the
mapping and ablation of VT are designed for use inside the vasculature
of the heart wall, facilitating access to arrhythmia causing tissue
through the venous system. Cardima believes that at least half of VT
foci are located in the intramyocardium and the epicardium, areas that
are ineffectively accessed using standard endocardial catheters or
basket type catheters in development. The intravascular approach to VT
ablation should permit the microcatheters to be positioned in close
proximity to the arrhythmia causing tissue, facilitating the creation of
smaller, more focused lesions. The Company believes that this approach
has the potential to be more effective than standard endocardial
ablation procedures, with
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reduced destruction of surrounding healthy tissue, thus maximizing and
optimizing the normal function of the heart after the procedure. The
Company is not aware of any epicardial mapping catheters other than the
Cardima Pathfinder and Tracer under development.
. COMPATIBLE WITH EXISTING CAPITAL EQUIPMENT. The Company's microcatheter
systems are designed to be compatible with leading electrophysiology
signal display systems and RF generators, in order to eliminate the need
for significant new investment in additional capital equipment. By
facilitating the rapid and precise location of the arrhythmia causing
tissues using a system that is compatible with standard laboratory
equipment, the Company believes its products will be rapidly adopted by
electrophysiologists.
. REDUCED PROCEDURE AND RADIATION EXPOSURE TIMES. The Company believes
that its microcatheter systems will reduce procedure times and thereby
decrease cumulative x-ray exposure to both patients and lab personnel.
Standard electrophysiology procedures, in many cases, expose both the
patient and the lab personnel to over one hour of accumulated x-ray time
during flouroscopy, which is used to visualize the placement of the
catheters. The Company believes that the total procedure and fluoroscopy
time associated with the use of its microcatheter systems are less than
those using standard electrophysiology catheters, thereby reducing
procedure costs and the risk of disease resulting from extended exposure
to x-ray flouroscopy.
STRATEGY
Cardima's objective is to establish its microcatheter systems as the
standard of electrophysiological care for mapping and ablating AF and VT. To
achieve its objective, the Company is pursuing the following strategies:
DEVELOP MICROCATHETER TECHNOLOGY TO ADDRESS UNMET CLINICAL NEEDS FOR BOTH
MAPPING AND ABLATION. Cardima is developing microcatheter systems to address
clinical needs that are not adequately addressed by current technology.
Cardima is focused on both endocardial access for AF and intravascular access
for VT, and provides a microcatheter systems approach to addressing AF and VT.
Cardima has designed systems incorporating variable stiffness technology
originally developed at Target, including guiding catheters, fixed-wire and
over-the-wire systems, in order to optimize the physician's ability to access
the areas of interest in the heart easily and safely. By using microcatheters
that can map as well as ablate, the Company believes the electrophysiologist
need only access the arrhythmia causing tissue once in order to map it, verify
that it is causing the arrhythmia and then ablate the tissue using the same
catheter.
PROVIDE MICROCATHETER SYSTEMS THAT LOWER THE COST OF TREATING
ELECTROPHYSIOLOGICAL DISORDERS. The Company's microcatheter systems are
designed to reduce the average time required for AF and VT diagnostic and
treatment procedures significantly. As a result, time spent in high cost
electrophysiology laboratories should be reduced, lowering the overall cost of
AF or VT treatments. The shorter procedure time that the Company believes will
result from the use of its microcatheter systems should enable physicians to
perform a greater number of AF or VT procedures and reduce the overall cost
per procedure. In addition, the Company intends to use data derived from its
clinical studies to establish reimbursement for AF and VT procedures using the
Company's microcatheter systems. The Company believes that its microcatheter
systems will appeal to patients and third party payors seeking a cost-
effective solution to the diagnosis and treatment of AF and VT.
ACCELERATE ACCEPTANCE AND ADOPTION OF THE COMPANY'S MICROCATHETER SYSTEMS BY
LEADING ELECTROPHYSIOLOGISTS. The Company has formed relationships with
leading medical centers in the United States, and is formalizing relationships
with centers in Europe and Japan, to perform clinical trials of its
microcatheter systems for the diagnosis and treatment of AF and VT. In the
United States, the Company is formalizing arrangements with Massachusets
General Hospital and Stanford University Medical Center to perform the mapping
phase of the Company's feasibility study of the Cardima Pathfinder AF
microcatheter system for mapping and ablation of AF. Cardima believes that
successful acceptance and adoption of these systems by widely recognized
experts in the field of electrophysiology is a critical step in the overall
market acceptance of its microcatheter systems. In addition, the Company has
established a Scientific Advisory Board composed of
32
<PAGE>
leading electrophysiologists at medical centers in the United States to
consult with the Company concerning the preclinical and clinical development
of the Company's microcatheter systems. The Company intends to continue to
work with leading physicians and medical centers and to initiate clinical
trials to demonstrate the safety and effectiveness of its microcatheter
systems and ultimately to establish broad market acceptance. In addition,
Cardima intends to accelerate physician education and adoption through peer-
reviewed publications concerning the clinical trials of the Company's
microcatheter systems.
BUILD MARKET LEADERSHIP THROUGH STAGED INTRODUCTION OF MICROCATHETER
SYSTEMS. In the United States, the Company intends to first introduce
microcatheter systems for mapping while continuing to develop its
microcatheter systems for ablating AF and VT. The Company has received 510(k)
premarket clearance for its Cardima Pathfinder microcatheter system for VT
mapping in January 1997 and submitted a 510(k) premarket notification for the
Cardima Pathfinder AF microcatheter system for AF mapping in March 1997. The
Company expects to establish the benefits of its microcatheter systems by
encouraging their use initially as a diagnostic complement to standard
ablation catheters. As a result, the Company's strategy is to establish the
utility of these diagnostic systems in advance of regulatory approval for the
Company's microcatheter systems for the treatment of AF and VT.
INCREASE SALES BY FURTHER PENETRATING INTERNATIONAL MARKETS. The Company
intends to devote significant resources to further penetrate international
markets, given their substantial size and the relatively lower regulatory
barriers. The Company has received ISO 9001 (EN 46001) Quality Systems
certification, as well as the right to affix the CE Mark to a number of its
products. The Company has received regulatory approval in the United States,
Europe, Japan, Australia and Canada for the Cardima Pathfinder microcatheter
system for mapping VT and has received regulatory approval in Europe, Japan
and Australia for the Cardima Pathfinder AF microcatheter system for mapping
AF. The Company is pursuing additional regulatory approvals in Europe, Canada
and Japan necessary to market its microcatheter systems for ablation. In
addition, the Company has trained electrophysiologists in Europe, Canada and
Japan in the use of its products.
PRODUCTS
Cardima is developing the Cardima Pathfinder and Tracer families of
microcatheter systems for the diagnosis and treatment of AF and VT. These
systems are designed, in the case of AF, to access both the right and left
atria and, in the case of VT, to be positioned within the coronary vasculature
using a guiding catheter in a system similar to that used in angioplasty
procedures. Cardima's microcatheter systems are designed to be used
endocardially in the atria to map and then ablate AF through the creation of
long, thin, continuous, linear, transmural lesions to treat AF. For VT, these
systems are designed to provide intravascular access to the heart to map and
ablate within the wall of the ventricles. The Cardima Pathfinder and Tracer
families of microcatheters are available in a variety of electrode numbers,
electrode spacing configurations and outer diameters. These microcatheter
systems are smaller in diameter and are designed to be more flexible and
torqueable than standard electrophysiology catheters, providing better
steerability for the electrophysiologist. In addition, these systems have a
series of electrodes at their distal ends that can both receive electrical
signals for mapping and emit RF energy for ablation. The Company's Cardima
Pathfinder and Tracer microcatheters are designed for single use. The Company
is designing its products to be used with existing electrophysiology computer
systems and RF ablation generators. The Company's ancillary products,
including guidewires and connecting cables, support these families of
microcatheter systems.
33
<PAGE>
The following table describes the Company's products and their intended
indications and regulatory status:
<TABLE>
<CAPTION>
INTERNATIONAL
AF PRODUCTS DESCRIPTION INDICATION U.S. REGULATORY STATUS(1) REGULATORY STATUS(1)
----------- ------------------- ---------- ------------------------- --------------------
<S> <C> <C> <C> <C>
Cardima Fixed-wire multi- Mapping 510(k) Approved in Europe
Pathfinder electrode submission filed in (CE Mark) and
AF microcatheter March 1997. Japan.
system designed to
create long, thin,
continuous, linear,
transmural lesions
in both right and
left atria.
Ablation IDE submission European and
filed in January Japanese ablation
1997. Conditional submissions
approval for Phase necessary for
I (mapping) clinical trials
obtained in January expected in 1997.
1997.
<CAPTION>
INTERNATIONAL
VT PRODUCTS DESCRIPTION INDICATION U.S. REGULATORY STATUS(1) REGULATORY STATUS(1)
----------- ------------------- ---------- ------------------------- --------------------
<S> <C> <C> <C> <C>
Cardima Fixed-wire multi- Mapping 510(k) clearance Approved in Europe
Pathfinder electrode obtained. (CE Mark) and
microcatheter Japan.
system designed for
accessing coronary
vasculature to
locate the
arrhythmia causing
tissue.
Cardima Smallest Cardima Mapping 510(k) submission Approved in Europe
Pathfinder Pathfinder expected in first (CE Mark) and
1.5 Fr. microcatheter (1.5 half of 1997. Japan.
French) designed to
provide more distal
access to smaller
blood vessels in
the heart wall.
Tracer Over-the-wire Mapping 510(k) submission Approved in Europe
and multi-electrode expected in first (CE Mark) and
Tracer VT microcatheter half of 1997 for Japan.
system designed to mapping using
be used in the Tracer.
veins of the heart
wall over a
steerable
guidewire.
Ablation IDE submission European and
expected in late Japanese ablation
1997 for ablation submissions
using Tracer VT. necessary for
clinical trials
expected in 1997.
<CAPTION>
INTERNATIONAL
ANCILLARY PRODUCT DESCRIPTION INDICATION U.S. REGULATORY STATUS(1) REGULATORY STATUS(1)
- ----------------- ------------------- ---------- ------------------------- --------------------
<S> <C> <C> <C> <C>
Venaport Coronary sinus Venous 510(k) clearance Approved in Europe
guiding catheters access obtained. (CE Mark). Japanese
with a family of submission expected
curved shapes and first half of 1997.
lengths. Designed
to deliver Cardima
Pathfinder and
Tracer
microcatheter
systems to desired
coronary veins.
</TABLE>
- --------
(1) The regulatory status of the Company's microcatheter systems reflects the
Company's current estimates of the timing of regulatory submission in the
Unites States, Europe or Japan. See "--Government Regulation." The actual
submission times could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including
failure to complete development of microcatheter systems or to demonstrate
safety or effectiveness in clinical studies, as well as the other factors
set forth under "Risk Factors" and elsewhere in this Prospectus.
34
<PAGE>
Products Designed for Mapping and Ablating AF
The Company believes its microcatheter systems can access the right and left
atria in a minimally invasive procedure and are designed to effectively ablate
AF by creating long, thin, continuous, linear, transmural lesions in the
atria.
Cardima Pathfinder AF for AF Mapping. The Cardima Pathfinder AF
microcatheter system is designed to facilitate mapping of both the right and
left atria. The Cardima Pathfinder AF is a thin, flexible, multi-electrode
microcatheter. The Cardima Pathfinder AF microcatheter system utilizes a three
French diameter microcatheter that incorporates Target variable stiffness
technology that both permits access to any area of the atria and enhances
contact to surrounding heart tissue, and also has three millimeter long
platinum coil electrodes for added flexibility. Because the Cardima Pathfinder
AF is one of the smallest electrophysiology catheters ever developed, the
Company believes several catheters can be positioned in the right atrium and
the left atrium at the same time to map both atria simultaneously. This
microcatheter system is being sold for mapping AF in Europe and Japan. In
March 1997, the Company submitted a 510(k) premarket notification for this
microcatheter system for mapping AF, based in part on results of the Company's
laboratory and animal studies.
There is considerable clinical debate regarding the need for mapping AF
prior to ablation, because, among other reasons, the electrical
characteristics of the arrhythmia causing tissue cannot be assessed adequately
using current technology. No mapping is performed during the open heart
surgical maze procedure. However, the Company believes that mapping prior to
ablation may be useful to identify different segments of the AF population,
each of which could require slightly different mapping and ablation
procedures. For example, some electrophysiologists believe most AF patients
will need to be mapped and ablated in both the left and right atria, while
others believe only right atrial intervention is warranted. The Company
believes that its products will have clinical utility in either of these
situations.
Cardima Pathfinder AF for AF Ablation. The multiple electrodes of the
Cardima Pathfinder AF microcatheter are closely grouped and can be used to
create a continuous lesion that extends through the thickness of the atrial
wall. The Company believes that the electrophysiologist will be able to use
the Cardima Pathfinder AF microcatheter system to create long, thin,
continuous, linear, transmural lesions in both the right and left atria,
thereby restoring normal electrical function in the atria by isolating the
arrhythmia causing tissue in a manner similar to the open heart surgical maze
procedure, without the associated risk and expense. Unlike other proposed
catheter-based ablation techniques, such as the "drag and burn" approach, the
Cardima approach does not involve resetting the catheter position during the
linear ablation procedure. As a result, the Cardima Pathfinder AF may have the
ability to more effectively and rapidly ablate the arrhythmia causing tissue.
The Cardima Pathfinder AF microcatheters are designed with narrow electrodes
that are able to deliver ablation level energy to the atrial tissue at much
lower power settings than documented with standard electrophysiology
catheters. The Company's animal studies have demonstrated the ability of the
Cardima Pathfinder AF to create the thinnest linear lesions that the Company
believes have ever been documented and presented generally to the
electrophysiology community. The Company has designed its Cardima Pathfinder
AF microcatheter system to be used with leading cardiac electrophysiology RF
generators and electrophysiology mapping computer systems.
The Company filed an IDE with the FDA for the Cardima Pathfinder AF
microcatheter system for mapping and ablation of AF in January 1997. The
protocol for this feasibility study was divided into two parts, one focusing
on mapping and one focusing on ablation. The Company has subsequently received
conditional approval for the mapping phase of the study and expects to begin
human mapping clinical trials in the first half of 1997. This feasibility
study will not be sufficient to support a PMA, and the Company will need to
conduct additional studies prior to submission of a PMA application. The
Company expects to submit an IDE for the Phase II pivotal clinical trials for
the Cardima Pathfinder AF microcatheter system for ablation in the second half
of 1997. The Company believes that PMA approval will be required before the
Cardima Pathfinder AF for atrial ablation can be marketed in the United
States. See "--Government Regulation."
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<PAGE>
Products Designed for Mapping and Ablating VT
The Company's intravascular approach allows its microcatheters to be
positioned in close proximity to the VT causing tissue and provides stable
positioning within the vascular system. The Company believes this approach will
result in greater accuracy of diagnosis and more effective treatment. The
Company is not aware of any other epicardial mapping catheters in development.
Cardima Pathfinder and Tracer for VT Mapping. The Company's microcatheter
systems used for diagnosing and treating VT are designed to be positioned
within the coronary vasculature using a guiding catheter in a system similar to
that used in angioplasty procedures and also have a series of electrodes at
their distal ends in order to perform as electrophysiology catheters. The
Cardima Pathfinder and Tracer microcatheter systems can be used to subselect
vessels and access the small veins located at the apex (lower tip) of the
heart. The Cardima Pathfinder microcatheter systems are configured with either
four, eight or 16 electrodes, that enable the physician to perform a narrow
focus evaluation using a smaller number of electrodes, if there is reason to
believe the VT causing tissue is located in a specific area, or a wider focus
evaluation using larger number of electrodes, if there is little indication
regarding the location of the VT causing tissue.
The Company received 510(k) clearance for the Cardima Pathfinder
microcatheter system for VT in January 1997 and has begun marketing and selling
the product in the United States. The Company is also currently selling the
Cardima Pathfinder product for VT mapping in Europe, Japan, Australia and
Canada. The Company's animal studies have shown that the Cardima Pathfinder can
safely map via the vessels of the coronary venous system and have demonstrated
the ability to simultaneously position five different Cardima Pathfinders in
various vessels of the coronary system. To date, the Cardima microcatheter
systems have been used to map VT in more than 30 patients in Europe, South
America and Japan. See "--Government Regulation."
Cardima Pathfinder 1.5 Fr. for VT Mapping. The Cardima Pathfinder 1.5 Fr.,
the Company's smallest microcatheter system, is being developed for VT mapping
in the venous system. The Cardima Pathfinder 1.5 Fr. is 1.5 French in diameter
(the typical catheter is six or seven French) and provides more distal access
to smaller vasculature of the heart. Similar to the Cardima Pathfinder
microcatheter, the Cardima Pathfinder 1.5 Fr. microcatheter is constructed
around a finely ground core-wire to provide the steerability necessary to
access distal vasculature. The Cardima Pathfinder 1.5 Fr. microcatheter has a
flexible platinum tip coil and contains a variable number of electrodes with
different spacing options. The Company expects to submit a 510(k) premarket
notification for this product in the first half of 1997.
Tracer VT for VT Ablation. The Company's epicardial approach to VT ablation
is intended to address the shortcomings of standard endocardial ablation
catheters. Once a VT focus has been identified as being epicardial or
intramyocardial, the electrophysiologist must decide whether or not to attempt
to ablate that focus from the endocardial side of the heart wall. Physicians
using existing ablation systems are faced with a fundamental problem: the
further the VT focus is from the endocardial side of the heart wall, the larger
the lesion size necessary to cure the condition. Traditionally,
electrophysiologists have had to use catheters and generators capable of making
larger lesions since they can only ablate the arrhythmia causing tissue from
the endocardial side. A large number of VT ablation cases required multiple
endocardial RF energy deliveries (up to 30 or more in one electrophysiology
study). Increased endocardial RF energy in ablation may result in greater risk
that the patient will develop blood clots, which may dislodge and travel to the
brain causing stroke and decreased cardiac output. Cardima's microcatheter
systems are intended to offer an alternative approach to current ablation
techniques by facilitating access to the arrhythmia causing tissue and
providing greater ablation accuracy using less RF energy. The Company is not
aware of any epicardial RF ablation catheter other than its Tracer VT
microcatheter system under development.
The Tracer VT microcatheter tracks over a guidewire in the coronary veins and
can access the important distal vasculature regions of the heart and deliver RF
energy to the epicardium. The Tracer VT is designed to map, locate and ablate
the VT focus using RF energy directly applied through the veins. The Company is
currently conducting animal studies to demonstrate the ability of the Tracer VT
to access the distal venous system and safely release RF energy with no damage
to the adjacent arteries. In these experiments the Tracer VT has required
significantly less energy to ablate VT than standard endocardial catheters.
36
<PAGE>
The Company believes that it will submit an IDE for the Tracer VT
microcatheter system in 1997 and begin clinical trials if the IDE is approved.
The Company expects that PMA approval will be required before the Tracer VT for
VT ablation can be marketed in the United States. See "--Government
Regulation."
The Company's intravascular electrophysiology catheters are coated with a
hydrophilic coating. This coating has been used on Target's products designed
to access the vessels of the brain. The Company believes the coating
significantly improves mechanical function. The Company has an exclusive
license to use the hydrophilic coating technology in products designed to map
and ablate cardiac arrhythmias while positioned within coronary vasculature.
Cardima's microcathether system for venous mapping of VT has received 510(k)
clearance from the FDA for sale in the United States and includes the Cardima
Pathfinder microcatheter and Venaport guiding catheter. The Company's other
microcatheter systems for mapping or ablation have not received FDA clearance
or approval for marketing and distribution in the United States. The Company's
microcatheter systems for ablation are at an early stage of testing. There can
be no assurance that the results of the Company's human clinical studies will
validate the results of its animal studies. The Company has not received
approval to begin clinical trials of any of its microcatheter systems for
ablation and there can be no assurance that any such approvals will be
received. See "Risk Factors--Early Stage of Product Development; No Assurance
of Safety and Effectiveness" and "--No Assurance of Obtaining Required
Regulatory Approvals; Government Regulation."
RESEARCH AND NEW PRODUCT DEVELOPMENT
The Company believes its future success will depend in large part on its
ability to develop and introduce clinically advanced diagnostic and therapeutic
systems that are effective, easy to use, safe and reliable. The Company's
research and new product development department focuses on the continued
development and refinement of its existing diagnostic devices, systems and
procedures, as well as on the development of new devices, systems and
procedures for treating cardiac arrhythmias. The Company's primary research and
development programs involve completing the development of microcatheter
systems for AF and VT ablation and developing smaller second generation
microcatheter systems for multi-catheter mapping of VT.
Research and development expenses for the years ended December 31, 1994,
1995, 1996 and for the three months ended March 31, 1997, were $2.2 million,
$2.6 million, $3.3 million and $810,000, respectively. The Company intends to
make significant investments in research and new product development for the
foreseeable future.
MARKETING AND DISTRIBUTION
The Company markets and sells its Cardima Pathfinder, Tracer and Venaport
microcatheter systems internationally through medical device distributors, and
currently sells its approved devices in the United States through a direct
sales force. The Company believes there are between 500 and 600 hospitals in
the United States and an additional 600 hospitals internationally that perform
electrophysiology procedures on a routine basis. Further, the Company believes
there are over 600 board certified electrophysiologists in the United States,
and an equal number of practicing electrophysiologists internationally. The
Company believes that a small sales force can serve its target market
effectively due to the relatively small number of physicians performing a
significant percentage of electrophysiology procedures.
United States
The Company's sales strategy in the United States involves the use of both
direct sales representatives and clinical specialists. The Company intends to
use its clinical specialists to support U.S. clinical trials for the AF and VT
microcatheter systems. The Company currently sells the Cardima Pathfinder for
VT mapping through a direct sales force in the United States consisting of five
sales personnel and two clinical specialists.
37
<PAGE>
The Company is currently establishing relationships with regional training
hospitals in the United States in order to provide physicians with both a
clinical perspective on the use of the Company's products as well as the
appropriate technical training for the handling of its products. The Company
intends to continue to develop relationships with key academic institutions and
physicians who are well recognized in the field of electrophysiology for the
quality of their research and their ability to influence medical opinion. The
Company intends to utilize these product champions in the United States, as it
is internationally, to assist it in gaining broad market acceptance and
adoption of its products. Several of these physicians have been involved in the
development of the Company's products, and the Company intends to continue to
build these relationships through its Scientific Advisory Board, participation
in regional training centers and physician-oriented symposia.
International
The Company's international distributors are experienced in cardiovascular
products and many have prior experience with electrophysiology. The Company
currently uses distributors in Germany, France, Italy, Spain, Portugal, the
United Kingdom, Belgium, The Netherlands and Japan. These countries accounted
for approximately 70% and 91% of the Company's total sales in 1995 and 1996,
respectively, and 47% in the three months ended March 31, 1997. In addition,
the Company has distribution in other countries in Europe and the Pacific Rim.
The Company operates under written distribution agreements in Germany, Spain,
Portugal, Belgium, The Netherlands and Japan. These agreements grant exclusive
rights to sell the Company products within a defined territory for periods
ranging from approximately two to three years. These agreements generally
reserve for the Company the right to terminate the distribution agreement for
cause, which includes failure to meet specified minimum performance
obligations, or the failure of the distributor to obtain required governmental
approvals to distribute the Company's products in the territory. The Company
has retained the right to terminate the distribution agreement should the
distributor begin to market medical devices that compete directly with those of
the Company. In France, Italy and the United Kingdom, where there are
significant sales of the Company's products, the Company is currently
negotiating distribution agreements on similar terms; however, there can be no
assurance that the Company will be able to complete these negotiations and
enter into agreements with these distributors on commercially reasonable terms.
In other countries where the Company's products are sold, the Company's
distributors operate under letter or oral arrangements. In the territories
where the Company does not have written agreements with its exclusive
distributors, the terms of the arrangements, such as length of arrangements and
minimum purchase obligations are uncertain. In addition, the laws in certain
international jurisdictions may make it difficult for the Company to terminate
such distribution arrangements absent specific written termination terms. These
distributors also sell medical products manufactured by other companies.
Distributors typically purchase the Company's products at a discount to list
price and resell the products to hospitals and physicians at a price determined
by the distributor. Sales to the international distributors are denominated in
U.S. dollars.
The Company currently has a limited sales organization. The Company's Vice
President, World Wide Sales and the Company's Director, European Sales manage
distributor relationships on a worldwide basis. In addition, the Company has
hired two clinical specialists (based in the United States) to support the
global sales effort.
Establishing a sales organization with the ability to support sales in
significant volumes will require significant management and financial
resources. To date, the Company has not established all of the international
distribution alliances necessary to fully market these products on a worldwide
basis, nor does the Company have written distribution agreements with all of
its international distributors. There can be no assurance the Company will be
able to enter into agreements with the desired distributors on a timely basis,
or that such distributors will devote adequate resources to selling the
Company's products.
Since the Company introduces its products initially in foreign markets, the
Company expects to continue to derive a substantial portion of its revenues
from international sales. The Company expects that international sales will
continue to account for a significant portion of the Company's total revenues
for the foreseeable future. As a result, a significant portion of the Company's
revenues will be subject to the risks associated with international sales. See
"Risk Factors--Risk of International Sales."
38
<PAGE>
MANUFACTURING
The Company fabricates certain proprietary components of the Company's
products and assembles, inspects, tests and packages most components into
finished products. Designing and manufacturing its products from raw materials
allows the Company to maintain greater control of quality and manufacturing
process changes and the ability to limit outside access to its proprietary
technology.
The Company believes its custom-designed, proprietary process equipment is an
important component of its manufacturing strategy. In some cases, the Company
has developed proprietary enhancements for existing production machinery to
facilitate the manufacture of its products to exacting standards. The Company
has also developed core manufacturing technologies and processes, including
proprietary extrusion techniques and equipment, polymer processing
capabilities, including composite lamination, welding of dissimilar materials,
balloon forming and proprietary precision guidewire grinding techniques
enabling fabrication of a large variety of guidewire core profiles.
Furthermore, the Company's technological expertise includes braiding,
hydrophilic coating, material cleaning and surface preparation.
The manufacture of catheters is a complex operation involving a number of
separate processes and components. Catheters are assembled and tested by the
Company prior to sterilization. The manufacturing process for the connecting
cable consists primarily of packaging and testing purchased units. The Company
has no experience manufacturing its products in the volumes that will be
necessary for the Company to achieve significant commercial sales, and there
can be no assurance that reliable, high-volume manufacturing capacity can be
established or maintained at commercially reasonable costs. If the Company
receives additional FDA clearance or approval for its products, it will need to
expend significant capital resources and develop additional manufacturing
expertise to establish large-scale manufacturing capabilities.
Components and raw materials are purchased from various qualified suppliers
and subjected to stringent quality specifications. The Company expects to
conduct supplier quality audits and is establishing a supplier certification
program. A number of the components such as the laminate tubing, core wiring
mandrels, connector components and hydrophilic coating are provided by sole
source suppliers. For certain of these components, there are relatively few
alternative sources of supply, and establishing additional or replacement
suppliers for such components, particularly the laminate tubing, could not be
accomplished quickly. The Company plans to qualify additional suppliers if and
as future production volumes increase. Because of the long lead time for some
components which are currently available from a single source, a supplier's
inability to supply such components in a timely manner could have a material
adverse effect on the Company's ability to manufacture products and therefore
on its business, financial condition and ability to test or market its products
on a timely basis.
The Company's manufacturing facilities are subject to periodic inspection
from regulatory authorities, and its operations must undergo QSR and ISO 9001
(EN 46001) compliance inspections conducted by the FDA and TUV, a notified body
(a regulatory agency) in the European Union ("EU"), respectively. In addition,
the Company has obtained ISO 9001 (EN 46001) Quality Systems certification from
TUV and has obtained the right to affix the CE Mark to its electrophysiology
mapping catheters and accessories. The Company's facilities and manufacturing
processes have recently successfully undergone a combined inspection by the FDA
and California Department of Health Services and an annual reinspection by TUV.
See "--Government Regulation."
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain patent and
copyright protection for its products and processes, to preserve its trade
secrets and to operate without infringing or violating the proprietary rights
of third parties. The Company's strategy is to actively pursue patent
protection in the United States and foreign jurisdictions for technology it
believes to be proprietary and which offers a potential competitive advantage
for its products. The Company has filed and intends to continue to file patent
applications, both in the United States and selected international markets, to
seek protection for proprietary aspects of the technology. No assurance can be
given that these patent applications will provide competitive advantages for
the Company's products or that any patent application filed by the Company will
issue as a patent. In addition, there can be no
39
<PAGE>
assurance any of the Company's patents or patent applications will not be
challenged, invalidated, or circumvented in the future. There can also be no
assurance that competitors, many of whom have greater resources than the
Company and have substantial investments in competing technologies, will not
apply for and obtain patents which will prevent, limit or interfere with the
Company's ability to make, use, or sell its products either in the United
States or internationally.
The Company has also obtained rights to certain technology by entering into
license arrangements. Pursuant to a license agreement with Target (the "License
Agreement"), the Company obtained an exclusive, royalty-free, worldwide license
under certain patents issued in the United States and corresponding
international patents to use Target's technology and to make, use and sell or
otherwise distribute products for the diagnosis and treatment of
electrophysiological diseases in the body, other than in the central nervous
system, including the brain. The exclusive license applies to any Target
technology developed through May 1996 and will terminate on April 23, 2013, the
expiration date of the last-to-issue licensed patents issued prior to May 21,
1996. In addition, the Company has obtained a non-exclusive license to use
Target's technology, provided it has made a substantial improvement on such
technology, for the diagnosis or treatment of diseases of the heart other than
using balloon angioplasty. As defined in the License Agreement, a substantial
improvement is any modification, improvement or enhancement of Target
technology that results in a material change in the function, purpose or
application of a particular product incorporating Target technology. The
Company believes that the incorporation of electrodes in its microcatheter
systems, together with other modifications, satisfies the substantial
improvement requirements.
Under the License Agreement, Cardima granted back to Target an exclusive,
royalty-free, worldwide license to use technology developed by Cardima through
May 1996 in the fields of neurology, interventional neurology, interventional
reproductive disorders and vascular prostheses (the "Target Field"). In
addition, the Company agreed not to conduct material research and development,
acquire corporate entities or make or sell products in the Target Field or to
sell products, other than products utilizing Target's technology, for use in
diagnosis or treatment of diseases related to the production of electrical
current in tissue located in areas of the body other than the heart, without
first notifying Target and negotiating a distribution agreement. Cardima also
agreed that it would not sell products utilizing Target's technology for use in
diagnosis or treatment of diseases related to the production of electrical
current in tissue located in areas of the body other than the heart without, if
selling to a distributor, first notifying Target and offering Target the right
of first refusal with respect to the terms of the distribution, or if selling
directly to the consumer, paying to Target an amount equal to 40% of the gross
profit for such product.
In April 1997, Boston Scientific completed the acquisition of Target, by
merging Target with a wholly-owned subsidiary. As a result of the acquisition,
Boston Scientific will exercise control over a significant portion of the
Company's outstanding Common Stock. Accordingly, Boston Scientific may be able
to exercise influence over the business and financial affairs of the Company.
Boston Scientific develops, markets and sells cardiac electrophysiology
products that compete directly with the microcatheter products being developed
by the Company. There can be no assurance that Boston Scientific will not take
actions or engage in activities that could have a material adverse effect on
the Company's business, financial condition or results of operations. See "Risk
Factors--Influence of Boston Scientific Corporation/Target Therapeutics, Inc,"
and "Risk Factors--Control by Existing Stockholders."
The Company obtained rights to its biocompatible hydrophilic coating material
and process through an exclusive, royalty bearing license to use the
hydrophilic coating technology in products designed to map and ablate cardiac
arrhythmias while positioned within the coronary arteries and coronary veins.
The license will terminate upon the later of 15 years from first commercial
sale of catheters treated with the coating material or the expiration of the
last-to-issue licensed patent, unless terminated earlier for material breach.
In addition to patents and licenses, the Company also relies upon trade
secrets, technical know-how and continuing technical innovation to develop and
maintain its competitive position. The Company typically requires its
employees, consultants, and advisors to execute confidentiality and assignment
of invention
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agreements in connection with their employment, consulting or advisory
relationships with the Company. There can be no assurance, however, that the
agreements will not be breached or that the Company will have adequate remedies
for any breach. Furthermore, no assurance can be given that competitors will
not independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's proprietary knowledge, or
that the Company can meaningfully protect its rights in unpatented proprietary
technology.
Patent applications in the United States Patent and Trademark Office
("USPTO") are maintained in secrecy until patents issue, and patent
applications in the patent offices of foreign countries are maintained in
secrecy for a period of 18 months from the priority date. Publication of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries and related patent applications, and the large number of patents
and applications and the fluid state of the Company's development activities
make comprehensive patent searches and analysis impractical or not cost-
effective. Although the Company has made patent and publication searches in the
United States and in foreign countries to determine whether materials,
processes or designs used by it or its potential products infringe or will
infringe third-party patents, such searches have not been comprehensive.
Patents issued and patent applications filed relating to medical devices are
voluminous and there can be no assurance that current and potential competitors
and other third parties have not filed or will not file applications for, or
have not received or will not receive, patents and will not obtain additional
proprietary rights relating to products, materials or processes used or
proposed to be used by the Company.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain
a competitive advantage. While the Company's patents have not been the subject
of any litigation or reexamination, the Target patent which relates to the
variable stiffness design of Target's Tracker microcatheters (the "Tracker
Patent") has been the subject of four reexamination proceedings in the USPTO.
Following the completion of the first such proceeding, the USPTO issued a
reexamination certificate and confirmed the patentability of the patent claims
set forth in the certificate. Requests for second, third and fourth
reexaminations of the Tracker Patent were initiated by one of Target's
competitors, SciMed, a subsidiary of Boston Scientific. After the USPTO's
review of such petitions, Target received notice from the USPTO that it had
reaffirmed the patentability of the claims of the Tracker Patent.
In addition, the Company is aware that in 1994 Target filed a lawsuit against
SciMed and Cordis Endovascular Systems, Inc. (now a division of Johnson &
Johnson) in the U.S. District Court, seeking damages and preliminary and
permanent injunctive relief against further infringing sales. After various
court actions, the Court of Appeals has temporarily stayed the preliminary
injunction, which had been granted prohibiting Cordis and SciMed from
infringing on the Tracker Patent, while it considers a motion opposing the
injunction filed by Cordis and SciMed. In April 1997, Target merged with a
wholly-owned subsidiary of Boston Scientific. It is expected that this merger
will result in the termination of the lawsuit between Target and SciMed. If the
lawsuit is not terminated and if the Tracker Patent is ultimately determined to
be invalid, the Company's proprietary rights in the variable stiffness
technology could be compromised, and the Company's competitors would have the
ability to incorporate such technology in their products. This erosion of this
competitive advantage could have a material adverse effect on the Company's
business, financial condition and results of operations.
Although there are no claims against the Company, any such claims, whether
with or without merit, could be time-consuming and expensive to respond to and
could divert the Company's technical and management personnel. If any claims of
third party patents are upheld as valid and enforceable in any litigation or
administrative proceeding, the Company could be prevented from practicing the
subject matter claimed in such patents, or could be required to obtain licenses
from the patent owners of each patent, or redesign its products or processes to
avoid infringement. There can be no assurance the licenses will be available
or, if available, will be available on terms acceptable to the Company or that
the Company will be successful in any attempt to redesign its products or
processes to avoid infringement. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing and selling its products, which
would have a material adverse effect on the Company's business, financial
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condition, and results of operations. The Company intends to vigorously protect
and defend its intellectual property. Costly and time-consuming litigation
brought by the Company may be necessary to enforce patents issued to the
Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain.
There can be no assurance that any issued patent or patents based on pending
patent applications or any future patent application will exclude competitors
or provide competitive advantages to the Company, that any of the Company's
patent or patents in which it has licensed rights will be held valid if
subsequently challenged or that others will not claim rights in or ownership of
the patents and other proprietary rights held or licensed by the Company. There
can be no assurance that others have not developed or will not develop similar
products, duplicate any of the Company's products or design around any patents
issued to or licensed by the Company or that may be issued in the future to the
Company. Since patent applications in the United States are maintained in
secrecy until the patent issues, the Company also cannot be certain that others
did not first file applications for inventions covered by the Company's pending
patent applications, nor can the Company be certain that it will not infringe
any patents that may issue to others on such applications. The Company
periodically reviews the scope of patents of which it is aware. Although
Cardima does not believe that it infringes patents known to the Company, the
question of patent infringement involves complex legal and factual issues and
there can be no assurance that any conclusion reached by the Company regarding
infringement will be consistent with the resolution of any such issues by a
court.
In addition, the U.S. patent laws were recently amended to exempt physicians,
other heath care professionals and affiliated entities from infringement
liability for medical and surgical procedures performed on patients. The
Company cannot predict whether this amendment might have a material adverse
effect on the Company's ability to protect its proprietary methods and
procedures.
COMPETITION
The Company believes it currently has the only intravascular approach to VT.
The Company considers its primary competitors to be companies engaged in the
development and marketing of more established, but the Company believes, less
effective therapies for the treatment of AF and VT, such as drugs, external
electrical cardioversion and defibrillation, implantable defibrillators and
purposeful destruction of the AV node, followed by implantation of a pacemaker
and open heart surgery. Several competitors are also developing new approaches
and new products for the mapping and/or ablation of AF and VT. These approaches
include mapping systems using contact mapping, single-point spacial mapping and
non-contact, multisite electrical mapping technologies and ablation systems
using ultrasound, microwave, laser and cryoablation technologies. In addition,
companies are developing surgical procedures that could potentially be used by
physicians to perform the open heart surgical maze procedure in a minimally
invasive manner. If any of these new approaches or new products prove to be
safe and effective, the Company's products could be rendered uncompetitive or
obsolete, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Many of the Company's competitors have an established presence in the field
of interventional cardiology and electrophysiology, including Boston
Scientific, C.R. Bard, Inc., Johnson & Johnson, through its Cordis division,
St. Jude Medical, Inc., through its Daig division, and Medtronic, Inc. These
competitors have substantially greater financial and other resources than the
Company, including larger research and development staffs and more experience
and capabilities in conducting research and development activities, testing
products in clinical trials, obtaining regulatory approvals, and manufacturing,
marketing and distributing products. Other companies are developing proprietary
systems for the diagnosis and treatment of cardiac arrhythmias, including
Biosense, Inc., Cardiac Pathways, Inc. and Endocardial Solutions, Inc. Other
companies develop, market and sell alternative approaches to the treatment of
AF and VT, including Guidant, Medtronic, Inc., and Ventritex Inc., the leading
manufacturers of implantable defibrillators. There can be no assurance that the
Company will succeed in developing and marketing technologies and products that
are more clinically effective and cost-effective than the more established
treatments or the new approaches and products being developed and marketed by
its
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competitors. Furthermore, there can be no assurance that the Company will
succeed in developing new technologies and products that are available prior to
its competitors' products. Failure of the Company to demonstrate the
competitive advantages of its products would have a material adverse effect on
the Company's business, financial condition and results of operations.
In the market for cardiac mapping and ablation devices, the Company believes
that the primary competitive factors are safety, clinical effectiveness, ease
of use and overall cost to the health care system. In addition, the length of
time required for products to be developed and to receive regulatory and, in
some cases, reimbursement approval is an important competitive factor. The
medical device industry is characterized by rapid and significant technological
change. Accordingly, the Company's success will depend in part on its ability
to respond quickly to medical and technological changes through the development
and introduction of new products. Product development involves a high degree of
risk and there can be no assurance that the Company's new product development
efforts will result in any commercially successful products. The Company
believes it competes favorably with respect to these factors, although there is
no assurance that it will be able to continue to do so. See "Risk Factors--
Rapid Technological Change; Significant Competition."
GOVERNMENT REGULATION
The preclinical and clinical testing, manufacturing, labeling, distribution
and promotion of the Company's products are subject to extensive and rigorous
government regulation in the United States and other countries. Noncompliance
with applicable requirements can result in enforcement action by the Food and
Drug Administration ("FDA") or comparable foreign regulatory bodies including,
among other things, fines, injunctions, civil penalties, recall or seizure of
products, refusal to grant premarket clearances or approvals, withdrawal of
marketing approvals and criminal prosecution.
United States
A medical device may be marketed in the United States only with the FDA's
prior authorization. Devices classified by the FDA as posing less risk are
placed either in Class I or II and require the manufacturer to seek 510(k)
clearance from the FDA prior to marketing. Such clearance generally is granted
when submitted information establishes that a proposed device is "substantially
equivalent" in intended use and safety and effectiveness to a Class I or II
device already legally on the market or to a "preamendment" Class III device
(i.e., one that has been in commercial distribution since before May 28, 1976)
for which the FDA has not called for PMA applications. The FDA recently has
been requiring a more rigorous demonstration of substantial equivalence than in
the past, including in some cases requiring clinical trial data. The Company
believes that it usually takes from four to 12 months from the date of
submission to obtain 510(k) clearance, but it may take longer, and there can be
no assurance that 510(k) clearance will ever be obtained. During this process,
the FDA may determine that it needs additional information or that a proposed
device is precluded from receiving clearance because it is not substantially
equivalent to a legally marketed Class I or II device. After a device receives
clearance, any modification that could significantly affect its safety or
effectiveness, or would constitute a major change in the intended use of the
device, will require a new 510(k) submission.
The Company believes that its current mapping products, including the Cardima
Pathfinder, will be Class II devices and will require 510(k) clearance prior to
marketing. To date, the Company has received 510(k) clearance for its Cardima
Pathfinder microcatheter system for mapping VT, Venaport guiding catheter and
certain cabling systems and has submitted a 510(k) premarket notification for
the Cardima Pathfinder AF microcatheter system for mapping. The Company also
intends to seek 510(k) clearance for its Cardima Pathfinder 1.5 Fr. and Tracer
products for mapping uses. These submissions may need to include clinical trial
data, which could lengthen the time necessary to prepare a 510(k) submission
and in which the Company could receive 510(k) clearance. There can be no
assurance that any of these products will receive 510(k) clearance in a timely
fashion, or at all. Delays in market introduction resulting from the 510(k)
clearance process would have a material adverse effect on the Company's
business, financial condition and results of operation.
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A device that does not qualify for 510(k) clearance is placed in Class III,
which is reserved for devices classified by the FDA as posing the greatest risk
(e.g., life-sustaining, life-supporting or implantable devices, or devices that
are not substantially equivalent to a legally marketed Class I or Class II
device). A Class III device generally must receive PMA approval, which requires
the manufacturer to establish the safety and effectiveness of the device to the
FDA's satisfaction. A PMA application must provide extensive preclinical and
clinical trial data and also include information about the device and its
components regarding, among other things, manufacturing, labeling and
promotion. As part of the PMA review, the FDA will inspect the manufacturer's
facilities for compliance with the Quality System Regulation ("QSR"), which
includes elaborate testing, control, documentation and other quality assurance
procedures.
Upon submission, the FDA determines if the PMA application is sufficiently
complete to permit a substantive review, and, if so, the application is
accepted for filing. The FDA then commences an in-depth review of the PMA
application, which the Company believes typically takes one to three years, but
may take longer. The review time is often significantly extended as a result of
the FDA asking for more information or clarification of information already
provided. The FDA also may respond with a "not approvable" determination based
on deficiencies in the application and require additional clinical trials that
are often expensive and time consuming and can delay approval for months or
even years. Recently, the FDA has heightened its scrutiny of clinical trial
data submitted in support of PMA applications. During the review, an FDA
advisory committee, typically a panel of clinicians, likely will be convened to
review the application and recommend to the FDA whether, or upon what
conditions, the device should be approved. Although the FDA is not bound by the
advisory panel decision, the panel's recommendation is important to the FDA's
overall decision making process.
If the FDA's evaluation of the PMA application is favorable, the FDA
typically issues an "approvable letter" requiring the applicant's agreement to
comply with specific conditions (e.g., changes in labeling) or to supply
specific additional data (e.g., longer patient follow up) or information (e.g.,
submission of final labeling) in order to secure final approval of the PMA
application. Once the approvable letter is satisfied, the FDA will issue a PMA
for the approved indications, which can be more limited than those originally
sought by the manufacturer. The PMA can include postapproval conditions that
the FDA believes necessary to ensure the safety and effectiveness of the device
including, among other things, restrictions on labeling, promotion, sale and
distribution. Failure to comply with the conditions of approval can result in
enforcement action, including withdrawal of the approval, which in turn would
have a material adverse effect on the Company. The PMA process can be expensive
and lengthy, and no assurance can be given that any PMA application will ever
be approved for marketing. Even after approval of a PMA, a new PMA or PMA
supplement generally is required for any modification to the device, its
labeling or its manufacturing process.
The Company anticipates that its ablation products, including the Cardima
Pathfinder AF and Tracer VT, will be Class III devices requiring PMA approval.
There can be no assurance that a PMA application will be submitted for any such
products or that, once submitted, the PMA application will be accepted for
filing, found approvable, or, if found approvable, will not take longer than
expected to obtain, or will not include unfavorable restrictions.
A clinical trial in support of a 510(k) submission or PMA application
generally requires an IDE application approved in advance by the FDA for a
specific number of patients. The IDE application must be supported by
appropriate data, such as animal and laboratory testing results. Clinical
trials may begin if the IDE application is approved by the FDA and by the
appropriate institutional review boards at the clinical trial sites. During a
clinical trial, the Company would be permitted to sell products used for the
study for an amount that does not exceed recovery of the costs of manufacture,
research, development and handling. The Company's failure to adhere to
regulatory requirements generally applicable to clinical trials and to the
conditions of an IDE approval could result in a material adverse effect on the
Company, including an inability to obtain marketing clearance or approval for
its products.
In January 1997, the Company submitted an IDE for the Cardima Pathfinder AF
microcatheter system for mapping and ablation of AF and received conditional
approval from the FDA to begin its Phase I feasibility
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study for mapping AF. The Company expects to begin its Phase I clinical trials
for its Cardima Pathfinder AF microcatheter system in the first half of 1997
and to file an additional IDE and begin its clinical trials for its Tracer VT
microcatheter systems in the second half of 1997. These studies are not
expected to supply pivotal evidence of safety and effectiveness; rather, they
are intended to generate data to help finalize the device's design and
determine its potential for further development, if any. Additional clinical
trials will be necessary to support PMA applications by the Company. There can
be no assurance that any clinical study proposed by the Company will be
approved by the FDA, will be completed or, if completed, will provide data and
information that supports PMA approval or additional clinical investigations of
the type necessary to obtain PMA approval.
Any devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals will be subject to pervasive and continuing regulation
by the FDA and certain state agencies. The Company will be subject to
inspection by the FDA and the California Department of Health Services and,
once it commences marketing products, will have to comply with various other
regulatory requirements that usually apply to medical devices marketed in the
United States, including labeling regulations, the QSR, the Medical Device
Reporting ("MDR") regulation (which requires that a manufacturer report to the
FDA certain types of adverse events involving its products), and the FDA's
prohibitions against promoting approved products for unapproved ("off-label")
uses. In addition, Class II devices, such as the Company's mapping products,
can be subject to additional special controls (e.g., performance standards,
postmarket surveillance, patient registries, and FDA guidelines) that do not
apply to Class I devices. The Company's failure to comply with applicable
regulatory requirements could result in enforcement action by the FDA, which
could have a material adverse effect on the Company.
Unanticipated changes in existing regulatory requirements, failure of the
Company to comply with such requirements or adoption of new requirements could
have a material adverse effect on the Company. The Company also is subject to
numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and hazardous substance disposal. There can be no assurance the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will not have a
material adverse effect upon the Company's business, financial condition and
results of operations.
International
In order for the Company to market its products in Europe and certain other
foreign jurisdictions, the Company must obtain required regulatory approvals
and clearances and otherwise comply with extensive regulations regarding safety
and manufacturing processes and quality. These regulations, including the
requirements for approvals or clearance to market and the time required for
regulatory review, vary from country to country. In addition, there may be
foreign regulatory barriers other than premarket approval. There can be no
assurance the Company will obtain regulatory approvals in such countries or
that it will not be required to incur significant costs in obtaining or
maintaining its foreign regulatory approvals. Under certain circumstances, FDA
approval is required for the Company to export its products. Delays in receipt
of approvals to market the Company's products, failure to receive these
approvals or loss of previously received approvals could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The EU has promulgated rules that require medical products to bear the CE
mark by mid-1998. The CE mark is recognized by the EU as a symbol of adherence
to strict quality systems requirements set forth in the ISO 9001 (EN 46001)
quality standards, as well as compliance with 93/42/EEC, the Medical Device
Directive. A CE mark allows the Company to avoid the costly and cumbersome
requirements to obtain approvals in each EU country. In December 1995, the
Company received ISO 9001 (EN 46001) Quality Systems certification for its
manufacturing facilities in Fremont, California. This certification provides
approval for the Company to apply the CE mark to the Tracer and Cardima
Pathfinder mapping products and to the Venaport guiding catheter.
The Company plans to commence clinical trials in the EU, Canada and Japan for
its ablation products. Although the Company intends to seek international
approvals for its ablation products, including certification to enable CE
marking, there can be no assurance the Company will be successful in obtaining
such approvals.
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Failure to receive approval to affix the CE mark would prohibit the Company
from selling these products in member countries of the EU, and would require
significant delays in obtaining individual country approvals. There can be no
assurance that such approvals will ever be obtained. In such event, the Company
would be materially and adversely affected. See "Risk Factors--No Assurance of
Obtaining Required Regulatory Approvals; Government Regulation."
THIRD-PARTY REIMBURSEMENT
In the United States, health care providers, including hospitals and
physicians, that purchase medical products for treatment of their patients,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or a part of the
costs and fees associated with the procedures performed using these products.
The Company's success will be dependent upon, among other things, the ability
of health care providers to obtain satisfactory reimbursement from third-party
payors for medical procedures in which the Company's products are used. Third-
party payors may deny reimbursement if they determine that a prescribed device
has not received appropriate regulatory clearances or approvals, is not used in
accordance with cost-effective treatment methods as determined by the payor, or
is experimental, unnecessary, inappropriate or used for a nonapproved
indication. If FDA clearance or approval is received, third-party reimbursement
would also depend upon decisions by the U.S. Health Care Financing
Administration ("HCFA") for Medicare, as well as by individual health
maintenance organizations, private insurers and other payors. Government
agencies, private insurers and other payors determine whether to provide
coverage for a particular procedure based on its medical necessity for the
patient in question. The Federal Medicare Program, many state Medicaid programs
and other payors reimburse health care providers for medical treatment at a
fixed rate based on, or adapted from the diagnosis-related group ("DRG")
established by the HCFA. The fixed rate of reimbursement is typically based on
the patient's diagnosis and the procedure performed, and unrelated to the
specific type or number of devices used in a procedure. The Company intends to
seek an appropriate Medicare DRG assignment by HCFA for procedures performed
using its devices. As part of this process, during clinical trials the Company
intends to collect economic data regarding resources expended in performing
procedures with the devices. The Company expects to use this data to document
differences in resource use between procedures performed with the Company's
devices and procedures currently categorized under existing DRGs. The Company
intends to meet with HCFA policy staff to request and support development of
appropriate hospital payment policies for the procedures performed using the
Company's devices. In addition, the Company may also collect resource use data
regarding physician services to support establishment of appropriate fee
schedules by third-party payers. The Company believes these efforts may also
support reimbursement among private payors. However, there can be no assurance
that reimbursement for the Company's products will be available in sufficient
amounts if, at all, or that future reimbursement policies of payors will not
adversely affect the Company's ability to sell its products on a profitable
basis
In addition, Medicare traditionally has considered items or services
involving devices that have not been approved or cleared for marketing by FDA
to be precluded from Medicare coverage. However, under a new policy which has
been in effect since November 1, 1995, Medicare coverage will not be precluded
for items and related services involving devices that have been classified by
FDA as "non-experimental/investigational" (Category B) devices and that are
furnished in accordance with the FDA-approved IDE governing clinical trials.
Even with items or services involving Category B devices, however, Medicare
coverage may be denied if any other coverage requirements are not met, for
example if the treatment is not medically needed for the specific patient.
There can be no assurance that the Company's systems will be covered when they
are used in clinical trials and, if covered, whether the payment amounts for
their use will be considered to be adequate by hospitals and physicians. If the
devices are not covered or the payments are considered to be inadequate, the
Company may need to bear additional costs to sponsor such trials, and such
costs could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, there is proposed federal legislation that would change the
traditional Medicare payment system by creating a new visit-based payment
system called ambulatory patient groups ("APG") that establishes fixed
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payments for specific medical procedures that are performed on an outpatient
basis. If the Company's products increase the cost per procedure above the
fixed rate under the APG system, market acceptance of such products could be
impaired.
Reimbursement systems in international markets vary significantly by country
and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems
as well as government managed systems. Market acceptance of the Company's
products will depend on the availability and level of reimbursement in
international markets targeted by the Company. There can be no assurance that
the Company will obtain reimbursement in any country within a particular time,
for a particular time, for a particular amount, or at all.
Regardless of the type of reimbursement system, the Company believes that
physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and other treatments. In addition, the Company believes that a patient's
underlying arrhythmia should typically not recur after treatment with the
Company's procedures. The Company anticipates that hospital administrators and
physicians would justify the use of the Company's products by the attendant
cost savings and clinical benefits that the Company believes would be derived
from the use of its products. However, there can be no assurance this will be
the case. There can be no assurance reimbursement for the Company's products
will be available in the United States or in international markets under either
government or private reimbursement systems, or that physicians will support
and advocate reimbursement for procedures using the Company's products. Failure
by hospitals and other users of the Company's products to obtain reimbursement
from third-party payors, or changes in government and private third-party
payors' policies toward reimbursement for procedures employing the Company's
products, would have a material adverse effect on the Company's business,
financial condition and results of operations.
PRODUCT LIABILITY AND INSURANCE
The development, manufacture and sale of the Company's microcatheter systems
may expose the Company to product liability claims. Although to date no claim
has been asserted against the Company, there can be no assurance that the
Company will not experience losses due to product liability claims in the
future. Although the Company currently has general liability insurance with
coverage in the amount of $1.0 million per occurrence, subject to a $2.0
million annual limitation, and product liability insurance with coverage in the
amount of $5.0 million per occurrence, subject to a $5.0 million annual
limitation, there can be no assurance that such coverage will be available to
the Company in the future on reasonable terms, if at all. In addition, there
can be no assurance that all of the activities encompassed within the Company's
business are or will be covered under the Company's policies. Although the
Cardima Pathfinder and Tracer products are labeled for single use only, the
Company is aware that some physicians are reusing such products. Moreover,
despite labeling of the Company's microcatheters for diagnostic use only, the
Company believes physicians are using such mapping microcatheters for ablation.
Multiple use or "off-label" use of the Company's microcatheters could subject
the Company to increased exposure to product liability claims, which could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company may require additional product liability
coverage if the Company significantly expands commercialization of its
products. Such additional coverage is expensive, difficult to obtain and may
not be available in the future on acceptable terms, if at all. Any claims or
series of claims against the Company, regardless of their merit or eventual
outcome, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Risk of
Product Liability; Adequacy of Insurance Coverage."
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EMPLOYEES
At March 31, 1997, the Company had 74 employees, 16 of whom were engaged
directly in research and new product development, seven in regulatory affairs,
quality assurance and clinical activities, 25 in manufacturing, 14 in sales and
marketing and 12 in finance and administration. The Company maintains
compensation, benefit, equity participation, and work environment policies
intended to assist in attracting and retaining qualified personnel. The Company
believes the success of its business will depend, in significant part, on its
ability to attract and retain such personnel. No employee of the Company is
represented by a collective bargaining agreement, nor has the Company
experienced any work stoppage. The Company considers its relations with its
employees to be good. See "Risk Factors--Dependence on Key Personnel."
FACILITIES
The Company leases approximately 44,000 square feet in Fremont, California.
The Company's facility includes a 4,000 square foot cleanroom, a machine shop
for prototyping and tooling, extrusion and braiding capability, wire grinding
operations, general assembly/test/inspection areas, and a materials area. The
Company is currently subleasing approximately 6,700 square feet of this
facility to Target under a sublease expiring in November 1997. The facility is
leased through November 1999, at which time the Company has the option to
extend the lease for an additional five-year term. The Company believes this
facility will be adequate to meet its requirements for the foreseeable future.
SCIENTIFIC ADVISORY BOARD
The Company has established a Scientific Advisory Board consisting of
medical, clinical and scientific advisors to consult with the Company's
scientists and research staff and to advise the Company on its research and
development program, the design of its products and on other medical and
scientific matters relating to the Company's business. Each member of the
Scientific Advisory Board has entered into an agreement with the Company,
pursuant to which he agrees to provide services to the Company on an as-needed
basis. Members receive a fee for each meeting of the Scientific Advisory Board
attended, except for Dr. Wang who receives no fee, and are compensated for
reasonable out-of-pocket expenses incurred in connection with such attendance.
In addition, members of the Scientific Advisory Board generally receive options
to purchase shares of the Company's Common Stock, subject to vesting and other
customary restrictions. Most members of the Scientific Advisory Board are
employed by institutions other than the Company and may have commitments to, or
consulting or advisory agreements with, other entities that may limit their
availability to the Company. The Company's advisors include the following
individuals:
Tim A. Fischell, M.D., Director of Cardiovascular Research at Heart Institute
at Borgess Medical Center, Kalamazoo, Michigan, Professor of Medicine at
Michigan State University, formerly Research Director, Cardiovascular
Interventions at Vanderbilt University.
Laszlo Littmann, M.D., Medical Director of Cardiology Unit at Carolinas
Medical Center, Charlotte, North Carolina, Director of Experimental
Electrophysiology Research, Laser & Applied Technologies Laboratory at
Carolinas Medical Center.
Jeremy N. Ruskin, M.D., Director, Cardiac Arrhythmia Service and
Electrophysiology Laboratory, Massachusetts General Hospital, Committee Member,
American College of Cardiology, Committee on Electrocardiology and
Electrophysiology.
William G. Stevenson, M.D., Co-Director, Cardiac Arrhythmias Service and
Clinical Electrophysiology Laboratory, Brigham and Women's Hospital.
Ruey J. Sung, M.D., Professor and Director of Cardiac Electrophysiology,
Stanford University School of Medicine, formerly Associate Professor and
Director of Cardiac Electrophysiology, San Francisco General Hospital.
Paul J. Wang, M.D., Attending Physician, Pratt Medical Group/New England
Medical Center, Boston, Massachusetts.
48
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
April 29, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Phillip C. Radlick, 59 President, Chief Executive Officer and Director
Ph.D. .................
Gabriel B. Vegh......... 57 Chief Operating Officer, Executive Vice President and Director
Allan L. Abati, Ph.D. .. 52 Vice President, Regulatory Affairs and Quality Assurance
Omar Amirana, M.D. ..... 32 Vice President, Marketing
Ronald E. Bourquin...... 46 Vice President and Chief Financial Officer
Duane D. Dickens........ 51 Vice President, New Product Development
David A. Smith.......... 43 Vice President, World Wide Sales
Joseph S. Lacob(1)(2)... 41 Chairman of the Board of Directors
Michael J.F. Du Cros 59 Director
(2)....................
Neal Moszkowski......... 31 Director
Charles P. Waite, Jr. 41 Director
(1)....................
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
The executive officers of the Company are elected annually by the Board of
Directors of the Company (the "Board") and serve at the discretion of the
Board.
Dr. Radlick has been the President, Chief Executive Officer and a Director
of Cardima since November 1994. Prior to joining the Company, from November
1992 until October 1994, Dr. Radlick was the President and Chief Executive
Officer of Hepatix, Inc., a start-up medical device company. From November
1986 until November 1992, Dr. Radlick was the President of Edwards
Cardiovascular Surgery Division, a division of Baxter Healthcare responsible
for the development, manufacture and sale of cardiovascular products. Dr.
Radlick received a B.S. in Chemistry and a Ph.D. in Organic Chemistry from
University of California, Los Angeles.
Mr. Vegh, the founder of the Company, has been a Director of Cardima since
November 1992. Mr. Vegh has been the Chief Operating Officer of Cardima since
November 1994, and the Executive Vice President since January 1995. From May
1993 until November 1994, Mr. Vegh was the Company's President, and from May
1993 until July 1996, he served as the Company's Chief Financial Officer.
Prior to joining the Company, from August 1985 until May 1993, Mr. Vegh was
the Vice President, Operations of Target, and from February 1983 until August
1985, Mr. Vegh was General Manager, Pilot Operations of Advanced
Cardiovascular Systems. Mr. Vegh received a B.S. in Mechanical Engineering
from the New Jersey Institute of Technology.
Dr. Abati has been the Vice President, Regulatory Affairs and Quality
Assurance of Cardima since February 1996. Prior to joining the Company, from
February 1992 until February 1996, Dr. Abati was the Vice President,
Regulatory Affairs and Quality Assurance of Johnson & Johnson Professional,
Inc., a manufacturer of neurosurgical and orthopaedic medical devices. From
August 1989 until February 1992, Dr. Abati was the Director, Regulatory and
Clinical Affairs of Shiley Inc., a Pfizer company and manufacturer of
interventional cardiology products. From June 1986 until August 1989, Dr.
Abati was the Manager, Regulatory Affairs and Clinical Programs, and from
November 1982 until June 1986 he was Senior Regulatory and Clinical Affairs
Specialist, of Edwards Critical-Care Division, a division of Baxter Healthcare
responsible for the development, manufacture and sale of critical care and
interventional cardiology products. Dr. Abati received a B.S. in Zoology and
an M.A. in Biology from California State University, Long Beach and a Ph.D. in
Physiology from Rutgers University.
49
<PAGE>
Dr. Amirana has been the Vice President, Marketing of Cardima since
September 1995. From June 1993 until September 1995, Dr. Amirana was the
Company's Director of Marketing, and from March 1993 until June 1993, he
served as a consultant to the Company. Prior to joining the Company, from May
1992 until November 1992, Dr. Amirana was the Program Manager of the Advanced
Development Group of EP Technologies, Inc. ("EPT"), an electrophysiology
catheter manufacturer that was acquired by Boston Scientific in January 1996.
Dr. Amirana received a B.S. in Mechanical Engineering from Tufts University
and an M.D. from Eastern Virginia Medical School.
Mr. Bourquin has been the Vice President and Chief Financial Officer of
Cardima since July 1996. Prior to joining the Company, from July 1993 until
July 1996, Mr. Bourquin was the Corporate Controller of EPT, and from April
1993 until July 1993, he served as a consultant to EPT. From December 1991
until February 1993, Mr. Bourquin was the Controller of the Endoscopy Division
of Stryker Corporation, a medical instrument company. From January 1979 until
December 1991, Mr. Bourquin held various positions of increasing
responsibility at Coherent, Inc., a manufacturer of lasers, ultimately serving
as the Director of Finance of the Medical Group from November 1985 to December
1991. Mr. Bourquin is a Certified Management Accountant and received a B.A. in
Accounting and a M.B.A. in Finance from Golden Gate University.
Mr. Dickens has been the Vice President, New Product Development of Cardima
since May 1993. From March 1992 until June 1993, Mr. Dickens was the President
of Rhythmetrix, Inc., a medical device company. From September 1990 until
March 1992, Mr. Dickens was the Director of Science, Technology and Business
Development of Medtronic Inc., a medical device company. Mr. Dickens received
a B.S. in Mechanical Engineering from University of Nebraska.
Mr. Smith has been the Vice President, World Wide Sales of Cardima since
March 1996. Prior to joining the Company, from January 1994 until December
1995, Mr. Smith was the Director of Marketing of Baxter Healthcare,
International Cardiology Division, a manufacturer and distributor of
interventional cardiology products. From June 1991 until December 1993, Mr.
Smith was the Business Unit Manager, Germany, and from April 1990 until May
1991, he was the National Sales Manager, Endovascular Products, of Baxter
Healthcare, Less Invasive Surgery Division. Mr. Smith has a B.S. in Business
Administration from Michigan State University.
BOARD OF DIRECTORS
In addition to Messrs. Radlick and Vegh, the Board includes:
Mr. Lacob has served as Chairman of the Board of Directors of Cardima since
May 1993. Mr. Lacob has been a general partner of Kleiner Perkins Caufield &
Byers, a venture capital firm, since May 1992, and was a venture partner from
May 1987 until May 1992. Mr. Lacob serves as a director of several public
companies, including: CellPro, Incorporated, a medical systems company
("CellPro"); Heartport, Inc., a developer of systems and procedures for
minimally invasive cardiac surgery; Microcide Pharmaceuticals, Inc., a
developer of antibiotics for treatment of serious bacterial infections; and
Pharmacyclics, Inc., a developer of macrocylic chemistry for treatment of
diseases such as cancer and atherosclerosis, and for diagnostic imaging
procedures. Mr. Lacob received a B.S. in Biochemistry from University of
California, Irvine, a M.P.H. from University of California, Los Angeles and a
M.B.A. from Stanford University Graduate School of Business.
Mr. Du Cros has served as a Director of the Company since March 1997. Mr. Du
Cros has served as a partner of Atlas Venture, a venture capital firm, since
1993, and as a general partner of Aspen Venture Partners, L.P., a limited
partnership formed to carry on the venture capital activities of 3i Ventures
in the United States, since 1991. Mr. Du Cros served as Chief Executive
Officer of Protein Databases, Inc., a life sciences instrumentation company,
from 1984 to 1988. Mr. Du Cros received a B.Sc. in Industrial Chemistry from
the City University of London.
50
<PAGE>
Mr. Moszkowski has served as a Director of the Company since March 1997.
Since 1993, Mr. Moszkowski has been an associate in the Principal Investment
Area of Goldman, Sachs & Co. Prior to joining Goldman, Sachs & Co., Mr.
Moszkowski was enrolled in the Stanford University Graduate School of
Business. Mr. Moszkowski received a B.A. from Amherst College and a M.B.A.
from the Stanford Graduate School of Business.
Mr. Waite has served as a Director of Cardima since February 1996. Mr. Waite
joined Olympic Venture Partners, a venture capital firm, as a general partner
in 1987, having previously been a general partner at Hambrecht & Quist Venture
Partners from 1984 to 1987. Mr. Waite also serves as a director of CellPro and
Verity, Inc., which develops and markets tools for locating information on the
Internet and other databases. He received an A.B. in History from Kenyon
College and a M.B.A. from Harvard University.
In 1976, Dr. Radlick was convicted of a felony, conspiracy to manufacture a
controlled substance and was sentenced, following appeal, to five years
probation and 500 hours of community service. The Company's Board of Directors
has concluded that this incident has no material bearing on Dr. Radlick's
business integrity or his fitness to serve as an officer and director of the
Company.
The Company's Bylaws authorize the Board of Directors to determine the size
of the Company's Board. The Company's Board has authorized between four and
nine members of the Board and has set the exact number at nine. Currently, the
Company's Board consists of six directors and there are three vacancies.
Directors hold office until their terms expire or until their successors have
been elected and qualified. The current directors were elected pursuant to a
voting agreement between the Company and certain stockholders of the Company,
which will terminate upon the completion of the Offering.
There are two standing committees of the Board of Directors, the Audit
Committee and Compensation Committee. The Audit Committee, which consists of
Messrs. Du Cros and Lacob, reviews the Company's annual audit and meets with
the Company's independent auditors to review the Company's internal controls
and financial management practices. The Compensation Committee, which consists
of Messrs. Lacob and Waite, makes recommendations to the Board regarding
compensation for certain of the Company's personnel and, together with the
Board of Directors, administers the Company's stock and option plans.
Directors are reimbursed for reasonable expenses incurred in attending Board
meetings. Nonemployee directors of the Company are eligible to participate in
the Company's 1997 Directors' Stock Option Plan. See " --Stock Option and
Incentive Plans--1997 Directors' Stock Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the Board of Directors or
Compensation Committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past. See "Certain Transactions."
51
<PAGE>
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid to the Company's Chief Executive Officer and each of the
other most highly compensated executive officers who were serving as executive
officers on December 31, 1996 (the "Named Executive Officers") whose aggregate
annual compensation exceeded $100,000 for the year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1996 ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------- -------------------------------------
SECURITIES OTHER
NAME AND PRINCIPAL POSITION(1) SALARY($) BONUS($) UNDERLYING OPTIONS COMPENSATION($)(2)
- ------------------------------ ------------ ----------- ------------------ ------------------
<S> <C> <C> <C> <C>
Phillip C. Radlick,
Ph.D.(3) .............. $ 177,832 $ 25,000 127,559 $29,718
President and Chief
Executive Officer
Gabriel B. Vegh(4)...... 166,561 60,000 127,559
Chief Operating Officer
and Executive Vice
President
Allan L. Abati,
Ph.D.(5)............... 116,383 60,696 111,884
Vice President,
Regulatory Affairs and
Quality Assurance
Omar Amirana, M.D. ..... 110,173 50,286
Vice President,
Marketing
Duane D. Dickens........ 109,292 42,115
Vice President, New
Product Development
</TABLE>
- --------
(1) Ronald Bourquin, the Company's Vice President and Chief Financial Officer,
joined the Company in July 1996 and currently receives an annual base
salary of $110,000, and David Smith, the Company's Vice President, World
Wide Sales, joined the Company in March 1996 and currently receives an
annual base salary of $125,000.
(2) Drs. Radlick and Abati were reimbursed for relocation expenses in the
amount of $29,718 and $111,884, respectively. Mr. Smith was reimbursed in
1996 for relocation expenses in the amount of $62,762.
(3) The Company has entered into an employment agreement with Dr. Radlick
which provides for, among other things, a current annual salary of
$175,000, bonus compensation as may from time to time be awarded by the
Board of Directors and participation in all employee benefit plans
sponsored by the Company. If Dr. Radlick's employment is terminated other
than for "good cause" (as defined in the agreement), Dr. Radlick will
enter into a six month consulting arrangement with the Company, and stock
options held by Dr. Radlick would continue to vest over such six month
period. Under this consulting arrangement, Dr. Radlick would be paid a
consulting fee in an amount equal to the salary in effect at the time of
his resignation, and would be eligible to continue to receive Company
benefits. If Dr. Radlick were to obtain new employment during such period,
the consulting fee payable to Dr. Radlick would be reduced by the amount
of compensation payable to Dr. Radlick under such new arrangement.
(4) The Company has entered into an employment agreement with Mr. Vegh which
provides for, among other things, an annual salary, bonus compensation as
may from time to time be awarded by the Board of Directors and
participation in all employee benefit plans sponsored by the Company. If
Mr. Vegh's employment is terminated other than for "good cause" (as
defined in the agreement), Mr. Vegh will enter into a six month consulting
arrangement with the Company, and stock options held by Mr. Vegh would
continue to vest over such six month period. Under this consulting
arrangement, Mr. Vegh would be paid a consulting fee in an amount equal to
the salary in effect at the time of his resignation, and would be eligible
to continue to receive Company benefits. If Mr. Vegh were to obtain new
employment during such period, the consulting fee payable to Mr. Vegh
would be reduced by the amount of compensation payable to Mr. Vegh under
such new arrangement and the continued vesting of his options would
terminate.
(5) Represents salary amounts paid to Dr. Abati in fiscal 1996 beginning from
February 1996, when he joined the Company.
52
<PAGE>
The following table provides certain summary information concerning options
granted during the fiscal year ended December 31, 1996 to the Named Executive
Officers.
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1) POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS GRANTED STOCK PRICE
SECURITIES TO EMPLOYEES APPRECIATION FOR
UNDERLYING IN FISCAL OPTION TERM ($)(2)
OPTIONS YEAR ENDED EXERCISE PRICE EXPIRATION ---------------------
NAME GRANTED DECEMBER 31, 1996(%) ($ PER SHARE) DATE 5% 10%
---- ---------- -------------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Phillip C. Radlick,
Ph.D................... 127,559 19.0% $1.40 5/30/06 $ 112,310 $ 284,615
Gabriel B. Vegh......... 127,559 19.0 1.40 5/30/06 112,310 284,615
Allan L. Abati, Ph.D.... 52,667 7.8 0.56 3/13/06 18,548 47,005
8,029 1.1 1.40 5/30/06 7,069 17,915
Omar Amirana, M.D....... 50,286 7.5 1.40 5/30/06 44,278 112,200
Duane D. Dickens........ 42,115 6.2 1.40 5/30/06 37,080 93,969
</TABLE>
- --------
(1) Consists of stock options granted pursuant to the Company's 1993 Stock
Option Plan. Options generally become exercisable over a four-year period
subject to continued employment with the Company. The maximum term of each
option granted is ten years from the date of grant. The exercise price is
equal to the fair market value of the Common Stock on the grant date as
determined by the Board of Directors. See "--Stock Option and Incentive
Plans."
(2) The 5% and 10% assumed compounded annual rates of stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future Common Stock
prices.
The following table provides certain summary information concerning the
shares of Common Stock represented by outstanding stock options held by each
of the Named Officers as of December 31, 1996.
FISCAL 1996 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END(1)(2) AT FISCAL YEAR-END($)(2)
------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE(3) UNEXERCISABLE
---- ----------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Phillip C. Radlick,
Ph.D. ................. 194,226 -- $907,062 $--
Gabriel B. Vegh......... 127,559 -- 580,393 --
Allan L. Abati, Ph.D. .. 60,696 -- 320,407 --
Omar Amirana, M.D. ..... 73,144 -- 344,806 --
Duane D. Dickens........ 61,259 -- 292,129 --
</TABLE>
- --------
(1) No stock appreciation rights or options were exercised by the Named
Executive Officers during the fiscal year ended December 31, 1996.
(2) Options generally become exercisable over a four-year period subject to
continued employment with the Company. The maximum term of each option
granted is ten years from the date of grant. The exercise price is equal
to the fair market value of the Common Stock on the grant date as
determined by the Board of Directors. See "--Stock Option and Incentive
Plans."
(3) Based on the deemed fair market value of the option shares at December 31,
1996 ($5.95 per share as determined in good faith by the Board of
Directors), less the option exercise price payable for such shares.
53
<PAGE>
STOCK OPTION AND INCENTIVE PLANS
1993 Stock Plan
The Company's 1993 Stock Option Plan (the "1993 Stock Plan") was adopted by
the Board of Directors in June 1993 and approved by the Company's stockholders
in September 1993. The 1993 Stock Plan was amended in June 1996, subject to
stockholder approval, and in March 1997, subject to the effectiveness of the
Offering. At March 31, 1997, an aggregate of 903,185 shares of Common Stock
were authorized for issuance under the 1993 Stock Plan and 877,570 shares were
issuable on the exercise of outstanding options with 17,276 shares available
for future issuance. In April 1997, the 1993 Stock Plan was amended, subject
to stockholder approval, to increase the number of shares available for
issuance to 1,000,000. The number of authorized shares is subject to automatic
increase, on the first trading day of each of the five years from 1998 to
2002, in an amount equal to three percent of the number of shares of Common
Stock outstanding on December 31 of the immediately preceding calendar year,
up to a maximum of 300,000 shares each year--over the five year period. The
1993 Stock Plan provides for the grant to employees (including officers and
employee directors) of "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), and for
grant to employees, non-employee directors and consultants of nonstatutory
stock options.
The 1993 Stock Plan may be administered by the Board of Directors or the
Compensation Committee of the Board (the "Administrator"). The Administrator
determines the terms of options granted under the 1993 Stock Plan, including
the number of shares subject to the option exercise price, term and
exercisability. However, in no event may any one person participating in the
1993 Stock Plan receive options for more than 500,000 shares in any calendar
year beginning with the 1996 calendar year, subject to adjustment as provided
in the 1993 Stock Plan. The exercise price of all incentive stock options
granted under the 1993 Stock Plan must be at least equal to the fair market
value of the Common Stock on the date of grant. The exercise price of
nonstatutory stock options must be at least 85% of fair market value on the
date of grant. The exercise price of any incentive stock option granted to an
optionee who owns stock representing more than 10% of the voting power of the
Company's outstanding capital stock must equal at least 110% of the fair
market value of the Common Stock on the date of grant. Payment of the exercise
price may be made in cash, stock, promissory notes, or other consideration
determined by the Administrator. The Administrator determines the term of
options. With respect to any participant who owns stock possessing more than
10% of the voting power of the Company's outstanding capital stock, the
maximum term of an incentive stock option must not exceed five years. The term
of all other options may not exceed ten years.
If the Company consolidates or merges with another corporation, then each
option will accelerate so that each option will be fully exercisable for all
of the shares subject to such option immediately prior to the transaction and,
if not exercised or assumed by the successor corporation, each option will
terminate on the effective date of the transaction. In addition, upon the
occurrence of such a transaction, the 1993 Stock Plan provides that all of the
outstanding repurchase rights of the Company with respect to shares of Common
Stock acquired upon exercise of options granted under the 1993 Stock Plan will
terminate. If not terminated earlier, the 1993 Stock Plan will terminate in
2003. The Administrator has the authority to amend or terminate the 1993 Stock
Plan as long as such action does not adversely affect any outstanding option
and as long as stockholder approval is obtained, if required under applicable
law.
1997 Directors' Stock Option Plan
The 1997 Directors' Stock Option Plan (the "Directors' Plan") was adopted by
the Board of Directors in March 1997, subject to stockholder approval. A total
of 200,000 shares of Common Stock has been reserved for issuance under the
Directors' Plan. The Directors' Plan provides for the grant of nonstatutory
stock options to nonemployee directors of the Company. The Directors' Plan is
designed to operate automatically, without administration; however, to the
extent administration is necessary, the administrator will be the Board of
Directors. Any conflicts of interest will be addressed by abstention of the
interested director from both deliberations and voting regarding matters in
which he has a personal interest.
The Directors' Plan provides that each person who first becomes a
nonemployee director of the Company after the Offering will be granted a
nonstatutory stock option to purchase 20,000 shares of Common Stock (the
54
<PAGE>
"First Option") on the date on which the optionee first becomes a nonemployee
director of the Company. Thereafter, on the date of each subsequent annual
meeting of the Company's stockholders during the period in which a nonemployee
director is serving on the Board, each nonemployee director will be granted an
additional option to purchase 2,000 shares of Common Stock (a "Subsequent
Option") if, on such date, he has served on the Board for at least three
months.
The Directors' Plan sets neither a maximum nor a minimum number of shares
for which options may be granted to any one nonemployee director, but does
specify the number of shares that may be included in any grant and the method
of making a grant. No option granted under the Directors' Plan is transferable
by the optionee other than by will or the laws of descent or distribution or
pursuant to a qualified domestic relations order, and each option is
exercisable, during the lifetime of the optionee, only by such optionee or a
transferee permitted under the Directors' Plan. The Directors' Plan provides
that the First Option will become exercisable in installments as to 25% of the
total number of shares subject to the First Option on each of the first,
second, third and fourth anniversaries of its date of grant, and each
Subsequent Option will become exercisable in full on the first anniversary of
its date of grant. If a nonemployee director ceases to serve as a director, he
may, but only within 90 days after the date he ceases to be a director of the
Company, exercise options granted under the Directors' Plan to the extent that
he was entitled to exercise such options at the date of such termination. To
the extent he was not entitled to exercise any such option at the date of such
termination, or if he does not exercise such option (which he was entitled to
exercise) within such 90-day period, the option will terminate. In the event a
nonemployee director is unable to continue to serve as a director as a result
of his or her total and permanent disability, he or she may exercise his or
her option within six months from the date of such termination, but only to
the extent such option is exercisable. In the event of a director's death
while serving as a director or within three months of termination of such
service, options may be exercised at any time within six months following the
date of death, but only to the extent the right to exercise had accrued at the
time of death, unless the director died while serving on the Board, in which
case the option is exercisable to the extent of the right to exercise that
would have accrued had the director continued living and remained a director
without interruption for 12 months after the date of death. The exercise price
of all stock options granted under the Directors' Plan will be equal to the
fair market value of a share of the Common Stock on the date of grant of the
option. Options granted under the Directors' Plan have a term of ten years.
In the event of a merger of the Company with another corporation or a sale
of all or substantially all of the Company's assets, the Company will give to
each nonemployee director either (i) a reasonable time within which to
exercise the option, including any part of the option that would not otherwise
be exercisable, prior to the effectiveness of any such transaction at the end
of which time the option will terminate, or (ii) the right to exercise the
option, including any part of the option that would not otherwise be
exercisable (or grant a substitute option with comparable terms) as to an
equivalent number of shares of stock of the corporation succeeding the Company
or acquiring its business by reason of any such transaction. The Board of
Directors may amend or terminate the Directors' Plan; provided, however, that
no such action may adversely affect any outstanding option. If not terminated
earlier, the Directors' Plan will have a term of ten years.
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in March 1997, subject to stockholder
approval. A total of 250,000 shares of Common Stock has been reserved for
issuance under the Purchase Plan.
The Purchase Plan, which is intended to qualify under Section 423 of the
Code, will be implemented by a series of offering periods of 12 months
duration with new offering periods (other than the first offering period)
commencing on or about February 1 and August 1 of each year. Each offering
period will consist of two consecutive purchase periods of six months
duration, with the last day of each purchase period being designated a
purchase date. The first such offering period is expected to commence on the
date of this Offering and continue through July 31, 1998, with the first
purchase date occurring on January 31, 1998. The Purchase Plan will be
administered by the Board of Directors or by a committee appointed by the
Board. Employees (including officers
55
<PAGE>
and employee directors) of the Company, or of any majority-owned subsidiary
designated by the Board, are eligible to participate in the Purchase Plan if
they are employed by the Company or any such subsidiary for at least 20 hours
per week and more than five months per year. The Purchase Plan permits
eligible employees to purchase Common Stock through payroll deductions, which
may not exceed 10% of an employee's compensation (excluding payments for
overtime, shift premium, incentive compensation, bonuses, commissions and
other cash compensation), at a price equal to the lower of 85% of the fair
market value of the Common Stock at the beginning of the offering period or
the purchase date. If the fair market value of the Common Stock on a purchase
date is less than the fair market value at the beginning of the offering
period, a new 12-month offering period will automatically begin on the first
business day following the purchase date with a new fair market value.
Employees may end their participation in an offering period at any time within
ten days of the end of a purchase period during such offering period, and
participation ends automatically on termination of employment with the
Company.
The Purchase Plan provides that in the event of a consolidation or merger of
the Company with another corporation or a sale of substantially all of the
Company's assets, each right to purchase stock under the Purchase Plan will be
assumed or an equivalent right substituted by the successor corporation,
unless the Board of Directors shortens the offering period so that employees'
rights to purchase stock under the Purchase Plan are exercised prior to the
merger or sale of assets. The Board of Directors has the power to amend or
terminate the Purchase Plan as long as such action does not adversely affect
any outstanding rights to purchase stock thereunder and provided that
stockholder approval is obtained, as required under applicable law. If not
terminated earlier, the Purchase Plan will have a term of 20 years.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for (i)
any breach of their duty of loyalty to the Company or its stockholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) unlawful payments of dividends or unlawful
stock repurchases or redemptions, or (iv) any transaction from which the
director derived an improper personal benefit.
The Company's Certificate of Incorporation and Bylaws provide that the
Company will indemnify its directors and officers against any damages arising
from their actions as an agent of the Company to the fullest extent permitted
by Delaware law. The Bylaws further provide that the Company may similarly
indemnify its other employees and agents. In addition, each director has
entered into an indemnification agreement with the Company which may require
the Company, among other things, to indemnify its directors against certain
liabilities that may arise by reason of their status or service as directors
(other than liabilities arising from willful misconduct of a culpable nature),
to advance their expenses incurred as a result of any proceeding against them
as to which they could be indemnified, and to obtain directors' and officers'
insurance, if available on reasonable terms.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company in respect of which
indemnification would be required or permitted. The Company is not aware of
any threatened litigation or proceeding which might result in a claim for such
indemnification.
56
<PAGE>
CERTAIN TRANSACTIONS
In June 1994 and July 1994, the Company sold an aggregate of 85,713 shares
of Series C Preferred Stock at $10.50 per share. Additionally, during the
period from September through November 1994, the Company issued convertible
promissory notes in the aggregate principal amount of $999,667 and warrants to
purchase an aggregate number of shares of Series A Preferred Stock to be
determined based upon a formula relating to the monthly principal amount
outstanding under the convertible promissory notes at an exercise price of
$7.00 per share. In December 1994, the convertible promissory notes, together
with the accrued interest, were cancelled and converted into an aggregate of
96,394 shares of Series C Preferred Stock and the warrants were cancelled and
reissued for an aggregate of 18,410 shares of Series A Preferred Stock at an
exercise price of $7.00 per share. At that time, an additional 165,863 shares
of Series C Preferred Stock were issued for $10.50 per share. From March 1995
through August 1995, the Company also issued an additional 85,666 shares of
Series C Preferred Stock at $10.50 per share.
During the period from April through December 1995, the Company issued
promissory notes in the aggregate principal amount of $2,263,000 and warrants
to purchase an aggregate number of shares of Common Stock to be determined
based upon a formula relating to the monthly principal dollar amount
outstanding under these notes at an exercise price of $1.05 per share. In
December 1995, the notes, together with the accrued interest, were cancelled
and converted into an aggregate of 423,402 shares of Series D Preferred Stock
at $5.11 per share and the warrants were cancelled and reissued for an
aggregate of 456,523 shares of Common Stock at an exercise price of $1.05 per
share, including a warrant reissued to Gabriel B. Vegh, an executive officer
and director of the Company, exercisable for 37,301 shares of Common Stock. At
that time, an additional 792,516 shares of Series D Preferred Stock were
issued and sold to certain investors at $5.11 per share, including 1,957
shares of Series D Preferred Stock to Omar Amirana, an executive officer of
the Company and 19,569 shares of Series D Preferred Stock to Gabriel B. Vegh.
In October 1996, the Company entered into a $2.5 million note purchase
agreement with certain of its existing investors, including Gabriel B. Vegh.
During the period from November 1996 to January 1997, the Company borrowed
$2.5 million under this note purchase agreement at an annual interest rate
equal to the applicable Internal Revenue Service imputed rate in effect at the
time of the borrowing. In March 1997, the holders of these notes converted the
principal amount of these notes, together with accrued interest, into 440,963
shares of Series E Preferred Stock.
In February 1997, the Company entered into a note purchase agreement with
certain investors and borrowed $750,000 under this note purchase agreement at
an annual interest rate of 5.66%. In March 1997, the holders of these notes
converted the principal amount of these notes, together with accrued interest,
into 130,955 shares of Series E Preferred Stock. At such time, an additional
1,784,823 shares of Series E Preferred Stock were issued and sold to certain
investors at $5.74 per share.
57
<PAGE>
The purchasers of the Company's Preferred Stock included, among others, the
following five percent stockholders and associated entities:
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK PURCHASED OR ACQUIRED
-------------------------------------------------------
NAME SERIES A SERIES B SERIES C SERIES D SERIES E
- ---- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Kleiner Perkins Caufield
& Byers VI............. 285,714 -- 143,455 300,164 147,126
New Enterprise
Associates V, L.P. and
Catalyst Ventures
Limited Partnership.... 119,285 -- 82,087 85,941 47,060
Target Therapeutics,
Inc.................... -- 333,333 47,824 254,403 91,884
Atlas Venture Fund II,
L.P. and Atlas Venture
Europe Fund B.V........ -- -- -- 489,236 65,137
Olympic Venture Partners
III, L.P. and OVP III
Entrepreneur's Fund.... -- -- -- 391,389 52,111
GS Capital Partners II,
L.P. and affiliated
entities............... -- -- -- -- 1,132,050
Chase Venture Capital
Associates, L.P........ -- -- -- -- 505,069
</TABLE>
In addition, Kleiner Perkins Caufield & Byers VI was granted warrants to
purchase 9,245 shares of Series A Preferred Stock and warrants to purchase
308,512 shares of Common Stock, New Enterprise Associates V, L.P. was granted
a warrant to purchase 4,362 shares of Series A Preferred Stock and warrants to
purchase 79,340 shares of Common Stock and Catalyst Ventures Limited
Partnership was granted a warrant to purchase 857 shares of Series A Preferred
Stock and warrants to purchase 15,685 shares of Common Stock.
During the years 1994, 1995 and 1996 Target administered the Company's
employee benefit plans, and Cardima reimbursed Target for administrative
expenses incurred by Target on the Company's behalf. The Company has
terminated this administrative arrangement and currently administers its
employee benefit plans. During 1994, the Company occupied a portion of
Target's facilities and paid Target $1,000 per month for each Cardima employee
using the facility. In April 1994, the Company ended this facility sharing
arrangement, when it entered into a lease relating to its current facility. In
1994, 1995 and 1996, expenses incurred by the Company under these arrangements
totaled approximately $532,000, $183,000 and $194,000, respectively. All
amounts have been paid to Target under these arrangements. In December 1994,
Target agreed to sublet certain facilities from the Company for approximately
$3,000 per month. In November 1996, the Company subleased certain facilities
to Target for approximately $4,500 per month.
All future transactions, including any loans from the Company to its
officers, directors, principal stockholders or affiliates, will be approved by
a majority of the Board of Directors, including a majority of the independent
and disinterested members of the Board of Directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
58
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of March 31, 1997, and as adjusted to reflect
the sale of shares offered by this Prospectus (i) by each person who is known
by the Company to beneficially own five percent or more of the Common Stock,
(ii) by each of the Company's directors and Named Executive Officers and (iii)
by all executive officers and directors as a group. Unless otherwise indicated
below, to the knowledge of the Company, all persons listed below 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.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED
SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED(1) OFFERING OFFERING
---------------- ------------ ---------- ----------
<S> <C> <C> <C>
Kleiner Perkins Caufield & Byers 1,252,056 20.5% 14.9%
VI(2)..............................
2750 Sand Hill Road
Menlo Park, CA 94025
The Goldman Sachs Group, L.P.(3).... 1,132,050 19.5 14.0%
85 Broad Street
New York, NY 10004
Target Therapeutics, Inc.(4)........ 786,381 13.5 9.7%
47201 Lakeview Blvd.
Fremont, CA 94537
Atlas Venture(5).................... 554,373 9.6 6.9%
222 Berkeley Street
Boston, MA 02116
Chase Venture Capital Associates, 505,069 8.7 6.3%
L.P. ..............................
380 Madison Avenue, 12th Floor
New York, NY 10017
New Enterprise Associates V, 469,800 8.0 5.7%
L.P.(6)............................
1119 St. Paul Street
Baltimore, MD 21202
Olympic Venture Partners III, 443,500 7.6 5.5%
L.P.(7)............................
2420 Carillon Point
Kirkland, WA 98033
Phillip C. Radlick, Ph.D.(8)........ 194,226 3.2 2.3%
Gabriel B. Vegh(9).................. 253,700 4.3 3.1%
Michael J.F. Du Cros (10)........... 554,373 9.6 6.9%
Joseph S. Lacob(2).................. 1,252,056 20.5 14.9%
Neal Moszkowski(3).................. 1,132,050 19.5 14.0%
Charles P. Waite, Jr.(7)............ 443,500 7.6 5.5%
Allan L. Abati, Ph.D.(11)........... 60,696 1.0 *
Omar Amirana, M.D.(12).............. 75,101 1.3 *
Duane D. Dickens(13)................ 61,259 1.0 *
All executive officers and directors 3,564,846 52.7 39.4%
as a group (11 persons)(14)........
</TABLE>
- --------
* Less than one percent.
59
<PAGE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In determining the number of shares
beneficially owned by a person, options or warrants to purchase Common
Stock held by that person that are currently exercisable, or become
exercisable within 60 days following March 31, 1997, are deemed
outstanding; however, such shares are not deemed outstanding for purposes
of computing the percentage ownership of any other person.
(2) Includes 317,321 shares issuable upon the exercise of outstanding
warrants exercisable within 60 days of March 31, 1997. Joseph S. Lacob,
the Chairman of the Board of Directors, is a general partner of KPCB VI
Associates, the general partner of Kleiner Perkins Caufield & Byers VI,
and, as such, may be deemed to share voting and investment power with
respect to such shares. Mr. Lacob disclaims beneficial ownership of such
shares, except to the extent of his pecuniary interest in such shares.
(3) Represents 1,132,050 shares owned by certain investment partnerships, of
which affiliates of The Goldman Sachs Group, L.P. ("GS Group") are the
general partner, managing general partner or investment manager. Includes
710,248 shares held of record by GS Capital Partners II, L.P. and 421,802
shares held by other investment partnerships. GS Group disclaims
beneficial ownership of the shares owned by such investment partnerships
to the extent attributable to partnership interests therein held by
persons other than GS Group and its affiliates. Each of such investment
partnerships shares voting and investment power with certain of its
respective affiliates. Mr. Moszkowski disclaims beneficial ownership of
such shares, except to the extent of his pecuniary interest in such
shares.
(4) Includes 13,370 shares issuable upon the exercise of outstanding warrants
exercisable within 60 days of March 31, 1997. In April 1997, Boston
Scientific completed the acquisition of Target, by merging Target with a
wholly-owned subsidiary.
(5) Includes 304,907 shares held by Atlas Venture Fund II, L.P. and 249,466
shares held by Atlas Venture Europe Fund B.V. The shares of each of these
funds may be deemed to be beneficially owned by each other fund, because
the parent entity of Atlas Venture Europe Fund B.V., Atlas Investerings
Group N.V., holds an approximate 80% interest in Atlas Venture Fund II,
L.P. Mr. Du Cros, a director of the Company, is a limited partner of
Atlas Venture Associates II, L.P., the general partner of Atlas Venture
Fund II, L.P. Mr. Du Cros disclaims beneficial ownership of such shares,
except to the extent of his pecuniary interests in such shares.
(6) Includes 400,494 shares held by New Enterprise Associates V, L.P. ("NEA
V") and 83,497 shares held by NEA V issuable upon the exercise of
outstanding warrants exercisable within 60 days of March 31, 1997. Also
includes 52,804 shares held by Catalyst Ventures Limited Partnership
("Catalyst") and 16,502 shares held by Catalyst issuable upon the
exercise of outstanding warrants exercisable within 60 days of March 31,
1997. Some of the general partners of NEA Partners V, Limited
Partnership, the general partner of NEA V, are also the general partners
of NEA Partners IV, Limited Partnership, the general partner of New
Enterprise Associates IV, Limited Partnership, which is a general partner
of Catalyst, and as such, may be deemed to share voting and investment
power with respect to such shares. Beneficial ownership of such shares is
disclaimed except to the extent of the respective pecuniary interests in
such shares.
(7) Includes 421,326 shares held by Olympic Venture Partners III, L. P. and
22,174 shares held by OVP III Entrepreneurs Fund. Mr. Waite, a director
of the Company, is a general partner OVMC III, L.P., the general partner
of Olympic Venture Partners III, L.P. and OVP III Entrepreneurs Fund,
and, as such, may be deemed to share voting and investment power with
respect to such shares. Mr. Waite disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest in such shares.
(8) Represents 194,226 shares issuable upon exercise of outstanding options
exercisable within 60 days of March 31, 1997, at which date 107,997
shares were fully vested.
(9) Includes 127,559 shares issuable upon exercise of an outstanding option
exercisable within 60 days of March 31, 1997, at which date 66,331 shares
were fully vested, and 37,301 shares issuable upon the exercise of an
outstanding warrant exercisable within 60 days of March 31, 1997.
60
<PAGE>
(10) Excludes 554,373 shares held by entities affiliated with Atlas Venture.
Mr. Du Cros, a director of the Company, is a limited partner of Atlas
Venture Associates II, L.P., the general partner of Atlas Venture Fund
II, L.P. Mr. Du Cros disclaims beneficial ownership of such shares,
except to the extent of his pecuniary interests in such shares.
(11) Represents 60,696 shares issuable upon exercise of outstanding options
exercisable within 60 days of March 31, 1997, at which date 18,968 shares
were fully vested.
(12) Includes 73,144 shares issuable upon exercise of outstanding options
exercisable within 60 days of March 31, 1997, at which date 42,102 shares
were fully vested.
(13) Represents 61,259 shares issuable upon exercise of outstanding options
exercisable within 60 days of March 31, 1997, at which date 40,360 shares
were fully vested.
(14) Includes shares referred to in footnotes 2, 3, 5, 7, 8, 9, 11, 12 and 13.
Also includes 43,701 and 48,557 shares issuable upon exercise of
outstanding options held directly by Ronald E. Bourquin and David A.
Smith, respectively, executive officers of the Company, exercisable
within 60 days of March 31, 1997, at which date 9,104 and 14,162 shares,
respectively, were fully vested.
61
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this Offering, after giving effect to the amendment of
the Company's Certificate of Incorporation to delete references to the Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series
D Preferred Stock and Series E Preferred Stock and to increase the authorized
number of shares of Common Stock, the authorized capital stock of the Company
will consist of 25,000,000 shares of Common Stock, par value $0.001 per share,
and 5,000,000 shares of Preferred Stock, par value $0.001 per share.
COMMON STOCK
As of March 31, 1997, there were 5,801,541 shares of Common Stock
outstanding (as adjusted to reflect the conversion of all outstanding shares
of Preferred Stock into an aggregate of 5,726,542 shares of Common Stock) held
of record by approximately 52 stockholders. After giving effect to this
Offering, there will be 8,076,541 shares of Common Stock outstanding (assuming
no exercise of the Underwriters' over-allotment option). The holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the stockholders. Subject to preferential rights with
respect to any outstanding Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and satisfaction of preferential rights of any outstanding
Preferred Stock. The Common Stock has no preemptive or conversion rights or
other subscription rights, and there are no redemption or sinking fund
provisions available to the Common Stock. The outstanding shares of Common
Stock are, and the shares of Common Stock to be issued upon completion of this
Offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon completion of this Offering, the Board of Directors will be authorized
to issue 5,000,000 shares of Preferred Stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of
shares constituting any such series, without further vote or action by the
stockholders. The issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change in control of the Company without further
action by the stockholders. The issuance of Preferred Stock with voting and
conversion rights may adversely affect the voting power of the holders of
Common Stock, including the loss of voting control to others. At present, the
Company has no plans to designate or issue any shares of Preferred Stock.
WARRANTS AND OTHER RIGHTS
As of March 31, 1997, there were outstanding warrants to purchase 456,523
shares of Common Stock at an exercise price of $1.05 per share, 25,918 shares
of Common Stock at an exercise price of $5.11 per share and 31,303 shares of
Common Stock at an exercise price of $7.00 per share. In April 1997, the
Company issued a warrant to acquire 13,937 shares of Common Stock at an
exercise price of $5.74 per share to Comdisco, Inc. in connection with an
equipment financing agreement.
REGISTRATION RIGHTS
The holders of 5,793,208 shares of Common Stock and the holders of warrants
to acquire 489,968 additional shares of Common Stock (the "Registrable
Securities") or their transferees are entitled to certain rights with respect
to the registration of such shares under the Securities Act, under the terms
of an agreement between the Company and the holders of Registrable Securities
(the "Rights Agreement"). The holders of at least 25% of the Registrable
Securities may require, on three occasions at any time after six months
following the effective date of this Offering, that the Company use its best
efforts to register the Registrable Securities for public resale. The Company
may delay such registration by up to 120 days for business reasons (but not
more than once in any 12-month period). If the Company registers the sale of
any of its Common Stock either for its own account
62
<PAGE>
or for the account of other security holders, the holders of Registrable
Securities are entitled to include their shares of Common Stock in the
registration, subject to certain conditions and limitations, including lock-up
agreements restricting the sale of such shares for 180 days after the
effective date of the registration statement filed in connection with this
offering and the right of the underwriters to limit the number of shares
included in such registration. Holders of the Registrable Securities may also
require the Company, on no more than two occasions over any 12-month period,
to register the resale of all or a portion of their Registrable Securities on
Form S-3 when use of such form becomes available to the Company; provided,
among other limitations, that the proposed aggregate selling price is at least
$1.0 million. The right of holders of Registrable Securities to have the
resale of such shares registered on Form S-3 is subject to the right of any
underwriter of the offering to limit the number of shares included in such
registration. The Company may delay such registration on Form S-3 by up to 60
days for business reasons (but not more than once in any 12-month period). All
fees, costs and expenses of registrations effected pursuant to the Rights
Agreement must be borne by the Company, and all selling expenses (including
underwriting discounts and selling commissions) relating to Registrable
Securities must be borne by the holders of the securities being registered.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
Certain provisions of law, and the Company's Certificate of Incorporation
and Bylaws, as they will be amended effective upon the completion of this
Offering, could make more difficult the acquisition of the Company by means of
a tender offer, proxy contest or otherwise and the removal of incumbent
officers and directors. These provisions include the authority of the Board of
Directors to designate and issue up to 5,000,000 shares of Preferred Stock.
The issuance of Preferred Stock, while providing desirable flexibility in
connection with potential future financings, acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of the outstanding voting stock of the Company, thereby
delaying, deferring, or preventing a change in control of the Company.
Furthermore, such Preferred Stock may have other rights, including economic
rights, senior to the Common Stock, and, as a result, the issuance of such
Preferred Stock could have a material adverse effect on the market value of
the Common Stock and may result in significant additional dilution to
purchasers in this Offering. The Company has no present plan to issue shares
of Preferred Stock. In addition, upon completion of this Offering, certain
provisions of the Company's charter documents, including a provision
eliminating the ability of stockholders to take actions by written consent,
may have the effect of delaying or preventing changes in control or management
of the Company, which could have an adverse effect on the market price of the
Common Stock.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporate Law. In general, the statute prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date that the
person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale or other
transaction resulting in a financial benefit to the stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's outstanding voting stock. This provision may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer
Corporation. Its telephone number is (818) 502-1404.
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering and based on the shares outstanding as of
March 31, 1997, there will be 8,076,541 shares of Common Stock outstanding. Of
these shares, the 2,275,000 shares sold in this Offering (assuming no exercise
of the underwriters' over-allotment option) will be freely tradeable without
restriction or further registration unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act. The
remaining 5,801,541 shares will be "restricted securities" as that term is
defined under Rule 144 (the "Restricted Shares"). Sales of Restricted Shares
in the public market, or the availability of such shares for sale, could
adversely affect the market price of the Common Stock.
Of the Restricted Shares, an aggregate of 3,953,712 shares of Common Stock
(including 508,912 shares issuable upon exercise of vested stock options) will
be eligible for sale in the public market subject to Rule 144 and Rule 701
under the Securities Act after expiration of a contractual lock-up beginning
180 days after the date of the Prospectus, unless earlier released, in whole
or in part, by Bear, Stearns & Co. Inc. In addition, an aggregate of 2,356,741
shares of Common Stock will become eligible for resale in the public market
upon expiration of a one-year holding period, subject to certain volume and
resale restrictions set forth in Rule 144, in the first quarter of 1998.
On April 29, 1997 an amendment to Rule 144 will become effective that
reduces the holding period requirements of Rule 144 to permit the resale of
limited amounts of restricted securities after a one-year, rather than a two-
year, holding period. Such amendment also permits unlimited resales of
restricted securities held by non-affiliates of an issuer after a holding
period of two years, rather than three years. In general, under the revised
Rule 144, beginning 90 days after the date of this Prospectus, a person (or
persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least one year, including persons who may be deemed to be
"affiliates" of the Company, would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of: (i) one percent
of the number of shares of Common Stock then outstanding (which will equal
approximately 80,765 shares immediately after this Offering); or (ii) the
average weekly trading volume of the Common Stock as reported through the
Nasdaq National Market during the four calendar weeks preceding the filing of
a Form 144 with respect to such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned
the Restricted Shares proposed to be sold for at least two years (including
the holding period of any prior owner except an affiliate), is entitled to
sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701 permits resales of shares issued pursuant to certain compensatory
benefit plans and contracts and prior to the date the issuer becomes subject
to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), subject to certain limitations on the aggregate
offering price of a transaction and certain other conditions, commencing 90
days after the issuer becomes subject to the reporting requirements of the
Exchange Act, in reliance upon Rule 144, but without compliance with certain
restrictions, including the holding period requirements, contained in Rule
144. In addition, the Securities and Exchange Commission has indicated that
Rule 701 will apply to typical stock options granted by an issuer before it
becomes subject to the reporting requirements of the Exchange Act, along with
the shares acquired upon exercise of such options (including exercises after
the date of this Prospectus). Securities issued in reliance on Rule 701 are
restricted securities and, subject to the contractual restrictions described
above, beginning 90 days after the date of this Prospectus, may be sold by
persons other than affiliates subject only to the manner of sale provisions of
Rule 144 and by affiliates under Rule 144 without compliance with its one-year
minimum holding period requirements.
The Company has agreed that it will not issue, sell or grant options to
purchase or otherwise dispose of any shares of its Common Stock or securities
convertible into or exchangeable for its Common Stock, except with respect to
options or other rights outstanding on the date of this Prospectus or pursuant
to the Company's stock plans, for a period of 180 days after the Effective
Date without the prior written consent of Bear, Stearns & Co. Inc.
64
<PAGE>
The Company intends to register on a Form S-8 registration statement under
the Securities Act, during the 180-day lockup period, the resale of 1,000,000
shares of Common Stock issuable upon exercise of outstanding options or
reserved for issuance under the 1993 Stock Plan, 200,000 shares of Common
Stock reserved for issuance under the 1997 Directors' Stock Option Plan and
250,000 shares reserved for issuance under the 1997 Employee Stock Purchase
Plan. Such registration will permit the resale of shares so registered by non-
affiliates in the public market without restriction under the Securities Act.
Prior to this Offering, there has been no public market for the Common
Stock, and any sale of substantial amounts of Common Stock in the open market
may adversely affect the market price of the Common Stock offered hereby. In
addition, after this Offering, the holders of 5,793,208 shares of Common Stock
and the holders of warrants to acquire 489,968 additional shares of Common
Stock are entitled to certain rights with respect to registration of such
shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by
affiliates of the Company) immediately upon the effectiveness of such
registration. See "Description of Capital Stock--Registration Rights." If such
holders, by exercising their demand registration rights, cause a large number
of securities to be registered and sold in the public market, such sales could
have an adverse effect on the market price for the Common Stock. If the
Company were to include in a Company-initiated registration, any Registrable
Securities pursuant to the exercise of piggyback registration rights, such
sales may have an adverse effect on the Company's ability to raise needed
capital.
65
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company, Bear, Stearns & Co. Inc. and Dain Bosworth Incorporated as the
Representatives of the Underwriters, each of the Underwriters named below has
severally agreed to purchase from the Company, and the Company has agreed to
sell to the Underwriters, the respective number of shares of Common Stock set
forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Bear, Stearns & Co. Inc..................................
Dain Bosworth Incorporated...............................
---------
Total.................................................. 2,275,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to approval of
certain legal matters by counsel and to certain other conditions precedent. If
any of the shares of Common Stock are purchased by the Underwriters pursuant
to the Underwriting Agreement, all such shares of Common Stock (other than
shares of Common Stock covered by the over-allotment option described below)
must be so purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus, and at such price less a concession not in excess of per share
of Common Stock to certain others dealers who are members of the National
Association of Securities Dealers, Inc. The Underwriters may allow, and such
dealers may reallow, concessions not in excess of per share to certain
other dealers. After the public offering, the offering price and other selling
terms may be changed by the Underwriters. The Company's Common Stock will be
quoted on the Nasdaq National Market.
The Underwriters have been granted a 30-day over-allotment option to
purchase up to 341,250 additional shares of Common Stock of the Company
exercisable at the public offering price less the underwriting discount. If
the Underwriters exercise such over-allotment option, then each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof as the number of shares of
Common Stock to be purchased by it as shown in the above table bears to the
2,275,000 shares of Common Stock offered hereby. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
the shares of Common Stock offered hereby.
The officers and directors of the Company and certain holders of the Common
Stock have agreed not to offer, sell, transfer, assign or otherwise dispose of
any of the Common Stock owned by them prior to the expiration of 180 days from
the Effective Date without the prior written consent of Bear, Stearns & Co.
Inc. After such 180-day period, such persons will be entitled to sell,
distribute or otherwise dispose of the Common Stock that they hold subject to
the provisions of applicable securities laws.
66
<PAGE>
The Company has agreed that it will not issue, sell or grant options to
purchase or otherwise dispose of any shares of its Common Stock or securities
convertible into or exchangeable for its Common Stock, except with respect to
options or other rights outstanding on the date of this Prospectus or pursuant
to the Company's stock plans, for a period of 180 days after the Effective
Date without the prior written consent of Bear, Stearns & Co. Inc.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and controlling persons, if any, against certain civil
liabilities, including liabilities under the Securities Act, or will
contribute to payments that the Underwriters or any such controlling persons
may be required to make in respect thereof.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales in excess of five percent of the
number of shares of Common Stock offered hereby to accounts over which they
exercise discretionary authority.
Prior to this Offering, there was no public market for the Common Stock.
Consequently, the initial public offering price was determined by negotiations
among the Company and the Representatives. Among the factors considered in
such negotiations were the history of, and the prospects for, the Company and
the industry in which it competes, an assessment of the Company's management,
its past and present operations, its past and present earnings and the trend
of such earnings, the prospects for future earnings of the Company, the
present state of the Company's development, the general condition of the
economy and the securities markets at the time of this Offering, the market
conditions for new offerings of securities and the recent market prices and
price/earnings multiples of publicly traded common stocks of comparable
companies.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Venture Law Group, A Professional Corporation, Menlo Park,
California. As of the date of this Prospectus, a director and an employee of
Venture Law Group and an investment partnership of which certain employees of
Venture Law Group are general partners beneficially own an aggregate of 5,311
shares of Common Stock and options to purchase 11,430 shares of Common Stock.
Certain legal matters in connection with this Offering will be passed upon for
the Underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP, Menlo Park, California.
EXPERTS
The financial statements of the Company included in this Prospectus and
elsewhere in the Registration Statement as of December 31, 1995 and 1996, for
each of the three years in the period ended December 31, 1996 and for the
period from inception (November 12, 1992) to December 31, 1996 have been
audited by Ernst & Young LLP, independent auditors (period from inception to
December 31, 1993 and as of December 31, 1993 and 1994 not separately
presented in this Prospectus or Registration Statement), as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The statements in this Prospectus under the captions "Risk Factors--
Dependence on Patents and Proprietary and Licensed Technology; Risk of Patent
Infringement" and "Business--Patents and Proprietary Rights" and other
references herein to intellectual property of the Company have been reviewed
and approved by Heller Ehrman White & McAuliffe, patent counsel for the
Company, as experts on such matters, and are included herein in reliance upon
that review and approval.
67
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act
with respect to the Common Stock offered hereby (the "Registration
Statement"). This Prospectus does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and such Common Stock,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part thereof. Statements contained herein as to the contents of any
documents are not necessarily complete. In each instance, reference is made to
the copy of such document filed as an exhibit to the Registration Statement,
and each such statement is qualified in its entirety by such reference. Copies
of the Registration Statement, including exhibits and schedules filed
therewith, may be inspected without charge at the Commission's principal
office in Washington, D.C. or obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding companies that file electronically with the
Commission. The Company has filed the Registration Statement, including the
exhibits and schedules thereto, electronically with the Commission via the
Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR)
system. The Company intends to distribute to its stockholders annual reports
containing audited financial statements examined by an independent public
accountant and will make available copies of quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information.
68
<PAGE>
CARDIMA, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Balance Sheets............................................................ F-3
Statements of Operations.................................................. F-4
Statements of Changes in Redeemable Preferred Stock and Stockholders'
Equity (Net Capital Deficiency).......................................... F-5
Statements of Cash Flows.................................................. F-7
Notes to Financial Statements............................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cardima, Inc.
We have audited the accompanying balance sheets of Cardima, Inc. (a
development stage company) as of December 31, 1995 and 1996, and the related
statements of operations, changes in redeemable convertible preferred stock
and stockholders' equity (net capital deficiency), and cash flows for each of
the three years in the period ended December 31, 1996 and for the period from
inception (November 12, 1992) to December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cardima, Inc. (a
development stage company) at December 31, 1995 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996 and for the period from inception (November 12, 1992)
to December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Palo Alto, California
February 21, 1997
except as to Note 7, as to which the date is March 12, 1997
F-2
<PAGE>
CARDIMA, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------ MARCH 31, MARCH 31,
1995 1996 1997 1997
-------- -------- ----------- -------------
(UNAUDITED) (NOTE 7)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........ $ 2,993 $ 907 $ 9,008
Accounts receivable, net of
allowance for doubtful accounts
of $11 at March 31, 1997 and $30
at December 31, 1996 (none at
December 31, 1995).............. 46 68 181
Receivable from Target
Therapeutics, Inc............... 21 17 5
Inventory........................ 268 377 513
Other current assets............. 101 212 455
-------- -------- --------
Total current assets.......... 3,429 1,581 10,162
Property and equipment, net...... 747 1,400 1,551
Restricted cash.................. 345 275 255
Other assets..................... 214 708 778
-------- -------- --------
$ 4,735 $ 3,964 $ 12,746
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (NET CAPITAL DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable................. $ 228 $ 1,113 $ 420
Payable to Target Therapeutics,
Inc............................. 31 42 --
Accrued compensation............. 199 513 597
Other accrued liabilities........ 59 52 67
Notes payable.................... -- 1,682 --
Capital lease obligation--current
portion......................... 265 329 349
-------- -------- --------
Total current liabilities.... 782 3,731 1,433
Deferred rent.................... 129 139 127
Capital lease obligation--
noncurrent portion.............. 317 722 660
COMMITMENTS
Redeemable convertible preferred
stock at amount paid in:
Series D redeemable convertible,
1,215,924 shares issued and
outstanding at December 31,
1995 and 1,919,052 at December
31, 1996 and March 31, 1997,
respectively; aggregate
liquidation preference of
$9,806 at March 31, 1997; none
pro forma...................... 6,182 9,740 9,740
Series D-1 redeemable
convertible, none issued and
outstanding at December 31,
1996 and March 31, 1997; none
pro forma......................
Series E redeemable convertible,
2,356,741 shares issued and
outstanding at March 31, 1997;
aggregate liquidation
preference of $13,442 at March
31, 1997; none pro forma....... -- -- 13,442
Stockholders' equity (net capital
deficiency):
Preferred stock, $0.001 par
value, 6,263,966 shares
authorized, aggregate
liquidation preference of
$10,145 at March 31, 1997:
Series A convertible, 459,918
shares authorized, 428,567
shares issued and
outstanding--amount paid in;
none pro forma................. 2,949 2,949 2,949 $ --
Series B convertible, 333,333
shares authorized, issued and
outstanding amount paid in;
none pro forma
Series C convertible, 458,245
shares authorized, 458,245
shares issued and outstanding
at December 31, 1995 and
December 31, 1996 amount paid
in; none pro forma............. 4,764 4,764 4,764 --
Common stock, $0.001 par value,
8,500,000 shares authorized,
70,297 shares issued and
outstanding at December 31,
1995, 74,999 at December 31,
1996 and March 31, 1997, and
5,801,541 shares pro forma..... 8 595 995 31,890
Deferred compensation........... (526) (888) (888)
Deficit accumulated during the
development stage.............. (10,396) (18,150) (20,476) (20,476)
-------- -------- -------- --------
Total stockholders' equity
(net capital deficiency)..... (2,675) (10,368) (12,656) $ 10,526
-------- -------- -------- ========
$ 4,735 $ 3,964 $ 12,746
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CARDIMA, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS INCEPTION
YEARS ENDED DECEMBER 31, ENDED MARCH 31, (NOVEMBER 12, 1992) TO
---------------------------- ---------------- MARCH 31, 1997
1994 1995 1996 1996 1997 (UNAUDITED)
-------- -------- -------- ------- ------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 86 $ 362 $ 593 $ 132 $ 217 $ 1,258
Cost of goods sold...... 211 830 1,413 384 374 2,828
-------- -------- -------- ------- ------- --------
Gross Profit............ (125) (468) (820) (252) (157) (1,570)
Operating expenses:
Research and
development........... 2,205 2,581 3,319 596 810 9,998
Selling, general and
administrative........ 1,309 2,046 3,690 734 1,331 8,867
-------- -------- -------- ------- ------- --------
Total operating
expenses............... 3,514 4,627 7,009 1,330 2,141 18,865
-------- -------- -------- ------- ------- --------
Operating loss.......... (3,639) (5,095) (7,829) (1,582) (2,298) (20,435)
Interest and other
income................. 15 12 132 64 25 217
Interest expense........ (31) (117) (57) (2) (53) (258)
-------- -------- -------- ------- ------- --------
Net loss................ $ (3,655) $ (5,200) $ (7,754) $(1,520) $(2,326) $(20,476)
======== ======== ======== ======= ======= ========
Pro forma net loss per
share.................. $ (1.22) $ (0.25) $ (0.36)
======== ======= =======
Shares used in computing
pro forma net loss per
share.................. 6,372 6,195 6,434
======== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
CARDIMA, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
PERIOD FROM INCEPTION (NOVEMBER 12, 1992) TO DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES D SERIES E
REDEEMABLE REDEEMABLE
CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED
STOCK STOCK
----------- -----------
<S> <C> <C>
Issuance of
66,666 shares
common stock to
founder for cash
at $0.07 per
share in May
1993............ $-- $--
Issuance of
428,567 shares
of Series A
convertible
preferred stock
to investors for
cash at $7.00
per share in May
1993, net of
issuance costs
of $52.......... -- --
Issuance of
333,333 shares
of Series A
convertible
preferred stock
to Target
Therapeutics,
Inc. in
consideration of
the grant of a
fully paid
research license
in May 1993..... -- --
Issuance of
333,333 shares
of Series B
convertible
preferred stock
to Target
Therapeutics,
Inc. in June
1993 in exchange
for 333,333
shares of Series
A convertible
preferred stock
previously
issued.......... -- --
Issuance of a
warrant to
Target
Therapeutics,
Inc. to purchase
10,942 shares of
Series A
preferred stock
at $7.00 per
share in
connection with
a lease line
agreement in
December 1993,
for a
receivable...... -- --
Net loss........ -- --
---- -----------
Balances at
December 31,
1993............ -- --
Issuance of
340,834 shares
of Series C
convertible
preferred stock
to investors for
cash and
conversion of
bridge loans at
$10.50 per share
in June, July
and December
1994, net of
issuance costs
of $21.......... -- --
Net loss........ -- --
---- -----------
Balances at
December 31,
1994 (carried
forward)........ $-- $--
<CAPTION>
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
---------------------------------------------------------------------------------------------------
TOTAL
DEFICIT STOCKHOLDERS'
SERIES A SERIES B SERIES C ACCUMULATED EQUITY
CONVERTIBLE CONVERTIBLE CONVERTIBLE COMMON DEFERRED DURING THE (NET CAPITAL
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK STOCK COMPENSATION DEVELOPMENT STAGE DEFICIENCY)
--------------- --------------- --------------- ------ ------------ ----------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of
66,666 shares
common stock to
founder for cash
at $0.07 per
share in May
1993............ $ -- $-- $ -- $ 5 $-- $ -- $ 5
Issuance of
428,567 shares
of Series A
convertible
preferred stock
to investors for
cash at $7.00
per share in May
1993, net of
issuance costs
of $52.......... 2,948 -- -- -- -- -- 2,948
Issuance of
333,333 shares
of Series A
convertible
preferred stock
to Target
Therapeutics,
Inc. in
consideration of
the grant of a
fully paid
research license
in May 1993..... -- -- -- -- -- -- --
Issuance of
333,333 shares
of Series B
convertible
preferred stock
to Target
Therapeutics,
Inc. in June
1993 in exchange
for 333,333
shares of Series
A convertible
preferred stock
previously
issued.......... -- -- -- -- -- -- --
Issuance of a
warrant to
Target
Therapeutics,
Inc. to purchase
10,942 shares of
Series A
preferred stock
at $7.00 per
share in
connection with
a lease line
agreement in
December 1993,
for a
receivable...... 1 -- -- -- -- -- 1
Net loss........ -- -- -- -- -- (1,541) (1,541)
--------------- --------------- --------------- ------ ------------ ----------------- -------------
Balances at
December 31,
1993............ 2,949 -- -- 5 -- (1,541) 1,413
Issuance of
340,834 shares
of Series C
convertible
preferred stock
to investors for
cash and
conversion of
bridge loans at
$10.50 per share
in June, July
and December
1994, net of
issuance costs
of $21.......... -- -- 3,558 -- -- -- 3,558
Net loss........ -- -- -- -- -- (3,655) (3,655)
--------------- --------------- --------------- ------ ------------ ----------------- -------------
Balances at
December 31,
1994 (carried
forward)........ $2,949 $-- $3,558 $ 5 $-- $(5,196) $ 1,316
</TABLE>
See accompanying notes.
F-5
<PAGE>
CARDIMA, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)(CONTINUED)
PERIOD FROM INCEPTION (NOVEMBER 12, 1992) TO MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES E
SERIES D REDEEMABLE
REDEEMABLE CONVERTIBLE
CONVERTIBLE PREFERRED
PREFERRED STOCK STOCK
--------------- -----------
<S> <C> <C>
Balances at
December 31,
1994 (brought
forward)........ $ -- $ --
Issuance of
117,411 shares
of Series C
convertible
preferred stock
to investors for
cash, exercise
of warrants and
conversion of
bridge loans at
$10.50 per share
in March and
July 1995, net
of issuance
costs of $27.... -- --
Issuance of
1,215,924 shares
of Series D
redeemable
convertible
preferred stock
to investors for
cash and
conversion of
bridge loans at
$5.11 per share
in December
1995, net of
issuance costs
of $31.......... 6,182 --
Issuance of
3,631 shares of
common stock
upon exercise of
employee stock
options for cash
at $0.70-$1.05
per share in
April, October
and December
1995............ -- --
Net loss........ -- --
------ -------
Balances at
December 31,
1995............ 6,182 --
Issuance of
703,128 shares
of Series D
redeemable
convertible
preferred stock
to investors for
cash and
cancellation of
notes payable at
$5.11 per share
in February
1996, net of
issuance costs
of $35.......... 3,558 --
Issuance of
2,206 shares of
common stock for
cash upon
exercise of
employee stock
options at
$0.56-$2.10 per
share in
January-April,
July, September
and November.... -- --
Deferred
compensation
related to grant
of stock
options......... -- --
Amortization of
deferred
compensation.... -- --
Net loss........ -- --
------ -------
Balance at
December 31,
1996............ 9,740 --
Issuance of
2,356,741 shares
of Series E
redeemable
convertible
preferred stock
to investors for
cash and
conversion of
bridge loans at
approximately
$5.74 per share
in March 1997,
net of issuance
cost of $90
(unaudited)..... -- 13,442
Deferred
compensation
related to grant
of stock options
(unaudited)..... -- --
Amortization of
deferred
compensation
(unaudited)..... -- --
Net loss
(unaudited)..... -- --
------ -------
Balance at March
31, 1997
(unaudited)..... $9,740 $13,442
====== =======
<CAPTION>
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
---------------------------------------------------------------------------------------------
DEFICIT TOTAL
ACCUMULATED STOCKHOLDERS'
SERIES A SERIES B SERIES C DURING THE EQUITY
CONVERTIBLE CONVERTIBLE CONVERTIBLE COMMON DEFERRED DEVELOPMENT (NET CAPITAL
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK STOCK COMPENSATION STAGE DEFICIENCY)
--------------- --------------- --------------- ------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1994 (brought
forward)........ $2,949 $-- $3,558 $ 5 $ -- $ (5,196) $ 1,316
Issuance of
117,411 shares
of Series C
convertible
preferred stock
to investors for
cash, exercise
of warrants and
conversion of
bridge loans at
$10.50 per share
in March and
July 1995, net
of issuance
costs of $27.... -- -- 1,206 -- -- -- 1,206
Issuance of
1,215,924 shares
of Series D
redeemable
convertible
preferred stock
to investors for
cash and
conversion of
bridge loans at
$5.11 per share
in December
1995, net of
issuance costs
of $31.......... -- -- -- -- -- -- --
Issuance of
3,631 shares of
common stock
upon exercise of
employee stock
options for cash
at $0.70-$1.05
per share in
April, October
and December
1995............ -- -- -- 3 -- -- 3
Net loss........ -- -- -- -- -- (5,200) (5,200)
--------------- --------------- --------------- ------ ------------ ----------- -------------
Balances at
December 31,
1995............ 2,949 -- 4,764 8 -- (10,396) (2,675)
Issuance of
703,128 shares
of Series D
redeemable
convertible
preferred stock
to investors for
cash and
cancellation of
notes payable at
$5.11 per share
in February
1996, net of
issuance costs
of $35.......... -- -- -- -- -- -- --
Issuance of
2,206 shares of
common stock for
cash upon
exercise of
employee stock
options at
$0.56-$2.10 per
share in
January-April,
July, September
and November.... -- -- -- 7 -- -- 7
Deferred
compensation
related to grant
of stock
options......... -- -- -- 580 (580) -- --
Amortization of
deferred
compensation.... -- -- -- -- 54 -- 54
Net loss........ -- -- -- -- -- (7,754) (7,754)
--------------- --------------- --------------- ------ ------------ ----------- -------------
Balance at
December 31,
1996............ 2,949 -- 4,764 595 (526) (18,150) (10,368)
Issuance of
2,356,741 shares
of Series E
redeemable
convertible
preferred stock
to investors for
cash and
conversion of
bridge loans at
approximately
$5.74 per share
in March 1997,
net of issuance
cost of $90
(unaudited)..... -- -- -- -- -- -- --
Deferred
compensation
related to grant
of stock options
(unaudited)..... -- -- -- 400 (400) -- --
Amortization of
deferred
compensation
(unaudited)..... -- -- -- -- 38 -- 38
Net loss
(unaudited)..... -- -- -- -- -- (2,326) (2,326)
--------------- --------------- --------------- ------ ------------ ----------- -------------
Balance at March
31, 1997
(unaudited)..... $2,949 $-- $4,764 $995 $(888) $(20,476) $(12,656)
=============== =============== =============== ====== ============ =========== =============
</TABLE>
See accompanying notes.
F-6
<PAGE>
CARDIMA, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
YEARS ENDED THREE MONTHS (NOVEMBER 12,
DECEMBER 31, ENDED MARCH 31, 1992) TO
------------------------- ---------------- MARCH 31,
1994 1995 1996 1996 1997 1997
------- ------- ------- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS USED IN
OPERATING ACTIVITIES
Net loss................ $(3,655) $(5,200) $(7,754) $(1,520) $(2,326) $(20,476)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization.......... 91 296 403 79 143 943
Amortization of
deferred
compensation.......... -- -- 54 -- 38 92
Loss on disposal of
assets................ -- -- 15 -- -- 15
Loss on sale/leaseback
of capital equipment -- -- 95 -- -- 95
Issuance of preferred
stock upon conversion
of various related
party payables and
interest payable...... 12 339 -- -- -- 351
Changes in operating
assets and
liabilities:
Accounts receivable.... (44) (2) (22) (61) (113) (181)
Receivable from Target
Therapeutics, Inc..... 17 31 4 16 12 74
Inventory.............. (268) -- (109) 41 (136) (513)
Other current assets... (98) 11 (111) (20) (243) (455)
Restricted cash........ (330) (15) 70 -- 20 (255)
Other assets........... (94) (128) (526) (7) (82) (866)
Accounts payable....... 121 40 885 156 (693) 420
Payable to Target
Therapeutics, Inc..... 9 (67) 11 (31) (42) --
Accrued compensation... 106 52 314 42 84 597
Other accrued
liabilities........... 10 19 1 1 7 49
Deferred rent.......... 22 107 10 27 (12) 127
------- ------- ------- ------- ------- --------
Cash flows used in
operating activities... (4,101) (4,517) (6,660) (1,277) (3,343) (19,983)
------- ------- ------- ------- ------- --------
CASH FLOWS USED IN
INVESTING ACTIVITIES
Capital expenditures.... (184) (78) (388) (79) (243) (1,013)
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES
Net cash proceeds from
issuance of preferred
stock.................. 2,546 5,189 2,984 3,558 10,158 23,826
Proceeds from issuance
of bridge loans........ 1,000 2,263 1,674 -- 1,610 6,547
Payments of bridge
loans.................. -- (403) -- -- -- (403)
Payments under capital
lease obligations...... (52) (153) (286) (140) (81) (572)
Proceeds from issuance
of notes payable....... 32 -- -- -- -- 32
Payments under notes
payable................ -- (24) -- -- -- (24)
Proceeds from issuance
of common stock........ -- 3 7 2 -- 15
Proceeds from
sale/leaseback of
capital equipment...... -- -- 583 -- -- 583
------- ------- ------- ------- ------- --------
Cash flows provided by
financing activities... 3,526 6,875 4,962 3,420 11,687 30,004
------- ------- ------- ------- ------- --------
Net increase (decrease)
in cash and cash
equivalents............ (759) 2,280 (2,086) 2,064 8,101 9,008
Cash and cash
equivalents at the
beginning of the
period................. 1,472 713 2,993 2,993 907 --
------- ------- ------- ------- ------- --------
Cash and cash
equivalents at the end
of the period.......... $ 713 $ 2,993 $ 907 $ 5,057 $ 9,008 $ 9,008
======= ======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOWS
INFORMATION
Cash paid during the
year for interest...... $ 28 $ 43 $ 49 $ 2 $ 27 $ 147
======= ======= ======= ======= ======= ========
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Receivable from Target
Therapeutics, Inc.
recorded for sale-
leaseback of capital
equipment and for
issuance for a warrant
to purchase Series A
preferred stock........ $ 52 $ -- $ -- $ -- $ -- $ 121
======= ======= ======= ======= ======= ========
Equipment acquired under
capital leases......... $ 432 $ 286 $ 746 $ 16 $ 39 $ 1,503
======= ======= ======= ======= ======= ========
Conversion of various
related party payables,
bridge loans and
capital lease
obligations and related
accrued interest to
convertible preferred
stock.................. $ 1,012 $ 2,199 $ 574 $ -- $ 3,284 $ 7,069
======= ======= ======= ======= ======= ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
CARDIMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Cardima, Inc., (the "Company" or "Cardima") a development stage company, was
incorporated in the State of Delaware on November 12, 1992. The Company
designs, develops, manufactures and markets minimally invasive, single use,
microcatheter-based systems for the mapping and ablation of the two most
common forms of cardiac arrhythmias: atrial fibrillation and ventricular
tachycardia. The Company has licensed its microcatheter technology for use in
the treatment of electrophysiological diseases affecting areas other than the
central nervous system from a major stockholder, Target Therapeutics, Inc.
("Target").
The Company's activities to date have consisted principally of raising
capital, arranging for facilities, acquiring equipment and intellectual
property, recruiting managerial and technical personnel, conducting research
and development efforts, establishing a sales and marketing group, and minimal
sales of initial products. Accordingly, the Company is considered to be in the
development stage.
Since inception, the Company has accumulated a deficit of approximately
$20.5 million. Management expects to incur additional losses to complete
product development and commercialization, as necessary, and recognizes the
need to raise additional funds from outside sources. In March 1997, the
Company successfully consummated the sale of 2,356,741 shares of Series E
redeemable convertible preferred stock, from which the Company received gross
cash proceeds of approximately $10.3 million and converted approximately $3.3
million of outstanding short term debt, $1.6 million of which was incurred
after December 31, 1996. Management believes that it will be able to obtain
additional funds through either public or private equity or debt financings,
collaborative and other arrangements with corporate partners or from other
sources. If adequate funds are not available, the Company may be required to
reduce its level of spending, or eliminate one or more of its research and
development programs.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Interim Financial Information
The financial information at March 31, 1997 and for the three months ended
March 31, 1996 and 1997 is unaudited but includes all adjustments (consisting
of normal recurring adjustments) which the Company considers necessary for a
fair presentation of the financial position at such date and the operating
results and cash flows for those periods. Results of the March 31, 1997 period
are not necessarily indicative of the results for the entire year.
Revenue Recognition
Revenues are recognized when products are shipped. To date, product sales
have been to distributors primarily in Europe, Japan and South America. One
distributor accounted for approximately 45% and two distributors each
accounted for 31% of the Company's net sales during the years ended December
31, 1995 and December 31, 1996, respectively. No one distributor accounted for
more than 10% of the Company's net sales during the year ended December 31,
1994. All of the Company's sales from inception to December 31, 1996 were
export sales. Export sales represented 47% of net sales for the three months
ended March 31, 1997.
F-8
<PAGE>
CARDIMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Research and Development
Research and development costs, which include clinical and regulatory costs,
are charged to expense as incurred.
Net Loss Per Share
Except as noted below, net loss per share is computed using the weighted
average number of common shares outstanding. Common equivalent shares from
stock options and warrants are excluded from the computation as their effect
is antidilutive, except that, pursuant to the Securities and Exchange
Commission ("SEC") Staff Accounting Bulletins, common and common equivalent
shares (stock options, convertible notes payable and convertible preferred
stock) issued during the 12 months prior to the initial filing of the
registration statement relating to the proposed offering at prices below the
assumed public offering price have been included in the calculation as if they
were outstanding for all periods presented (using the treasury stock method
for stock options and warrants).
Historical loss per share information is as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31 MARCH 31,
---------------------- --------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net loss per share............. $(1.20) $(1.70) $(2.53) $(0.50) $(0.76)
------ ------ ------ ------ ------
Shares used in computing net
loss per share................ 3,055 3,057 3,060 3,059 3,064
====== ====== ====== ====== ======
</TABLE>
Pro forma net loss per share has been computed as described above and also
gives effect, pursuant to SEC staff policy, to the conversion of convertible
preferred shares issued within 12 months from the proposed initial public
offering that will be converted upon completion of the initial public offering
(using the if-converted method) from the original date of issuance.
Cash Equivalents
The Company considers all highly liquid investments purchased with maturity
of three months or less at the date of acquisition to be cash equivalents. The
Company places its cash with high-credit-quality financial institutions and
invests primarily in money market accounts. By policy, the Company limits the
amount of credit exposure in any one financial instrument or institution. The
Company had no short term investments at year end. Cash and cash equivalents
are with a major financial institution and consist of money markets and
certificate of deposits.
Inventory
Inventories are stated at the lower of cost or market. Cost is based on
actual costs computed on a first-in, first-out basis. Inventories consist of
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER
31,
--------- MARCH 31,
1995 1996 1997
---- ---- ---------
<S> <C> <C> <C>
Raw material............................................. $110 $145 $150
Work-in-process.......................................... 40 131 234
Finished goods........................................... 118 101 129
---- ---- ----
$268 $377 $513
==== ==== ====
</TABLE>
F-9
<PAGE>
CARDIMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment is stated at cost and consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- MARCH 31,
1995 1996 1997
------ ------ ---------
<S> <C> <C> <C>
Machinery and equipment........................... $ 956 $1,927 $2,204
Furniture and fixtures............................ 77 81 82
Leasehold improvements............................ 67 93 97
------ ------ ------
1,100 2,101 2,383
Less accumulated depreciation and amortization.... (353) (701) (832)
------ ------ ------
$ 747 $1,400 $1,551
====== ====== ======
</TABLE>
Depreciation is provided using the straight-line method over the shorter of
their estimated useful lives or lease term of the respective assets, generally
three to five years. Property and equipment financed under a capital lease
were $787,000, $1,523,000 and $1,562,000 at December 31, 1995 and 1996 and
March 31, 1997, respectively (see Note 6). Accumulated amortization related to
leased assets was $282,000, $564,000 and $667,000 at December 31, 1995 and
1996 and March 31, 1997, respectively. Amortization related to capital leases
are included in depreciation expense.
Concentrations of Risk
The Company purchases certain key components of its products, including the
hydrophilic coating for certain of its microcatheters, from sole, single or
limited source suppliers. For certain of these components there are relatively
few alternative sources of supply. Establishing additional or replacement
suppliers for any of the numerous components used in the Company's products,
if required, may not be accomplished quickly and could involve significant
additional costs. Any supply interruption from vendors or failure of the
Company to obtain alternative vendors for any of the numerous components used
to manufacture the Company's products would limit the Company's ability to
manufacture its products and would have a material adverse effect on the
Company's business, financial condition and results of operations.
Patents
Patents are amortized using the straight-line method over seven years,
beginning at their effective dates or over the remainder of such periods from
the dates acquired.
Reclassification
Certain prior period amounts have been reclassified to conform with current
period presentation.
F-10
<PAGE>
CARDIMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. LEASES
The Company leases facilities under an operating lease which commenced in
August 1994 and expires November 1999. The Company also leases certain
equipment under a noncancelable capital lease (see Note 6). Following is a
schedule of future minimum lease payments under both operating and capital
leases at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Years ending December 31:
1997.................................................... $ 360 $ 425
1998.................................................... 360 425
1999.................................................... 314 383
2000.................................................... -- 44
------ ------
Total minimum payments required........................... $1,034 1,277
======
Less amount representing interest......................... (226)
------
Present value of future lease payments.................... 1,051
Less current portion...................................... (329)
------
Noncurrent portion........................................ $ 722
======
</TABLE>
Rent expense, net of rental income was approximately $45,000 in 1994,
$312,000 in 1995, $295,000 in 1996, $77,000 for the three months ended March
31, 1997 and $729,000 for the period from inception to March 31, 1997 (see
Note 5). In connection with its facilities lease arrangements, the Company
issued letters of credit to lessors which are collateralized by certificates
of deposit totaling approximately $255,000 at March 31, 1997 ($275,000 at
December 31, 1996). Accordingly, this restricted cash amount has been
classified as a noncurrent asset.
In January 1996, the Company entered into a lease line agreement with a
stockholder for $1,500,000 to finance capital expenditures, approximately
$1,236,000 of which was utilized as of December 31, 1996. As partial
consideration for this arrangement, a warrant to purchase 23,777 shares of
Series D convertible preferred stock was issued to the lender. The warrant is
exercisable at $5.11 per share for a period of ten years or five years from
the effective date of the Company's initial public offering, whichever is
longer.
3. STOCKHOLDERS' EQUITY
Stock Split
On October 3, 1996, the Company effected a 1-for-7 share reverse stock split
of its common stock and preferred stock. All share and per share amounts in
the accompanying financial statements have been retroactively adjusted to
reflect this event.
Convertible Preferred Stock and Redeemable Convertible Preferred Stock
Each share of Series A and B preferred stock has a liquidation preference of
$7.00 per share plus declared but unpaid dividends. Series C preferred stock
has a liquidation preference of $10.50 per share plus declared but unpaid
dividends. Series E preferred stock has a liquidation preference of $5.74 per
share plus declared but unpaid dividends, and is senior to Series A, B, C and
D with respect to liquidation. Series D preferred stock has a liquidation
preference of $5.11 per share plus declared but unpaid dividends, and is
senior to Series A, B and
F-11
<PAGE>
CARDIMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
C preferred stock with respect to liquidation. Series A and C preferred stock
are senior to the Series B preferred stock with respect to liquidation.
Series A, B, C, D and E preferred stockholders are entitled to noncumulative
dividends at the rate of $0.70, $0.70, $1.05, $0.511 and $0.574 per share,
respectively, per annum, if declared by the board of directors, in preference
to common stock dividends. No dividends have been declared to date.
Each share of Series A, B, C, D and E preferred stock automatically converts
into approximately 0.9533, 1.0661, 1.50, 1.00 and 1.00 common shares,
respectively, in the event of an underwritten public offering of the Company's
common stock in which the aggregate net proceeds are at least $20,000,000 and
the price per share is at least $10.00, subject to adjustment in the event of,
among other things, stock splits and stock dividends. The Company has amended
and restated its certificate of incorporation to reserve sufficient shares of
common stock for issuance upon conversion of the Series A, B, C, D and E
preferred stock.
Each share of Series D and E preferred stock is redeemable upon the request
of at least a majority of the holders of the then outstanding shares of Series
D and E preferred stock given at least 90 days prior to the seventh
anniversary of the date upon which any shares of Series D and E preferred
stock were first issued. The redemption is payable in three equal annual
installments starting on the seventh anniversary of the date upon which any
shares of Series D and E preferred stock were first issued. The redemption
price is equal to the original issuance price, plus all declared and unpaid
dividends.
The holder of each share of preferred stock has voting rights equivalent to
the number of common shares assuming conversion.
In April and October 1996, and again in March, 1997, the Company amended and
restated its certificate of incorporation to increase the total number of
shares authorized to 14,763,966. Of the shares authorized, 8,500,000 are
designated for issuance of common stock and 6,263,966 are designated for
issuance of preferred stock.
Common Stock
In May 1993, 66,666 shares of common stock were issued to the Company's
founders at $0.07 per share. Certain of these shares were subject to
repurchase by the Company at the original issue price upon the occurrence of
certain events, including termination of employment. The Company's right of
repurchase expired ratably over three years. Shares subject to repurchase were
23,611 and 6,944 at December 31, 1994 and 1995, respectively. At December 31,
1996, no shares were subject to repurchase by the Company.
1993 Stock Option Plan
During 1993, the board of directors adopted the 1993 Stock Option Plan (the
"Plan") and, as amended, has reserved 903,185 shares of common stock for
issuance under the Plan. The Plan provides for both incentive and nonstatutory
stock options to be granted to employees, directors and consultants.
Exercisability, option price, fair value and other terms are determined by the
board of directors; however, the exercise price of each incentive stock option
shall be not less than 100% of the fair market value of the stock issuable
upon exercise of the option on the date the option is granted. The exercise
price of each nonstatutory stock option shall be not less than 85% of the fair
value of the stock subject to the option on the date the option is granted.
All options are generally exercisable upon grant, but shares received upon
exercise prior to vesting are subject to repurchase upon the stockholder's
termination of service to the Company. Shares purchased upon exercise of
options generally vest at the rate of 12.5% after six months from the date of
grant, and monthly thereafter over the following 48 months. No option shall
have a maximum term in excess of ten years from the grant date and no option
granted to a 10% stockholder shall have a maximum term in excess of five years
from the grant date.
F-12
<PAGE>
CARDIMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Activity under the 1993 Stock Option Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------
SHARES NUMBER OF
AVAILABLE SHARES PRICE PER SHARE
--------- --------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1994............ 133,200 129,906 $0.70-$2.10
Options granted......................... (41,903) 41,903 $0.56-$2.10
Options exercised....................... -- (3,631) $0.70-$1.05
Options canceled........................ 19,923 (19,923) $0.70-$1.05
-------- -------
Balance at December 31, 1995............ 111,220 148,255 $0.56-$2.10
Additional shares reserved.............. 640,079 -- --
Options granted......................... (733,778) 733,778 $0.56-$1.75
Options exercised....................... -- (4,708) $0.56-$2.10
Options canceled........................ 66,635 (66,635) $0.56-$2.10
-------- -------
Balance at December 31, 1996............ 84,156 810,690
Options granted......................... (67,268) 67,268 $1.75
Options canceled........................ 388 (388) $0.70-$1.75
-------- -------
Balance at March 31, 1997............... 17,276 877,570
======== =======
</TABLE>
From March to December 1996, options to purchase a total of 670,174 shares
were granted at prices ranging from $0.56 to $1.75 per share. Deferred
compensation of approximately $580,000 was recorded for these option grants
based on the deemed fair value of common stock (ranging from $1.00 to $5.95
per share). In the first quarter of 1997, the Company granted options to
purchase 67,268 shares of common stock at $1.75 per share for which deferred
compensation of $400,000 was recorded based on the deemed fair value of common
stock (ranging from $5.95 to $8.00 per share).
In December 1996, the Board of Directors approved the repricing of incentive
stock options granted in September and October 1996. During this period,
63,604 shares were granted at prices in excess of $5.60. Employees could elect
to exchange their outstanding options for the new exercise price of $1.75. The
exchange of such options is included in grants and cancellations and was also
included in the determination of deferred compensation discussed above.
1997 Directors' Stock Option Plan
In March 1997, the board of directors adopted the 1997 Directors' Stock
Option Plan (the "Directors' Plan), subject to stockholder approval. A total
of 200,000 shares of common stock has been reserved for issuance under the
Directors' Plan. The Plan provides for the grant of nonstatutory stock options
to nonemployee directors of the Company.
1997 Employee Stock Purchase Plan
In March 1997, the board of directors adopted the 1997 Employee Stock
Purchase Plan (the "Purchase Plan"), subject to stockholder approval. A total
of 250,000 shares of common stock has been reserved for issuance under the
Purchase Plan.
Warrants
At December 31, 1996, the Company had the following warrants outstanding:
warrants to purchase 456,523 shares of common stock at $1.05 per share issued
to certain investors in connection with bridge loans; warrants
F-13
<PAGE>
CARDIMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
to purchase 1,428 shares of common stock at $7.00 per share issued in
connection with the facility lease; warrants to purchase 1,999 shares of
Series A preferred stock at $7.00 per share and 2,142 shares of Series D
preferred stock at $5.11 per share issued in connection with a letter of
credit; warrants to purchase 23,776 shares of Series D convertible preferred
stock at $5.11 per share issued in connection with a capital lease; and
warrants to purchase 18,410 shares of Series A preferred stock at $7.00 per
share issued to certain investors in connection with bridge financings. These
warrants are exercisable immediately and expire at the earliest of (i) between
3 to 10 years after the date of grant or (ii) the closing of the Company's
sale of all or substantially all of its assets or (iii) the acquisition of the
Company by another entity by means of a merger or other transaction.
In December 1994, the Company also issued warrants to Target to purchase
24,610 shares of the Company's Series C preferred stock at $10.50 per share in
connection with a guarantee of a letter of credit. These warrants were
exercised in March 1995 for cash. Also in connection with a capital lease line
agreement, the Company issued to Target in December 1993 a warrant for $766 to
purchase 10,942 shares of the Company's Series A preferred stock at $7.00 per
share. This warrant is exercisable immediately and expires at the earlier of
December 9, 1998 or the disposition of substantially all of the Company's
assets or the acquisition of the Company by another entity by means of merger
or other transaction (see Note 6).
The Company has reserved shares of common stock for issuance upon exercise
of the warrants described above.
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair-value accounting provided for under FASB
Statement No. 123, ("Statement 123") "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant as determined by the Company's Board of
Directors, no compensation expense is recognized. However, as noted earlier in
this footnote, the Company has recorded deferred compensation expense based on
the deemed fair value of common stock which is higher than the originally
determined fair value.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994, under the fair-value method of that
Statement. The Company has evaluated the effects of Statement 123 and
determined that it does not have a material effect on the Company's statement
of operations or loss per share.
4. NOTES PAYABLE
In October 1996, the Company entered into a $2.5 million note purchase
agreement with certain of its existing investors. During November and December
1996, the Company borrowed approximately $1.7 million from the investors under
the note purchase agreement at an annual interest rate equal to the applicable
Internal Revenue Service imputed rate in effect at the time of the borrowing
(5.6%-5.8%). The notes matured on January 31, 1997.
The Company received an additional $833,000 from Target Therapeutics, Inc.
and other investors in January 1997 under the note purchase agreement
described above. The notes were due on January 31, 1997, however, the holders
of the notes agreed to convert both principal and interest to Series E
preferred stock in March 1997.
F-14
<PAGE>
CARDIMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
An additional $750,000 was received from various investors in February 1997 in
the form of bridge loans. The total of these loans, plus the outstanding notes
payable at December 31, 1996 and accrued interest totalled approximately $3.3
million and was converted into 571,918 shares of Series E redeemable
convertible preferred stock.
5. INCOME TAXES
As of December 31, 1995 and December 31, 1996, the Company had federal net
operating loss carryforwards of approximately $10,100,000 and $17,500,000,
respectively. The Company also had federal research and development tax credit
carryforwards of approximately $200,000 as of December 31, 1995 and 1996. The
net operating loss and credit carryforwards will expire at various dates
beginning on December 31, 2008 through December 31, 2011, if not utilized.
Significant components of the Company's deferred tax assets as of December
31 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Net operating loss carryforwards........................... $ 3,700 $ 6,500
Research credits carryforwards (federal and state)......... 250 300
Capitalized research and development....................... 300 500
Other, net................................................. 200 200
------- -------
Total deferred tax assets.................................. 4,450 7,500
Valuation allowance for deferred tax assets................ (4,450) (7,500)
------- -------
$ -- $ --
======= =======
</TABLE>
The valuation allowance increased by $1,600,000, and $2,350,000 in 1994 and
1995, respectively.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
6. RELATED PARTY TRANSACTIONS
License Rights
In May 1993, Target granted the Company an exclusive royalty-free worldwide
license to use Target's technology and to make, use and sell or otherwise
distribute products for the diagnosis and treatment of electrophysiological
diseases in the body, other than in the central nervous system, including the
brain. The exclusive license grant applied to any Target technology developed
through May 1996 and will expire upon the expiration of the last of the
patents relating to the Target technology. Under the License Agreement,
Cardima granted back to Target an exclusive royalty-free license to use
technology developed through May 1996 in the fields of neurology,
interventional neurology, interventional reproductive disorders and vascular
prostheses (the "Target Field"). Such license will expire upon the expiration
of the last of the patents relating to the Target technology. Target granted
the Company a nonexclusive, royalty-free license to use Target technology to
make, use and sell or otherwise distribute the Company's products for use
within the cardiology field, provided the Company's products represent a
substantial improvement. A substantial improvement is any modification,
improvement or enhancement by the Company of Target technology in a particular
product that results in a material change in the function, purpose or
application of such product. The Company believes that the
F-15
<PAGE>
CARDIMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
incorporation of electrodes in its microcatheter systems, together with other
modifications, satisfies the substantial improvement requirements. As part of
the same agreement, the Company granted to Target an exclusive, royalty-free
license to use the Company's technology to make, have made, use and sell or
otherwise distribute products within the Target Field.
In addition, the Company agreed not to conduct material research and
development, acquire corporate entities or make or sell products in the Target
Field or to sell products, other than products utilizing Target's technology,
for use in diagnosis or treatment of diseases related to the production of
electrical current in tissue located in areas of the body other than the
heart, without first notifying Target and negotiating a distribution
agreement. Cardima also agreed that it would not sell products utilizing
Target's technology for use in diagnosis or treatment of diseases related to
the production of electrical current in tissue located in areas of the body
other than the heart without, if selling to a distributor, first notifying
Target and offering Target the right of first refusal with respect to the
terms of the distribution, or if selling directly to the consumer, paying to
Target an amount equal to 40% of the gross profit for such product. In
exchange for the license, the Company initially issued 333,333 shares of
Series A preferred stock to Target. In June 1993, the Company effected a
recapitalization pursuant to which Target exchanged its existing shares of
Series A preferred stock for shares of newly created Series B preferred stock.
Series C, D and E Preferred Stock
In December 1994, the Company issued 23,216 shares of Series C preferred
stock to Target at $10.50 per share for cash and conversion of bridge loans.
The Company also issued to Target warrants to purchase 24,610 shares of the
Company's Series C preferred stock in connection with a guarantee of a letter
of credit which were exercised in March 1995 (see Note 3). In January 1995,
the Company issued an additional 7,143 shares of Series C preferred stock to
Target at $10.50 per share for cash and conversion of bridge loans.
In December 1995, the Company issued 142,029 shares of Series D preferred
stock to Target at $5.11 per share for cash and conversion of various payable
amounts and bridge loans. In February 1996, the Company issued an additional
112,374 shares of Series D preferred stock to Target at $5.11 per share in
exchange for the conversion of outstanding capital lease obligations.
See Note 4 with respect to the Series E preferred stock issued to Target in
March 1997.
Operations and Facilities
In May 1993, in the Company entered into an agreement with Target whereby
Target agreed to supply and/or manufacture such products and components
necessary to proceed with research and development activity pursuant to the
license mentioned above. This Agreement expired in May 1996. Target still
supplies the Company with products and components on an as-needed basis.
The Company occupied a portion of Target's facilities during 1994 prior to
occupying their own facility. As consideration, the Company paid $1,000 per
month for each employee using Target's facilities, as well as other
miscellaneous administrative expenses incurred by Target on the Company's
behalf.
As of December 31, 1996, $234,000 has been paid and $38,000 is owed to
Target under these arrangements (approximately $152,000 and $466,000 was paid
and $31,000 and $66,000 owed at December 31, 1995 and 1994, respectively) (see
Note 2).
Target has sublet certain facilities from the Company which can be renewed
annually. Net monthly rental income is approximately $4,500 (see Note 2).
F-16
<PAGE>
CARDIMA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Capital Lease Arrangement
In December 1993, the Company entered into a $1,000,000 capital lease line
agreement with Target. The lease line remained open until fully utilized or
until March 31, 1995, whichever occurred first. As of December 31, 1994 and
1995, $501,000 and $787,000, respectively, of the lease line was utilized for
capital equipment. In connection with this lease line agreement, the Company
issued to Target a warrant to purchase 10,942 shares of the Company's Series A
preferred stock (see Note 3). In January 1996, the outstanding capital lease
obligation, plus accrued interest, was converted into shares of Series D
convertible preferred stock (see Note 3).
7. INITIAL PUBLIC OFFERING
On March 12, 1997, the board of directors authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
the Company to sell shares of its common stock to the public. If the offering
is consummated under terms presently anticipated, all of the currently
outstanding preferred stock will convert to 5,726,542 shares of common stock.
Unaudited pro forma stockholders' equity as adjusted for the matters described
above is set forth in the accompanying balance sheet. The board will also
approve an amendment to the Certificate of Incorporation to change the number
of authorized shares of common stock to 25,000,000 shares and preferred shares
to 5,000,000 shares upon the closing of the offering.
8. SUBSEQUENT EVENTS
In April 1997, the Company entered into a lease agreement with a lessor that
allows for the Company to borrow up to $1.6 million under a lease line
arrangement. In connection with this arrangement, the Company issued to the
lessor a warrant to purchase 13,937 shares of Series E preferred stock at a
price of $5.74 per share. The warrant expires five years from the date of
issuance.
On April 29, 1997, the board of directors approved an increase to the 1993
Stock Option Plan, increasing the authorized number of shares under the Plan
to 1,000,000 shares.
F-17
<PAGE>
[PICTURE OF VEINS AND ARTERIES OF HUMAN HEART]
VEINS (WHITE) AND ARTERIES (RED) WITHIN THE WALL OF AN ACTUAL HUMAN HEART
The vessels of this human heart have been injected with a colored plastic
polymer and the ventricular muscle has been eroded away, exposing an extensive
vascular network that provides access to most areas of the ventricular wall
for mapping and ablating VT using Cardima microcatheters.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIR-
CUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 18
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Dilution................................................................. 19
Capitalization........................................................... 20
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 26
Management............................................................... 49
Certain Transactions..................................................... 57
Principal Stockholders................................................... 59
Description of Capital Stock............................................. 62
Shares Eligible for Future Sale.......................................... 64
Underwriting............................................................. 66
Legal Matters............................................................ 67
Experts.................................................................. 67
Additional Information................................................... 68
Index to Financial Statements............................................ F-1
</TABLE>
----------------
UNTIL , 1997 (25 DAYS AFTER THE EFFECTIVE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,275,000 SHARES
CARDIMA, INC.
COMMON STOCK
----------------
PROSPECTUS
----------------
BEAR, STEARNS & CO. INC.
DAIN BOSWORTH
INCORPORATED
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fee and the Nasdaq National
Market listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
SEC registration fee.............................................. $ 9,514
NASD filing fee................................................... 3,640
Nasdaq National Market listing fee................................ 38,254
Printing fees and expenses........................................ 150,000
Legal fees and expenses........................................... 450,000
Accounting fees and expenses...................................... 150,000
Blue Sky fees and expenses........................................ 15,000
Transfer Agent and Registrar fees................................. 10,000
Miscellaneous fees and expenses................................... 123,592
--------
Total........................................................... $950,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware Law authorizes a court to award, or a
corporation's Board of Directors to grant, indemnification to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Act").
Article X of the Registrant's Amended and Restated Certificate of
Incorporation (Exhibit 3.1 hereto) provides for indemnification of its
directors and officers to the maximum extent permitted by the Delaware Law,
and Section 6 of Article VII of the Registrant's Bylaws (Exhibit 3.2 hereto)
provides for indemnification of its directors, officers, employees and other
agents to the maximum extent permitted by Delaware Law. As permitted by
Section 145 of the Delaware Law, the Registrant's Amended and Restated
Certificate of Incorporation also includes a provision that eliminates the
personal liability of its directors for monetary damages for breach or alleged
breach of their duty of care. In addition, the Registrant has entered into
Indemnification Agreements (Exhibit 10.4 hereto) with its directors and
officers. Reference is also made to Section 7 of the Underwriting Agreement,
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities. The Indemnification Agreements include
provisions that are in some respects broader than the specific indemnification
provisions contained in the Delaware Law, and may require the Company, among
other things, to indemnify its directors against certain liabilities that may
arise by reason of their status or service as directors (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance,
if available on reasonable terms.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since December 31, 1993, the Company has sold and issued the following
unregistered securities (without payment of any selling commission to any
person), as adjusted to give effect to a one-for-seven reverse split of
outstanding shares of Preferred Stock and Common Stock effective October 1996:
(1) The Company has sold and issued 8,339 shares of its Common Stock at
prices per share ranging from $0.56 to $2.10 (an aggregate offering price
of $10,276) to employees and a former director pursuant to the exercise of
options under the 1993 Stock Plan.
II-1
<PAGE>
(2) In June 1994 and October 1994, the Company issued warrants to Silicon
Valley Bank to purchase 1,714 shares and 285 shares, respectively, of its
Series A Preferred Stock at an exercise price of $7.00 per share, and in
October 1995, the Company issued a warrant to Silicon Valley Bank to
purchase 2,142 shares of its Series D Preferred Stock at an exercise price
of $5.11 per share. All of these warrants were issued in connection with
letter of credit and equipment financing agreements.
(3) During the period from June 1994 through July 1994, the Company sold
and issued to certain accredited investors an aggregate of 85,713 shares of
its Series C Preferred Stock at a price per share of $10.50, for an
aggregate of $900,000 in cash.
(4) In July 1994, the Company issued a warrant to the State of California
Public Employees' Retirement System to purchase 1,428 shares of its Common
Stock at an exercise price of $7.00 per share in connection with its
facilities lease.
(5) During the period from September 1994 through November 1994, the
Company issued and sold to certain accredited investors convertible
promissory notes in the aggregate principal amount of $1.0 million and
warrants to purchase Series A Preferred Stock at an exercise price of $7.00
per share in an amount to be determined based upon a formula relating to
the monthly principal dollar amount outstanding under the convertible
promissory notes. In December 1994, the convertible promissory notes, and
accrued interest thereunder, were converted into an aggregate of 96,394
shares of Series C Preferred Stock, and the warrants were cancelled and
reissued as warrants to purchase an aggregate of 18,410 shares of Series A
Preferred Stock at an exercise price of $7.00 per share. At that time, an
additional 165,863 shares of Series C Preferred Stock were issued and sold
to certain accredited investors at a price per share of $10.50, for an
aggregate purchase price of $1.7 million in cash.
(6) During the period from March 1995 through August 1995, the Company
issued and sold to certain accredited investors an aggregate of 85,666
shares of its Series C Preferred Stock at a price per share of $10.50, for
an aggregate of $900,000 in cash.
(7) During the period from April 1995 through December 1995, the Company
issued and sold to certain accredited investors notes in the aggregate
principal amount of $2.3 million and warrants to purchase Common Stock at
an exercise price of $1.05 per share in an amount to be determined based
upon a formula relating to the monthly principal amount outstanding under
the notes. In December 1995, the outstanding principal amount of the notes,
and accrued interest thereon, were converted into an aggregate of 423,402
shares of Series D Preferred Stock, and the warrants were cancelled and
reissued as warrant to purchase an aggregate of 456,523 shares of Common
Stock at an exercise price of $1.05 per share. At that time, an additional
792,516 shares of Series D Preferred Stock were issued and sold to certain
accredited investors at a price per share of $5.11, for an aggregate
purchase price of $4.0 million in cash.
(8) In January 1996, the Company issued a warrant to Comdisco to purchase
23,776 shares of Series D Preferred Stock at an exercise price of $5.11 per
share and in April 1997, the Company issued a warrant to Comdisco to
purchase 13,937 shares of Series E Preferred Stock at an exercise price of
$5.74 per share, in connection with an equipment financing agreement.
(9) In February 1996, the Company issued and sold to certain accredited
investors an aggregate of 703,134 shares of Series D Preferred Stock at a
price per share of $5.11, for an aggregate purchase price of $3.6 million,
payable in cash and in cancellation of certain indebtedness.
(10) During the period from October 1996 through January 1997, the
Company issued and sold to certain accredited investors notes in the
aggregate principal amount of $2.5 million. In March 1997, the outstanding
principal amount of the notes, and accrued interest thereon, were converted
into an aggregate of 440,963 shares of Series E Preferred Stock.
(11) In February 1997, the Company issued and sold convertible notes to
certain accredited investors in the aggregate amount of $750,000. In March
1997, the outstanding principal amount of the notes, and accrued interest
thereon, were converted into an aggregate of 130,955 shares of Series E
Preferred Stock.
(12) In March 1997, the Company issued and sold to certain accredited
investors an aggregate of 1,784,823 shares of Series E Preferred Stock at a
price per share of $5.74, for an aggregate purchase price of approximately
$10.3 million in cash.
II-2
<PAGE>
The sales and issuances of securities in the transaction described in
paragraph 1 were deemed to be exempt from registration under the Securities
Act of 1933, as amended (the "Securities Act"), by virtue of Rule 701
promulgated thereunder in that they were offered and sold either pursuant to
written compensatory benefit plans or pursuant to a written contract relating
to compensation, as provided by Rule 701. The sales and issuances of
securities in the transactions described in paragraphs 2 through 12 above were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of such Securities Act as transactions by an issuer not involving
any public offering.
Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. In all such transactions, all recipients of
securities represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and all recipients either received adequate information
about the Registrant or had access, through employment or other relationships,
to such information.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of Registrant.
3.2* Bylaws of Registrant.
3.3* Form of Amended and Restated Certificate of Incorporation of Registrant
to become effective upon closing of this Offering.
3.4* Form of Bylaws of Registrant to become effective upon closing of this
Offering.
4.1* Form of Common Stock Certificate.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1* 1993 Stock Option Plan.
10.2* 1997 Directors' Stock Option Plan.
10.3* 1997 Employee Stock Purchase Plan.
10.4* Form of Indemnification Agreement.
10.5* Fourth Amended and Restated Stockholders' Rights Agreement dated March
7, 1997, between Registrant and certain stockholders of Registrant.
10.6+* License Agreement dated May 21, 1993, between Registrant and Target
Therapeutics, Inc.
10.7* Lease dated April 25, 1994, between Registrant and State of California
Public Employees' Retirement System.
10.8* Sublease dated November 14, 1996, between Registrant and Target
Therapeutics, Inc.
10.9* Master Lease Agreement dated January 26, 1996, between Registrant and
Comdisco, Inc.,together with the Purchase Agreements.
10.10* Warrant Purchase Agreement dated December 9, 1993, between Registrant
and Target Therapeutics, Inc., together with the Series A Preferred
Stock Warrant.
10.11* Series A Preferred Stock Warrant dated June 10, 1994, issued to Silicon
Valley Bank.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.12* Warrant Purchase Agreement dated July 1, 1994, between Registrant and
California Public Employees' Retirement System, together with the
Common Stock Warrant.
10.13* Series A Preferred Stock Warrant dated October 26, 1994, issued to
Silicon Valley Bank.
10.14* Form of Series A Preferred Stock Warrant issued to certain investors
in December 1994.
10.15* Series D Preferred Stock Warrant dated October 31, 1995, issued to
Silicon Valley Bank.
10.16* Form of Common Stock Warrant issued to certain investors from April
1995 to December 1995.
10.17* Warrant Agreement dated January 23, 1996, between Registrant and
Comdisco, Inc., together with the Series D Preferred Stock Warrant.
10.18+* Electrophysiology Catheter License Agreement dated May 17, 1994,
between Registrant and BSI Corporation, together with the Credit Pool
Agreement of same date.
10.19* Distribution Agreement dated June 15, 1995, between Registrant and
Paramedic Co., Ltd.
10.20* Distribution Agreement dated July 14, 1995, between Registrant and
Werfen Distribution AG, together with the May 15, 1996 letter
amendment.
10.21* Employment Agreement dated May 21, 1993, between Registrant and
Gabriel B. Vegh.
10.22* Employment Letter Agreement dated October 31, 1994, between Registrant
and Phillip C. Radlick, Ph.D.
10.23* Warrant Agreement dated April 7, 1997, between Registrant and
Comdisco, Inc.
10.24* Distribution Agreement dated April 1, 1997, between Registrant and
Cardiologic, GmbH.
11.1 Statement of Computation of Loss Per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Venture Law Group, A Professional Corporation (included in
Exhibit 5.1).
23.3* Consent of Heller Ehrman White & McAuliffe.
24.1* Power of Attorney.
</TABLE>
- --------
* Previously filed.
+ Certain portions of this Exhibit for which confidential treatment has been
requested, have been redacted and filed separately with the Securities and
Exchange Commission.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions referenced in Item 14 of this Registration
Statement or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question
II-4
<PAGE>
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
Rule 497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY HAS
DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT ON FORM S-1 TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF FREMONT, STATE OF CALIFORNIA ON THIS 29TH DAY OF APRIL, 1997.
Cardima, Inc.
By: /s/ Phillip C. Radlick
-----------------------------------
PHILLIP C. RADLICK,PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities on April 29, 1997:
SIGNATURE TITLE
--------- -----
/s/ Phillip C. Radlick President, Chief Executive Officer and
- ------------------------------------- Director (Principal Executive
PHILLIP C. RADLICK Officer)
/s/ Ronald E. Bourquin * Vice President and Chief Financial
- ------------------------------------- Officer(Principal Financial and
RONALD E. BOURQUIN Accounting Officer)
/s/ Joseph S. Lacob * Chairman of the Board of Directors
- -------------------------------------
JOSEPH S. LACOB
/s/ Michael J.F. Du Cros * Director
- -------------------------------------
MICHAEL J.F. DU CROS
/s/ Neal Moszkowski * Director
- -------------------------------------
NEAL MOSZKOWSKI
/s/ Gabriel B. Vegh * Director
- -------------------------------------
GABRIEL B. VEGH
/s/ Charles P. Waite, Jr. * Director
- -------------------------------------
CHARLES P. WAITE, JR.
*By: /s/ Phillip C. Radlick
---------------------------------
PHILLIP C. RADLICK,
ATTORNEY-IN-FACT
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of Registrant.
3.2* Bylaws of Registrant.
3.3* Form of Amended and Restated Certificate of Incorporation of
Registrant to become effective upon closing of this Offering.
3.4* Form of Bylaws of Registrant to become effective upon closing of this
Offering.
4.1* Form of Common Stock Certificate.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1* 1993 Stock Option Plan.
10.2* 1997 Directors' Stock Option Plan.
10.3* 1997 Employee Stock Purchase Plan.
10.4* Form of Indemnification Agreement.
10.5* Fourth Amended and Restated Stockholders' Rights Agreement dated March
7, 1997, between Registrant and certain stockholders of Registrant.
10.6+* License Agreement dated May 21, 1993, between Registrant and Target
Therapeutics, Inc.
10.7* Lease dated April 25, 1994, between Registrant and State of California
Public Employees' Retirement System.
10.8* Sublease dated November 14, 1996, between Registrant and Target
Therapeutics, Inc.
10.9* Master Lease Agreement dated January 26, 1996, between Registrant and
Comdisco, Inc., together with the Purchase Agreements.
10.10* Warrant Purchase Agreement dated December 9, 1993, between Registrant
and Target Therapeutics, Inc., together with the Series A Preferred
Stock Warrant.
10.11* Series A Preferred Stock Warrant dated June 10, 1994, issued to
Silicon Valley Bank
10.12* Warrant Purchase Agreement dated July 1, 1994, between Registrant and
California Public Employees' Retirement System, together with the
Common Stock Warrant.
10.13* Series A Preferred Stock Warrant dated October 26, 1994, issued to
Silicon Valley Bank.
10.14* Form of Series A Preferred Stock Warrant issued to certain investors
in December 1994.
10.15* Series D Preferred Stock Warrant dated October 31, 1995, issued to
Silicon Valley Bank.
10.16* Form of Common Stock Warrant issued to certain investors from April
1995 to December 1995.
10.17* Warrant Agreement dated January 23, 1996, between Registrant and
Comdisco, Inc., together with the Series D Preferred Stock Warrant.
10.18+* Electrophysiology Catheter License Agreement dated May 17, 1994,
between Registrant and BSI Corporation, together with the Credit Pool
Agreement of same date.
10.19* Distribution Agreement dated June 15, 1995, between Registrant and
Paramedic Co., Ltd.
10.20* Distribution Agreement dated July 14, 1995, between Registrant and
Werfen Distribution AG, together with the May 15, 1996 letter
amendment.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.21* Employment Agreement dated May 21, 1993, between Registrant and Gabriel
B. Vegh.
10.22* Employment Letter Agreement dated October 31, 1994, between Registrant
and Phillip C. Radlick, Ph.D.
10.23* Warrant Agreement dated April 7, 1997, between Registrant and Comdisco,
Inc.
10.24* Distribution Agreement dated April 1, 1997, between Registrant and
Cardiologic, GmbH.
11.1 Statement of Computation of Loss Per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Venture Law Group, A Professional Corporation (included in
Exhibit 5.1).
23.3* Consent of Heller Ehrman White & McAuliffe.
24.1* Power of Attorney.
</TABLE>
- --------
* Previously filed.
+ Certain portions of this Exhibit for which confidential treatment has been
requested, have been redacted and filed separately with the Securities and
Exchange Commission.
<PAGE>
EXHIBIT 1.1
2,275,000 Shares of Common Stock
CARDIMA, INC.
UNDERWRITING AGREEMENT
----------------------
<PAGE>
May ___, 1997
BEAR, STEARNS & CO. INC.
DAIN BOSWORTH INCORPORATED
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Dear Sirs:
Cardima, Inc., a corporation organized and existing under the laws of
Delaware (the "Company"), proposes, subject to the terms and conditions stated
herein, to issue and sell to the several underwriters named in Schedule I hereto
(the "Underwriters") an aggregate of 2,275,000 shares (the "Firm Shares") of its
common stock, par value $0.001 per share (the "Common Stock"), and, for the sole
purpose of covering over-allotments in connection with the sale of the Firm
Shares, at the option of the Underwriters, up to an additional 341,250 shares
(the "Additional Shares") of Common Stock. The Firm Shares and any Additional
Shares purchased by the Underwriters are referred to herein as the "Shares". The
Shares are more fully described in the Registration Statement referred to below.
1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement, and may have filed an amendment or
amendments thereto, on Form S-1 (No. 333-23209), for the registration of the
Shares under the Securities Act of 1933, as amended (the "Act"). Such
registration statement, including the prospectus, financial statements and
schedules, exhibits and all other documents filed as a part thereof, as amended
at the time of effectiveness of the registration statement, including any post-
effective amendments and including any information deemed to be a part thereof
as of the time of effectiveness pursuant to paragraph (b) of Rule 430A or Rule
434 of the Rules and Regulations of the Commission under the Act (the
"Regulations"), is herein called the "Registration Statement" and the
prospectus, in the form first filed with the Commission pursuant to Rule 424(b)
of the Regulations or filed as part of the Registration Statement at the time of
effectiveness if no Rule 424(b) or Rule 434 filing is required, is herein called
the "Prospectus". The term "preliminary prospectus" as used herein means a
preliminary prospectus as described in Rule 430 of the Regulations.
(b) At the time of the effectiveness of the Registration Statement or
the effectiveness of any post-effective amendment to the Registration Statement,
when the Prospectus is first filed with the Commission pursuant to Rule 424(b)
or Rule 434 of the Regulations, when any supplement to or amendment of the
Prospectus is filed with the
<PAGE>
Commission and at the Closing Date and the Additional Closing Date, if any, (as
hereinafter respectively defined), the Registration Statement and the Prospectus
and any amendments thereof and supplements thereto, including any post-effective
amendment, complied or will comply in all material respects with the applicable
provisions of the Act and the Regulations and does not or will not contain an
untrue statement of a material fact and does not or will not omit a statement of
material fact and does not or will not contain an untrue statement of material
fact required to be stated therein or necessary in order to make the statements
therein (i) in the case of the Registration Statement, not misleading and (ii)
in the case of the Prospectus, in light of the circumstances under which they
were made, not misleading. When any related preliminary prospectus was first
filed with the Commission (whether filed as part of the registration statement
for the registration of the Shares or any amendment thereto or pursuant to Rule
424(a) of the Regulations) and when any amendment thereof or supplement thereto
was first filed with the Commission, such preliminary prospectus and any
amendments thereof and supplements thereto complied in all material respects
with the applicable provisions of the Act and the Regulations and did not
contain an untrue statement of a material fact and did not omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein in light of the circumstances under which they were made not
misleading. No representation and warranty is made in this subsection (b),
however, with respect to any information contained in or omitted from the
Registration Statement or the Prospectus or any related preliminary prospectus
or any amendment thereof or supplement thereto in reliance upon and in
conformity with information furnished in writing to the Company by or on behalf
of any Underwriter through you as herein stated expressly for use in connection
with the preparation thereof. If Rule 434 is used, the Company will comply with
the requirements of Rule 434.
(c) Ernst & Young, L.L.P., who have certified the financial statements
and supporting schedules included in the Registration Statement, are independent
public accountants as required by the Act and the Regulations.
(d) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, except as set forth in the
Registration Statement and the Prospectus, there has been no material adverse
change or any development involving a prospective material adverse change in the
business, prospects, properties, operations, condition (financial or other) or
results of operations of the Company, whether or not arising from transactions
in the ordinary course of business, and since the date of the latest balance
sheet presented in the Registration Statement and the Prospectus, the Company
has not incurred or undertaken any liabilities or obligations, direct or
contingent, which are material to the Company, except for liabilities or
obligations which are reflected in the Registration Statement and the
Prospectus.
(e) This Agreement and the transactions contemplated herein have been
duly and validly authorized by the Company and this Agreement has been duly and
validly executed and delivered by the Company.
(f) The execution, delivery, and performance of this Agreement and the
consummation of the transactions contemplated hereby do not and will not (i)
conflict with or
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result in a breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or both, would
constitute a default) under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company pursuant
to, any agreement, instrument, franchise, license or permit to which the Company
is a party or by which the Company or its properties or assets may be bound,
(ii) violate or conflict with any provision of the certificate of incorporation
or by-laws of the Company or (iii) violate or conflict with any judgment,
decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over the Company
or its properties or assets, except with respect to clauses (i) and (iii) above,
such as would not have a material adverse effect on the business, prospects,
properties, operations, condition (financial or other) or results of operations
of the Company. No consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the Company
or its properties or assets is required for the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby, including the issuance, sale and delivery of the Shares to
be issued, sold and delivered by the Company hereunder, except the registration
under the Act of the Shares and such consents, approvals, authorizations,
orders, registrations, filings, qualifications, licenses and permits as may be
required under state securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters.
(g) All of the outstanding shares of Common Stock are duly and validly
authorized and issued, fully paid and nonassessable and were not issued and are
not now in violation of or subject to any preemptive rights. The Shares, when
issued, delivered and sold in accordance with this Agreement, will be duly and
validly issued and outstanding, fully paid and nonassessable, and will not have
been issued in violation of or be subject to any preemptive rights. The Company
had, at December 31, 1996, an authorized and outstanding capitalization as set
forth in the Registration Statement and the Prospectus. The Common Stock, the
Firm Shares and the Additional Shares conform to the descriptions thereof
contained in the Registration Statement and the Prospectus.
(h) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of Delaware. The Company is duly
qualified and in good standing as a foreign corporation in each jurisdiction in
which the character or location of its properties (owned, leased or licensed) or
the nature or conduct of its business makes such qualification necessary, except
for those failures to be so qualified or in good standing which will not in the
aggregate have a material adverse effect on the Company. The Company has all
requisite corporate power and authority, and all necessary consents, approvals,
authorizations, orders, registrations, qualifications, licenses and permits of
and from all public, regulatory or governmental agencies and bodies, to own,
lease and operate its properties and conduct its business as now being conducted
and as described in the Registration Statement and the Prospectus, and no such
consent, approval, authorization, order, registration, qualification, license or
permit contains a materially burdensome restriction not adequately disclosed in
the Registration Statement and the Prospectus. The Company does not presently
own or control, directly or indirectly, any interest in any other corporation,
association, or other business entity.
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(i) Except as described in the Prospectus, there is no litigation or
governmental proceeding to which the Company is a party or to which any property
of the Company is subject or which is pending or, to the knowledge of the
Company, contemplated against the Company which if determined adversely to the
Company would likely result in any material adverse change in the business,
prospects, properties, operations, condition (financial or other), or results of
operations of the Company or which is required to be disclosed in the
Registration Statement and the Prospectus.
(j) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Shares.
(k) The financial statements, including the notes thereto, and
supporting schedules included in the Registration Statement and the Prospectus
present fairly the financial position of the Company as of the dates indicated
and the results of its operations for the periods specified; except as otherwise
stated in the Registration Statement, said financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis; and the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein.
(l) Except as described in the Prospectus, no holder of securities of
the Company has any rights to the registration of securities of the Company
because of the filing of the Registration Statement or otherwise in connection
with the sale of the Shares contemplated hereby.
(m) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940.
(n) The Company owns or possesses licenses or other rights to use all
patents, trademarks, service marks, trade names, copyrights, mask work rights,
technology, know-how and other intellectual property rights ("Intellectual
Property") necessary to conduct the business now conducted by the Company as
described in the Prospectus, and, except as disclosed in the Prospectus, the
Company has not infringed, or received any notice of infringement of, or
conflict with (or knows of such infringement of or conflict with) asserted
rights of others with respect to the Intellectual Property which, individually
or in the aggregate, is reasonably likely to result in any material adverse
effect upon the business, prospects, properties, operations, condition
(financial or other) or results of operations of the Company; and, except as
disclosed in the Prospectus and to the knowledge of the Company, the Company
does not in the conduct of their business as now or proposed to be conducted as
described in the Prospectus, infringe or conflict with any Intellectual Property
of any third party, or any discovery, invention, product or process which is the
subject of a patent application filed by any third party, known to the Company,
where such infringement or conflict is reasonably likely to result in any
material
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adverse effect upon the business, prospects, properties, operations, condition
(financial or other) or results of operations of the Company.
(o) The Company has filed all tax returns and reports as required by
law and has paid, or made adequate provision for, all taxes and other
assessments that have or may become due. These returns and reports are true and
correct in all materials respects. The Company has not elected pursuant to the
Internal Revenue Code of 1986, as amended (the "Code"), to be treated as
----
Subchapter S corporation or a collapsible corporation pursuant to Section
1362(a) or Section 341(f) of the Code, nor has it made any other elections
pursuant to the Code (other than elections that relate solely to methods of
accounting, depreciation or amortization) that would have a material adverse
effect on the Company. The Company has withheld or collected from each payment
made to each of its employees, the amount of all taxes (including, but not
limited to, federal income taxes, Federal Insurance Contribution Act taxes and
Federal Unemployment Tax Act taxes) required to be held withheld or collected
therefrom, and has paid the same to the proper tax receiving officers or
authorized depositories.
(p) The Company has in full force and effect fire and casualty
insurance policies, with extended coverage, sufficient in amount (subject to
reasonable deductibles) to allow it to replace any of its properties that might
be damaged or destroyed.
(q) The Company and the uses made by the Company of its properties and
assets are in compliance in all material respects with all federal, state and
local environmental and occupational health and safety laws, regulations, rules,
orders and ordinances. To the Company's knowledge, no material expenditures are
or will be required to comply with such existing laws, regulations, rules,
orders and ordinances, and the Company holds all permits and licenses required
to conduct its business thereunder. To the Company's knowledge, all properties
and assets leased or owned, including, without limitation, all structures,
contents, soil, subsoil and groundwater, do not contain hazardous substances in
quantities that could reasonably be expected to have a material adverse effect
on the business, prospects, properties, operations, condition (financial or
other) or results of operations of the Company. To its knowledge, the Company
has no liability or obligation, whether to any governmental authority or to any
other person or entity, for damages, claims, penalties, forfeitures or
otherwise, as a consequence of the generation, transportation or disposal of any
such hazardous substance or any "hazardous waste" as defined in 42 U.S.C. 6901,
et. seq.
- -- ---
2. Purchase, Sale and Delivery of the Shares.
-----------------------------------------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters and the Underwriters,
severally and not jointly, agree to purchase from the Company, at a purchase
price per share of $_______, the number of Firm Shares set forth opposite the
respective names of the Underwriters in Schedule I hereto plus any
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<PAGE>
additional number of Shares which such Underwriter may become obligated to
purchase pursuant to the provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of certificates
for, the Shares shall be made at the offices of the Venture Law Group, A
Professional Corporation, or at such other place as shall be agreed upon by you
and the Company, at 7:00 A.M. PST, on the third or fourth business day (as
permitted under Rule 15c6-1 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (unless postponed in accordance with the provisions
of Section 9 hereof) following the date of the effectiveness of the Registration
Statement (or, if the Company has elected to rely upon Rule 430A of the
Regulations, the third or fourth business day (as permitted under Rule 15c6-1
under the Exchange Act) after the determination of the initial public offering
price of the Shares (such time and date of payment and delivery being herein
called the "Closing Date"). Payment shall be made to the Company by certified or
official bank check or checks drawn in New York Clearing House funds or similar
next day funds payable to the order of the Company, against delivery to you for
the respective accounts of the Underwriters of certificates for the Shares to be
purchased by them. Certificates for the Shares shall be registered in such name
or names and in such authorized denominations as you may request in writing at
least two full business days prior to the Closing Date. The Company will permit
you to examine and package such certificates for delivery at least one full
business day prior to the Closing Date.
(c) In addition, the Company hereby grants to the Underwriters the
option to purchase up to 341,250 Additional Shares at the same purchase price
per share to be paid by the Underwriters to the Company for the Firm Shares as
set forth in this Section 2, for the sole purpose of covering over-allotments in
the sale of Firm Shares by the Underwriters. This option may be exercised at any
time, in whole or in part, on or before the thirtieth day following the date of
the Prospectus, by written notice by you to the Company. Such notice shall set
forth the aggregate number of Additional Shares as to which the option is being
exercised and the date and time, as reasonably determined by you, when the
Additional Shares are to be delivered (such date and time being herein sometimes
referred to as the "Additional Closing Date"); provided, however, that the
Additional Closing Date shall not be earlier than the Closing Date or earlier
than the second full business day after the date on which the option shall have
been exercised nor later than the seventh full business day after the date on
which the option shall have been exercised (unless such time and date are
postponed in accordance with the provisions of Section 9 hereof). Certificates
for the Additional Shares shall be registered in such name or names and in such
authorized denominations as you may request in writing at least two full
business days prior to the Additional Closing Date. The Company will permit you
to examine and package such certificates for delivery at least one full business
day prior to the Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter shall be the
number which bears the same ratio to the aggregate number of Additional Shares
being purchased as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto (or such number increased as set forth in
Section 9 hereof) bears to 314,250,
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<PAGE>
subject, however, to such adjustments to eliminate any fractional shares as you
in your sole discretion shall make.
Payment for the Additional Shares shall be made by certified or official
bank check or checks, in New York Clearing House or similar next day funds,
payable to the order of the Company at the offices of the Venture Law Group, A
Professional Corporation, or such other location as may be mutually acceptable,
upon delivery of the certificates for the Additional Shares to you for the
respective accounts of the Underwriters.
3. Offering. Upon your authorization of the release of the Firm Shares, the
--------
Underwriters propose to offer the Shares for sale to the public upon the terms
set forth in the Prospectus.
4. Covenants of the Company. The Company covenants and agrees with the
------------------------
Underwriters that:
(a) If the Registration Statement has not yet been declared effective
the Company will use its best efforts to cause the Registration Statement and
any amendments thereto to become effective as promptly as possible, and if Rule
430A is used or the filing of the Prospectus is otherwise required under Rule
424(b) or Rule 434, the Company will file the Prospectus (properly completed if
Rule 430A has been used) pursuant to Rule 424(b) or Rule 434 within the
prescribed time period and will provide evidence satisfactory to you of such
timely filing. If the Company elects to rely on Rule 434, the Company will
prepare and file a term sheet that complies with the requirements of Rule 434.
The Company will notify you immediately (and, if requested by you, will
confirm such notice in writing) (i) when the Registration Statement and any
amendments thereto become effective, (ii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any post-
effective amendment thereto or of the initiation, or the threatening, of any
proceedings therefor, (v) of the receipt of any comments from the Commission,
and (vi) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Shares for sale in any jurisdiction or
the initiation or threatening of any proceeding for that purpose. If the
Commission shall propose or enter a stop order at any time, the Company will
make every reasonable effort to prevent the issuance of any such stop order and,
if issued, to obtain the lifting of such order as soon as possible. The Company
will not file any amendment to the Registration Statement or any amendment of or
supplement to the Prospectus (including the prospectus required to be filed
pursuant to Rule 424(b)or Rule 434) that differs from the prospectus on file at
the time of the effectiveness of the Registration Statement before or after the
effective date of the Registration Statement to which you shall reasonably
object in writing after being timely furnished in advance a copy thereof.
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<PAGE>
(b) If at any time when a prospectus relating to the Shares is required
to be delivered under the Act any event shall have occurred as a result of which
the Prospectus as then amended or supplemented would, in the judgment of the
Underwriters or the Company, include an untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it shall be necessary at any time to amend or
supplement the Prospectus or Registration Statement to comply with the Act or
the Regulations, the Company will notify you promptly and prepare and file with
the Commission an appropriate amendment or supplement (in form and substance
satisfactory to you) which will correct such statement or omission and will use
its best efforts to have any amendment to the Registration Statement declared
effective as soon as possible.
(c) The Company will promptly deliver to you two signed copies of the
Registration Statement, including exhibits and all amendments thereto, and the
Company will promptly deliver to each of the Underwriters such number of copies
of any preliminary prospectus, the Prospectus, the Registration Statement, and
all amendments of and supplements to such documents, if any, as you may
reasonably request.
(d) The Company will endeavor in good faith, in cooperation with you,
at or prior to the time of effectiveness of the Registration Statement, to
qualify the Shares for offering and sale under the securities laws of such
jurisdictions as you may designate and to maintain such qualification in effect
for so long as required for the distribution thereof; except that in no event
shall the Company be obligated in connection therewith to qualify as a foreign
corporation or to execute a general consent to service of process.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earning statement (in form complying with the provisions of
Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement.
(f) During the period of 180 days from the date of the Prospectus, the
Company will not, without your prior written consent, issue, sell, offer or
agree to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any Common Stock (or any securities convertible into,
exercisable for or exchangeable for Common Stock), and the Company will obtain
the undertaking of each of its officers and directors and such of its
shareholders as have been heretofore designated by you and listed on Schedule II
attached hereto not to engage in any of the aforementioned transactions on their
own behalf, other than the Company's sale of Shares hereunder and the Company's
issuance of Common Stock upon the exercise of presently outstanding stock
options.
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its
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<PAGE>
shareholders; and (ii) all reports, financial statements and proxy or
information statements filed by the Company with the Commission or any national
securities exchange.
(h) The Company will apply the proceeds from the sale of the Shares as
set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to cause the Shares to be
included in the Nasdaq National Market.
(j) The Company will file with the Commission such reports on Form SR
as may be required pursuant to Rule 463 of the Regulations.
5. Payment of Expenses. Whether or not the transactions contemplated in
-------------------
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
exhibits thereto), any preliminary prospectus, the Prospectus and any amendments
or supplements thereto (including, without limitation, fees and expenses of the
Company's accountants and counsel), the underwriting documents (including this
Agreement, the Agreement Among Underwriters, the Selling Agreement) and all
other documents related to the public offering of the Shares (including those
supplied to the Underwriters in quantities as hereinabove stated), (ii) the
issuance, transfer and delivery of the Shares to the Underwriters, including any
transfer or other taxes payable thereon, (iii) the qualification of the Shares
under state or foreign securities or Blue Sky laws, including the costs of
printing and mailing a preliminary and final "Blue Sky Survey" and the fees of
counsel for the Underwriters and such counsel's disbursements in relation
thereto, (iv) quotation of the Shares on the Nasdaq National Market, (v) filing
fees of the Commission and the National Association of Securities Dealers, Inc.;
(vi) the cost of printing certificates representing the Shares and (vii) the
cost and charges of any transfer agent or registrar.
6. Conditions of Underwriters' Obligations. The obligations of the
------------------------------------------
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company herein contained, as of the date hereof and as of the
Closing Date (for purposes of this Section 6 "Closing Date" shall refer to the
Closing Date for the Firm Shares and any Additional Closing Date, if different,
for the Additional Shares), to the absence from any certificates, opinions,
written statements or letters furnished to you or to Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP ("Underwriters' Counsel") pursuant to this
Section 6 of any misstatement or omission, to the performance by the Company of
its obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 12:00 P.M., New York time on the date an amendment to the Registration
Statement containing the public offering price has been filed with the
Commission, or at such later time and date as shall have been consented to in
writing by you; if the Company shall have elected to rely
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<PAGE>
upon Rule 430A or Rule 434 of the Regulations, the Prospectus shall have been
filed with the Commission in a timely fashion in accordance with Section 4(a)
hereof; and, at or prior to the Closing Date, no stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereof shall have been issued and no proceedings therefor shall have been
initiated or threatened by the Commission.
(b) At the Closing Date you shall have received the opinion of the
Venture Law Group, A Professional Corporation, counsel for the Company, dated
the Closing Date addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the state of Delaware. The
Company is duly qualified and in good standing as a foreign corporation in each
jurisdiction in which it owns or leases property or conducts business so as to
require such qualification, except for those failures to be so qualified or in
good standing which will not in the aggregate have a material adverse effect on
the Company. The Company has all requisite corporate authority to own, lease and
license its respective properties and conduct its business as now being
conducted and as described in the Registration Statement and the Prospectus.
(ii) The Company has an authorized capital stock as set forth in
the Registration Statement and the Prospectus. All of the outstanding shares of
Capital Stock are duly and validly authorized and issued, are fully paid and
nonassessable and were not issued in violation of or subject to any preemptive
rights. The Shares to be delivered on the Closing Date have been duly and
validly authorized and, when delivered by the Company in accordance with this
Agreement, will be duly and validly issued, fully paid and nonassessable and
will not have been issued in violation of or subject to any preemptive rights.
The Common Stock, the Firm Shares and the Additional Shares conform in all
material respects to the descriptions thereof contained in the Registration
Statement and the Prospectus.
(iii) The Common Stock currently outstanding is listed, and the
Shares to be sold under this Agreement to the Underwriters are duly authorized
for quotation on the Nasdaq National Market.
(iv) This Agreement has been duly and validly authorized, executed
and delivered by the Company.
(v) To such counsel's knowledge, there is no litigation or
governmental or other action, suit, proceeding or investigation before any court
or before or by any public, regulatory or governmental agency or body pending or
threatened against, or involving the properties or business of, the Company,
which
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<PAGE>
is of a character required to be disclosed in the Registration Statement and the
Prospectus which has not been properly disclosed therein.
(vi) The execution, delivery, and performance of this Agreement
and the consummation of the transactions contemplated hereby by the Company do
not and will not (A) conflict with or result in a breach of any of the terms and
provisions of, or constitute a default (or an event which with notice or lapse
of time, or both, would constitute a default) under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or assets of
the Company or any of its subsidiaries pursuant to, any agreement, instrument,
franchise, license or permit identified on Schedule A to such opinion (which
----------
will include all material agreements, instruments, franchises, licenses or
permits known to such counsel to which the Company is a party or by which its
properties or assets may be bound), or (B) violate or conflict with any
provision of the certificate of incorporation or by-laws of the Company, or, to
the knowledge of such counsel, any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets. No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any court or
any public, governmental, or regulatory agency or body having jurisdiction over
the Company or its properties or assets is required for the execution, delivery
and performance of this Agreement or the consummation of the transactions
contemplated hereby, except for (1) such as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of
the Shares by the Underwriters (as to which such counsel need express no
opinion) and (2) such as have been made or obtained under the Act.
(vii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial statements
and schedules and other financial data included or incorporated by reference
therein, as to which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and the Regulations.
(viii) The Registration Statement is effective under the Act, and,
to the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereof has been issued and no proceedings therefor have been initiated or
threatened by the Commission and all filings required by Rule 424(b) of the
Regulations have been made.
(ix) The Company is not an "investment company" or a person
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
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(x) The statements made in the Prospectus under (i) the fourth
paragraph under "Risk Factors--Dependence on Proprietary and Licensed
Technology", (ii) the second paragraph under "Risk Factors-- Influence of Target
Therapeutics", (iii) the second, third and eighth paragraph under "Business--
Patents and Proprietary Rights", (iv) "Management--Stock Option and Incentive
Plans", (v) "Certain Transactions", (vi) "Description of Capital Stock", and
(vii) "Shares Eligible for Future Sale" to the extent that they constitute
summaries of matters of law or legal conclusions or describe agreements or
transactions, fairly present the information required to be presented by the
applicable disclosure requirements of Regulation S-K under the Securities Act;
(xi) In addition, such opinion shall also contain a statement that
such counsel has participated in conferences with officers and representatives
of the Company, representatives of the independent public accountants for the
Company and the Underwriters at which the contents and the Prospectus and
related matters were discussed and, no facts have come to the attention of such
counsel which would lead such counsel to believe that either the Registration
Statement (other than the financial statements, financial data and related
schedules therein as to which such counsel expresses opinions) at the time it
became effective (including the information deemed to be part of the
Registration Statement at the time of effectiveness pursuant to Rule 430A(b) or
Rule 434, if applicable), or any amendment thereof made prior to the Closing
Date as of the date of such amendment, contained an untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus (other than the financial statements, financial data and related
schedules therein as to which such counsel expresses opinions) as of its date
(or any amendment thereof or supplement thereto made prior to the Closing Date
as of the date of such amendment or supplement) and as of the Closing Date
contained or contains an untrue statement of a material fact or omitted or omits
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading (it being understood that such counsel need express no
belief or opinion with respect to the financial statements and schedules and
other financial data included or incorporated by reference therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance reasonably satisfactory to Underwriters'
Counsel) of other counsel reasonably acceptable to Underwriters' Counsel,
familiar with the applicable laws; (B) as to matters of fact, to the extent they
deem proper, on certificates of responsible officers of the Company and
certificates or other written statements of
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officers of departments of various jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company, provided
that copies of any such statements or certificates shall be delivered to
Underwriters' Counsel. The opinion of such counsel for the Company shall state
that the opinion of any such other counsel is in form satisfactory to such
counsel and, in their opinion, you and they are justified in relying thereon.
(c) At the Closing Date you shall have received the opinion of Heller
Ehrman White & McAuliffe, intellectual property counsel for the Company, dated
the Closing Date addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) Heller Ehrman White & McAuliffe ("IP Counsel") represents
Company in certain matters relating to intellectual property, including patents
and trade secrets matters;
(ii) IP Counsel is familiar with the technology used by the
Company in its business and the manner of its use and has read the portions of
the Registration Statement and the Prospectus entitled "Risk Factor--Risk of
Patent Infringement; Dependence on Patents and Proprietary and Licensed
Technology" and "Business--Patents and Proprietary Rights" (collectively, the
"Intellectual Property Portion");
(iii) The Intellectual Property Portion contains accurate
descriptions of the Company's patents, patent applications and patents and
patent applications licensed to the Company, and fairly summarizes the legal
matters, documents and proceedings relating thereto;
(iv) IP Counsel has reviewed the Company's patent applications
filed in the U.S. and outside the U.S. and the patent applications in the U.S.
and outside the U.S. licensed to the Company (collectively, the "Applications"),
which Applications are described in the Intellectual Property Portion. To IP
Counsel's knowledge, the Applications presently pending have been properly
prepared and filed on behalf of the Company or its licensee, as the case may be,
and are being diligently pursued by the Company or its licensee, as the case may
be; the inventions described in the Applications are assigned or licensed to the
Company; to IP Counsel's knowledge, except for patents where the Company has
obtained a field of use license, no other entity or individual has any right or
claim in any of the inventions, Applications, or any patent to be issued
therefrom, and in IP Counsel's opinion each of the Applications discloses
patentable subject matter;
(v) There are no legal, judicial or governmental proceedings
pending relating to patent rights, trade secrets or other proprietary
information of the Company or which any property of the Company is subject,
13
<PAGE>
and, to the knowledge of IP Counsel, no such proceedings are threatened or
contemplated by governmental authorities or others;
(vi) To the knowledge of IP Counsel, the Company is not infringing
or otherwise violating any patents, trade secrets, or other proprietary
information of others, nor is IP Counsel aware of any rights of third parties to
any of the inventions described in the Applications, which could reasonably be
expected to materially affect the ability of the Company to conduct its business
as described in the Registration Statement and the Prospectus;
(vii) To the knowledge of IP Counsel, the Company owns or
possesses the rights to use all patents, trade secrets, or other proprietary
information or materials that are necessary to conduct the business now being
proposed to be conducted by the Company as described in the Prospectus; and
(viii) IP Counsel has no reason to believe that the information
contained in the Intellectual Property Portion of the Registration Statement or
the Prospectus at the time it became effective contained any untrue statement of
a material fact or omitted to state any material fact necessary to make the
statements therein not misleading or that, at the First Closing Date or the
Second Closing Date, as the case may be, the information contained in the
Intellectual Property Portion of the Prospectus contains any untrue statement of
a material fact or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(d) At the Closing Date you shall have received the opinion of Hogan &
Hartson, L.L.P,. regulatory special counsel for the Company, dated the Closing
Date addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) Hogan & Hartson, L.L.P. serves as special regulatory counsel
for the Company from time to time with regard to certain regulatory
matters;
(ii) The statements in the Prospectus under the captions "Risk
Factors -- No Assurance of Obtaining Required Regulatory Approvals;
Government Regulation", and "Business - Government Regulation", insofar as
such statements purport to summarize applicable provisions of the FDA Act
and the regulations promulgated thereunder, are accurate summaries in all
material respects of the provisions purported to be summarized under such
captions in the Prospectus; and
(iii) No facts have come to counsel's attention which cause
counsel to believe that the statements in the Prospectus under the captions
"Risk Factors -No Assurance of Obtaining Required Regulatory Approvals;
Government Regulation", and "Business - Government Regulation", insofar as such
statements relate to FDA regulatory matters, at the time the Registration
Statement became effective, contained an
14
<PAGE>
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or as of the date hereof contains an untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(e) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be satisfactory in
form and substance to you and to Underwriters' Counsel, and the Underwriters
shall have received from said Underwriters' Counsel a favorable opinion, dated
as of the Closing Date with respect to the issuance and sale of the Shares, the
Registration Statement and the Prospectus and such other related matters as you
may reasonably require, and the Company shall have furnished to Underwriters'
Counsel such documents as they reasonably request for the purpose of enabling
them to pass upon such matters.
(f) At the Closing Date you shall have received a certificate of the
Chief Executive Officer and Chief Financial Officer of the Company, dated the
Closing Date to the effect that (i) the condition set forth in subsection (a) of
this Section 6 has been satisfied, (ii) as of the date hereof and as of the
Closing Date the representations and warranties of the Company set forth in
Section 1 hereof are accurate, (iii) as of the Closing Date the obligations of
the Company to be performed hereunder on or prior thereto have been duly
performed and (iv) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company has not
sustained any material loss or interference with its business or properties from
fire, flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental proceeding,
and there has not been any material adverse change, or any development involving
a material adverse change, in the business prospects, properties, operations,
condition (financial or otherwise), or results of operations of the Company,
taken as a whole, except in each case as described in or contemplated by the
Prospectus.
(g) At the time this Agreement is executed and at the Closing Date, you
shall have received a letter, from Ernst & Young, L.L.P., independent public
accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date addressed to the Underwriters and in form
and substance satisfactory to you, to the effect that: (i) they are independent
certified public accountants with respect to the Company within the meaning of
the Act and the Regulations and stating that the answer to Item 10 of the
Registration Statement is correct insofar as it relates to them; (ii) stating
that, in their opinion, the financial statements and schedules of the Company
included in the Registration Statement and the Prospectus and covered by their
opinion therein comply as to form in all material respects with the applicable
accounting requirements of the Act and the applicable published rules and
regulations of the Commission thereunder; (iii) on the basis of procedures
consisting of a reading of the latest available unaudited interim consolidated
financial statements of the Company, a reading of the minutes of meetings and
consents of the stockholders and boards of directors of the Company, and the
committees of such boards subsequent to December 31, 1996, inquiries of officers
and other employees of the Company, who have responsibility for financial and
15
<PAGE>
accounting matters of the Company, with respect to transactions and events
subsequent to December 31, 1996 and other specified procedures and inquiries to
a date not more than five days prior to the date of such letter, nothing has
come to their attention that would cause them to believe that: (A) the unaudited
financial statements and schedules of the Company presented in the Registration
Statement and the Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the Act and, if applicable, the
Exchange Act and the applicable published rules and regulations of the
Commission thereunder or that such unaudited financial statements are not fairly
presented in conformity with generally accepted accounting principles applied on
a basis substantially consistent with that of the audited financial statements
included in the Registration Statement and the Prospectus; (B) with respect to
the period subsequent to December 31, 1996 there were, as of the date of the
most recent available monthly financial statements of the Company, and as of a
specified date not more than five days prior to the date of such letter, any
changes in the capital stock or long-term indebtedness of the Company or any
decrease in the net current assets or stockholders' equity of the Company, in
each case as compared with the amounts shown in the most recent balance sheet
presented in the Registration Statement and the Prospectus, except for changes
or decreases which the Registration Statement and the Prospectus disclose have
occurred or may occur or which are set forth in such letter, or (C) that during
the period from December 31, 1996 to the date of the most recent available
monthly financial statements of the Company, and to a specified date not more
than five days prior to the date of such letter, there was any decrease, as
compared with the corresponding period in the prior fiscal year, in total
revenues, or total or per share net income, except for decreases which the
Registration Statement and the Prospectus disclose have occurred or may occur or
which are set forth in such letter; and (iv) stating that they have compared
specific dollar amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to the Company set forth in
the Registration Statement and the Prospectus, which have been specified by you
prior to the date of this Agreement, to the extent that such amounts, numbers,
percentages, and information may be derived from the general accounting and
financial records of the Company or from schedules furnished by the Company, and
excluding any questions requiring an interpretation by legal counsel, with the
results obtained from the application of specified readings, inquiries, and
other appropriate procedures specified by you set forth in such letter, and
found them to be in agreement.
(h) Prior to the Closing Date the Company shall have furnished to you
such further information, certificates and documents as you may reasonably
request.
(i) You shall have received from each person who is a director or
officer of the Company or such shareholder as have been heretofore designated by
you and listed on Schedule II hereto an agreement to the effect that such person
will not, directly or indirectly, without your prior written consent, offer,
sell, offer or agree to sell, grant any option to purchase or otherwise dispose
(or announce any offer, sale, grant of an option to purchase or other
disposition) of any shares of Common Stock (or any securities convertible into,
exercisable for or exchangeable or exercisable for shares of Common Stock) for a
period of 180 days after the date of the Prospectus.
16
<PAGE>
(j) At the Closing Date, the Shares shall have been approved for
quotation on the Nasdaq National Market.
If any of the conditions specified in this Section 6 shall not have been
fulfilled when and as required by this Agreement, or if any of the certificates,
opinions, written statements or letters furnished to you or to Underwriters'
Counsel pursuant to this Section 6 shall not be in all material respects
reasonably satisfactory in form and substance to you and to Underwriters'
Counsel, all obligations of the Underwriters hereunder may be canceled by you
at, or at any time prior to, the Closing Date and the obligations of the
Underwriters to purchase the Additional Shares may be canceled by you at, or at
any time prior to, the Additional Closing Date. Notice of such cancellation
shall be given to the Company in writing, or by telephone, telex or telegraph,
confirmed in writing.
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all
losses, liabilities, claims, damages and expenses whatsoever as incurred
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any supplement thereto or amendment thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
- -------- -------
extent but only to the extent that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have including under this Agreement.
(b) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or
17
<PAGE>
litigation), joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the registration statement for the registration of
the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein; provided,
--------
however, that in no case shall any Underwriter be liable or responsible for any
- -------
amount in excess of the underwriting discount applicable to the Shares purchased
by such Underwriter hereunder. This indemnity will be in addition to any
liability which any Underwriter may otherwise have including under this
Agreement. The Company acknowledges that the statements set forth in the last
paragraph of the cover page and under the caption "Underwriting" in the
Prospectus constitute the only information furnished in writing by or on behalf
of any Underwriter expressly for use in the registration statement relating to
the Shares as originally filed or in any amendment thereof, any related
preliminary prospectus or the Prospectus or in any amendment thereof or
supplement thereto, as the case may be.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify each party against whom indemnification is
to be sought in writing of the commencement thereof (but the failure so to
notify an indemnifying party shall not relieve it from any liability which it
may have under this Section 7). In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been authorized in
writing by one of the indemnifying parties in connection with the defense of
such action, (ii) the indemnifying parties shall not have employed counsel to
have charge of the defense of such action within a reasonable time after notice
of commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
indemnifying parties. Anything in this subsection to the contrary
notwithstanding, an indemnifying party shall not be liable for any
18
<PAGE>
settlement of any claim or action effected without its written consent;
provided, however, that such consent was not unreasonably withheld.
- -------- -------
8. Contribution. In order to provide for contribution in circumstances in
------------
which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company and the Underwriters shall
contribute to the aggregate losses, claims, damages, liabilities and expenses of
the nature contemplated by such indemnification provision (including any
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claims
asserted, but after deducting in the case of losses, claims, damages,
liabilities and expenses suffered by the Company any contribution received by
the Company from persons, other than the Underwriters, who may also be liable
for contribution, including persons who control the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company) as
incurred to which the Company and one or more of the Underwriters may be
subject, in such proportions as is appropriate to reflect the relative benefits
received by the Company and the Underwriters from the offering of the Shares or,
if such allocation is not permitted by applicable law or indemnification is not
available as a result of the indemnifying party not having received notice as
provided in Section 7 hereof, in such proportion as is appropriate to reflect
not only the relative benefits referred to above but also the relative fault of
the Company and the Underwriters in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative benefits received
by the Company and the Underwriters shall be deemed to be in the same proportion
as (x) the total proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company and (y) the
underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company and of the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Underwriters agree that it would not be just and equitable if
contribution pursuant to this Section 8 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this Section 8 and the preceding sentence, (i) in no case shall any Underwriter
be liable or responsible for any amount in excess of the underwriting discount
applicable to the Shares purchased by such Underwriter hereunder, and (ii) no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Notwithstanding the provisions of
this Section 8, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages that such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue
19
<PAGE>
statement or omission or alleged omission. For purposes of this Section 8, each
person, if any, who controls an Underwriter within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act shall have the same rights to
contribution as such Underwriter, and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to clauses (i) and (ii) of
this Section 8. Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such party
in respect of which a claim for contribution may be made against another party
or parties, notify each party or parties from whom contribution may be sought,
but the omission to so notify such party or parties shall not relieve the party
or parties from whom contribution may be sought from any obligation it or they
may have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
provided, however, that such consent was not unreasonably withheld.
- -------- -------
9. Default by an Underwriter.
-------------------------
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or Additional Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, to which the default relates shall be purchased by the
non-defaulting Underwriters in proportion to the respective proportions which
the numbers of Firm Shares set forth opposite their respective names in Schedule
I hereto bear to the aggregate number of Firm Shares set forth opposite the
names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of the Firm
Shares or Additional Shares, as the case may be, you may in your discretion
arrange for yourself or for another party or parties (including any non-
defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares or Additional Shares, as the case may be, to which such default relates
on the terms contained herein. In the event that within five calendar days after
such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but nothing in
this Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their liability, if any, to the other Underwriters and the Company for damages
occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to which the
default relates are to be purchased by the non-defaulting Underwriters, or are
to be purchased by another party or parties as aforesaid, you or the Company
shall have the right to postpone the Closing Date or Additional Closing Date, as
the case may be for a period, not exceeding five
20
<PAGE>
business days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus which, in the opinion
of Underwriters' Counsel, may thereby be made necessary or advisable. The term
"Underwriter" as used in this Agreement shall include any party substituted
under this Section 9 with like effect as if it had originally been a party to
this Agreement with respect to such Firm Shares and Additional Shares.
10. Survival of Representations and Agreements. All representations and
------------------------------------------
warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5,
the indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 7, 8 and 11(d) hereof shall survive the termination of this Agreement,
including termination pursuant to Section 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
----------------------------------------
(a) This Agreement shall become effective, upon the later of when (i)
you and the Company shall have received notification of the effectiveness of the
Registration Statement or (ii) the execution of this Agreement. If either the
initial public offering price or the purchase price per Share has not been
agreed upon prior to 5:00 P.M., New York time, on the fifth full business day
after the Registration Statement shall have become effective, this Agreement
shall thereupon terminate without liability to the Company or the Underwriters
except as herein expressly provided. Until this Agreement becomes effective as
aforesaid, it may be terminated by the Company by notifying you or by you
notifying the Company. Notwithstanding the foregoing, the provisions of this
Section 11 and of Sections 1, 5, 7 and 8 hereof shall at all times be in full
force and effect.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date or the obligations of the Underwriters to purchase the
Additional Shares at any time prior to the Additional Closing Date, as the case
may be, if (i) any domestic or international event or act or occurrence has
materially disrupted, or in your opinion will in the immediate future materially
disrupt, the market for the Company's securities or securities in general; or
(ii) if trading on the New York or American Stock Exchanges shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required, on the New
York or American Stock Exchanges by the New York or American Stock Exchanges or
by order of the Commission or any other governmental authority having
jurisdiction; or (iii) if a banking moratorium has been declared by a state or
federal authority or if any new restriction materially and adversely affecting
the distribution of the Firm Shares or the Additional Shares, as the case may
be, shall have become effective; or (iv) (A) if the United States becomes
engaged in hostilities or there is
21
<PAGE>
an escalation of hostilities involving the United States or there is a
declaration of a national emergency or war by the United States or (B) if there
shall have been such change in political, financial or economic conditions if
the effect of any such event in (A) or (B) as in your judgment makes it
impracticable or inadvisable to proceed with the offering, sale and delivery of
the Firm Shares or the Additional Shares, as the case may be, on the terms
contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by you, reimburse the Underwriters for all out-
of-pocket expenses (including the fees and expenses of their counsel), incurred
by the Underwriters in connection herewith.
12. Notice. All communications hereunder, except as may be otherwise
------
specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, N.Y. 10167, Attention: Brian McCarthy, and, if sent to the Company,
shall be mailed, delivered, or telegraphed, telexed and confirmed in writing to
the Company, 47266 Benicia Street, Fremont, CA 94539, Attention: Phillip C.
Radlick, Ph.D.
13. Parties. This Agreement shall insure solely to the benefit of, and
-------
shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Section 7 and
8, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of Shares from any of the Underwriters.
14. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
22
<PAGE>
If the foregoing correctly sets forth the understanding between you and the
Company, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
CARDIMA, INC.
By:________________________________
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
DAIN BOSWORTH INCORPORATED
By:________________________
On behalf of themselves and the other
Underwriters named in Schedule I hereto.
23
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm
Name of Underwriter Shares to be Purchased
- ------------------- ----------------------
<S> <C>
Bear, Stearns & Co. Inc.....................
Dain Bosworth Incorporated..................
Total 2,275,000
=========
</TABLE>
S-1
<PAGE>
SCHEDULE II
[list of stockholders subject to lock-up provision]
S-2
<PAGE>
EXHIBIT 11.1
CARDIMA, INC.
COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Historical:
Weighted average common
stock outstanding.......... 66 68 71 70 75
Shares related to Staff Ac-
counting Bulletins Nos.
55, 64 and 83:
Stock Options.............. 632 632 632 632 632
Preferred Stock............ 2,357 2,357 2,357 2,357 2,357
------- ------- -------- ------- -------
Total shares used in
calculating net loss per
share....................... 3,055 3,057 3,060 3,059 3,064
======= ======= ======== ======= =======
Net loss..................... $(3,655) $(5,200) $ (7,754) $(1,520) $(2,326)
======= ======= ======== ======= =======
Net loss per share........... $ (1.20) $ (1.70) $ (2.53) $ (0.50) $ (0.76)
======= ======= ======== ======= =======
Pro forma:
Shares used in calculating
net loss per share (per
above)..................... 3,060 3,059 3,064
Preferred Stock if convert-
ed......................... 3,312 3,136 3,370
-------- ------- -------
Total shares used in calcu-
lating pro forma net loss
per share................... 6,372 6,195 6,434
======== ======= =======
Net loss..................... $ (7,754) $(1,520) $(2,326)
======== ======= =======
Pro forma net loss per
share....................... $ (1.22) $ (0.25) $ (0.36)
======== ======= =======
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 21, 1997, in the Amendment No. 2 to the
Registration Statement (Form S-1) and related Prospectus of Cardima, Inc. for
the registration of 2,616,250 shares of its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
April 28, 1997
