<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended
December 31, 1997 or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934. For the transition period
from to .
COMMISSION FILE NUMBER: 0-22419
CARDIMA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3177883
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
47266 BENICIA STREET, FREMONT, CA 94538-7330
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
Registrant's telephone number, including area code: (510) 354-0300
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) had been subject to
such filing requirements for the past 90 days. [X] Yes No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $5,759,918, based on the last reported sales price of the
Common Stock on the Nasdaq National Market on March 23, 1998.
As of March 23, 1998, there were 8,154,527 shares of Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form 10-K
portions of its Proxy Statement for the Annual Meeting of Stockholders to be
held May 19, 1998.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CARDIMA, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
ITEM 6. SELECTED FINANCIAL DATA........................................... 3
SIGNATURES................................................................. 4
</TABLE>
2
<PAGE>
Each of such amounts is a reasonable estimate of the application of the net
offering proceeds. This use of proceeds does not represent a material change
in the use of proceeds described in the prospectus of the Registration
Statement.
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below should be read in conjunction with the financial
statements and related notes attached to this report on Form 10-K as pages F-1
through F-17.
<TABLE>
<CAPTION>
PERIOD FROM
11/12/92
YEAR ENDED DECEMBER 31, (INCEPTION) TO
------------------------------------ DECEMBER 31,
1997 1996 1995 1994 1993(1)
-------- -------- ------- ------- --------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net Sales................. $ 1,261 $ 593 $ 362 $ 86 $ --
Cost of goods sold........ 2,011 1,413 830 211 --
-------- -------- ------- ------- --------
Gross profit............ (750) (820) (468) (125) --
Operating expenses:
Research and
development............ 5,320 3,319 2,581 2,205 1,083
Selling, general and
administrative......... 6,656 3,690 2,046 1,309 491
-------- -------- ------- ------- --------
Total operating
expenses............. 11,976 7,009 4,627 3,514 1,574
-------- -------- ------- ------- --------
Operating loss............ (12,726) (7,829) (5,095) (3,639) (1,574)
Interest and other income. 602 132 12 15 33
Interest expense.......... (148) (57) (117) (31) --
-------- -------- ------- ------- --------
Net loss.................. $(12,272) $ (7,754) $(5,200) $(3,655) $ (1,541)
======== ======== ======= ======= ========
Basic and diluted net loss
per share(2)............. $ (2.64) $(107.69) $(83.87) $(85.00) $(102.73)
======== ======== ======= ======= ========
Shares used in computing
basic and diluted net
loss per share(2)........ 4,642 72 62 43 15
======== ======== ======= ======= ========
<CAPTION>
PERIOD FROM
11/12/92
YEAR ENDED DECEMBER 31, (INCEPTION) TO
------------------------------------ DECEMBER 31,
1997 1996 1995 1994 1993(1)
-------- -------- ------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEETS DATA:
Cash, cash equivalents and
short-term investments... $ 12,848 $ 907 $ 2,993 $ 713 $ 1,472
Working capital (deficit). 11,609 (2,150) 2,647 571 1,318
Total assets.............. 17,674 3,964 4,735 2,284 1,701
Capital lease obligation,
noncurrent portion....... 840 722 317 308 50
Accumulated deficit....... (30,422) (18,150) (10,396) (5,196) (1,541)
Total stockholders' equity
(net capital deficiency). 14,444 (10,368) (2,675) 1,316 1,412
</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) The basic and diluted net loss per share amounts prior to 1997 have been
restated as required to comply with Statement of Financial Standards No.
128, "Earnings per Share" and Staff Accounting Bulletin No. 98. See Note 1
of the Notes to Financial Statements.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 26, 1998 CARDIMA, INC.
/s/ Phillip C. Radlick, Ph.D.
-------------------------------------
PHILLIP C. RADLICK, Ph.D.
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
NAME TITLE DATE
</TABLE>
/s/ Phillip C. Radlick, President, Chief Executive October 26, 1998
Ph.D. Officer and Director ------------------
- --------------------------- (Principal Executive Officer)
Phillip C. Radlick, Ph.D.
/s/ Ronald E. Bourquin Vice President and Chief October 26, 1998
- --------------------------- Financial Officer (Principal ------------------
Ronald E. Bourquin Financial and Accounting
Officer)
/s/ Michael J.F. Du Cros Director October 26, 1998
- --------------------------- ------------------
Michael J.F. Du Cros
/s/ Joseph S. Lacob Director October 26, 1998
- --------------------------- ------------------
Joseph S. Lacob
/s/ Neal Moszkowski Director October 26, 1998
- --------------------------- ------------------
Neal Moszkowski
/s/ Gabriel B. Vegh Executive Vice President, October 26, 1998
- --------------------------- Chief Operating Officer and ------------------
Gabriel B. Vegh Director
/s/ Charles P. Waite, Jr. Director October 26, 1998
- --------------------------- ------------------
Charles P. Waite, Jr.
4
<PAGE>
CARDIMA, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................... F-2
Balance Sheets at December 31, 1997 and 1996............................ F-3
Statements of Operations for the three years ended December 31, 1997.... F-4
Statements of Changes in Redeemable Preferred Stock and Stockholders'
Equity (Net Capital Deficiency) for the three years ended December 31,
1997................................................................... F-5
Statements of Cash Flows for the three years ended December 31, 1997.... F-6
Notes to Financial Statements........................................... F-7
</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. as of
December 31, 1997 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, 1997. 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. as December
31, 1997 and 1996, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
February 2, 1998
F-2
<PAGE>
CARDIMA, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
ASSETS -------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 8,578 $ 907
Short-term investments.................................... 4,270 --
Accounts receivable, net of allowances for doubtful
accounts of $40 and $30 at December 31, 1997 and 1996,
respectively............................................. 268 68
Inventories............................................... 532 377
Other current assets...................................... 261 229
-------- -------
Total current assets.................................... 13,909 1,581
Property and equipment, net................................. 2,488 1,400
Restricted cash............................................. 192 275
Other assets................................................ 1,085 708
-------- -------
$17,674 $ 3,964
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
Current liabilities:
Accounts payable.......................................... $ 898 $ 1,155
Accrued compensation...................................... 753 513
Other current liabilities................................. 55 52
Notes payable............................................. 7 1,682
Capital lease obligation--current portion................. 587 329
-------- -------
2,300 3,731
Deferred rent............................................... 90 139
Capital lease obligation--noncurrent portion................ 840 722
Commitments
Redeemable convertible preferred stock at amount paid in:
Series D redeemable convertible, none at December 31,
1997; 1,919,052 shares issued and outstanding as of
December 31, 1996........................................ -- 9,740
Series E redeemable convertible, none at December 31,
1997; none as of December 31, 1996....................... -- --
Stockholders' equity (net capital deficiency):
Preferred stock, $0.001 par value; 5,000,000 shares
authorized
Series A convertible, none at December 31, 1997; 428,567
shares issued and outstanding as of December 31, 1996
at amount paid in...................................... -- 2,949
Series B convertible, none at December 31, 1997; 333,333
shares issued and outstanding as of December 31, 1996
at amount paid in...................................... -- --
Series C convertible, none at December 31, 1997; 458,245
shares issued and outstanding as of December 31, 1996
at amount paid in...................................... -- 4,764
Common stock, $0.001 par value; 25,000,000 shares
authorized, 8,103,875 shares issued and outstanding at
December 31, 1997, 74,999 as of December 31, 1996; at
amount paid in............................................. 45,597 595
Deferred compensation....................................... (731) (526)
Accumulated deficit......................................... (30,422) (18,150)
-------- -------
Total stockholders' equity (net capital deficiency)....... 14,444 (10,368)
-------- -------
$ 17,674 $ 3,964
======== =======
</TABLE>
F-3
<PAGE>
CARDIMA, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Net sales......................................... $ 1,261 $ 593 $ 362
Cost of goods sold................................ 2,011 1,413 830
-------- -------- -------
Gross profit.................................... (750) (820) (468)
Operating expenses:
Research and development........................ 5,320 3,319 2,581
Selling, general and administrative............. 6,656 3,690 2,046
-------- -------- -------
Total operating expenses...................... 11,976 7,009 4,627
-------- -------- -------
Operating loss.................................... (12,726) (7,829) (5,095)
Interest and other income......................... 602 132 12
Interest expense.................................. (148) (57) (117)
-------- -------- -------
Net loss.......................................... $(12,272) $ (7,754) $(5,200)
======== ======== =======
Basic and diluted net loss per share.............. $ (2.64) $(107.69) $(83.87)
======== ======== =======
Shares used in computing basic and diluted net
loss per share................................... 4,642 72 62
======== ======== =======
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
CARDIMA, INC.
STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
----------------------------------------------------------------------------------
SERIES D SERIES E TOTAL
REDEEMABLE REDEEMABLE SERIES A SERIES B SERIES C STOCKHOLDERS'
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE EQUITY (NET
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED COMMON DEFERRED DEFICIT CAPITAL
STOCK STOCK STOCK STOCK STOCK STOCK COMPENSATION ACCUMULATED DEFICIENCY)
----------- ----------- ----------- ----------- ----------- ------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1994............ $ -- $ -- $ 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.......... 6,182 -- -- -- -- -- -- -- --
Issuance of
3,631 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............ 6,182 -- 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.......... 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
1996............ -- -- -- -- -- 7 -- -- 7
Deferred
compensation
related to grant
of stock
options......... -- -- -- -- -- 580 (580) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 54 -- 54
Net Loss........ (7,754) (7,754)
------- -------- ------- --- ------- ------- ----- -------- --------
Balances at
December 31,
1996............ 9,740 -- 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
$5.74 per share
in March 1997,
net of issuance
costs of $90.... -- 13,442 -- -- -- -- -- -- --
Issuance of
2,275,000 shares
of common stock
at $7.00 per
share in June
1997 through the
initial public
offering, net of
commissions and
issuance costs
of $2,286....... -- -- -- -- -- 13,639 -- -- 13,639
Conversion of
redeemable
convertible and
convertible
preferred stock
in connection
with the
Company's
initial public
offering........ (9,740) (13,442) (2,949) -- (4,764) 30,895 -- -- 23,182
Issuance of
27,338 shares of
common stock for
cash upon
exercise of
employee stock
options at
$0.56-$1.75 per
share in April-
August and
November 1997... -- -- -- -- -- 36 -- -- 36
Deferred
compensation
related to grant
of stock
options......... -- -- -- -- -- 432 (432) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 227 -- 227
Net Loss........ -- -- -- -- -- -- -- (12,272) (12,272)
------- -------- ------- --- ------- ------- ----- -------- --------
Balances at
December 31,
1997............ $ -- $ -- $ -- $-- $ -- $45,597 $(731) $(30,422) $ 14,444
======= ======== ======= === ======= ======= ===== ======== ========
</TABLE>
F-5
<PAGE>
CARDIMA, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $(12,272) $(7,754) $(5,200)
Adjustments to reconcile net loss to net cash
provided by operations:
Depreciation and amortization.................... 703 403 296
Amortization of deferred compensation............ 227 54 --
Loss on disposal of assets....................... -- 15 --
Loss on sale/leaseback of capital equipment...... -- 95 --
Issuance of preferred stock upon conversion of
various related party payables and interest
payable......................................... -- -- 339
Changes in operating assets and liabilities:
Accounts receivable............................ (200) (18) 29
Inventories.................................... (155) (109) --
Other current assets........................... (32) (111) 11
Restricted cash................................ 83 70 (15)
Notes receivable............................... (301) -- --
Other assets................................... (446) (526) (128)
Accounts payable............................... (257) 896 (27)
Accrued employee compensation.................. 240 314 52
Other current liabilities...................... 3 1 19
Deferred rent.................................. (49) 10 107
-------- ------- -------
Net cash used in operating activities........ (12,456) (6,660) (4,517)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments................ (4,270) -- --
Capital expenditures............................... (883) (388) (78)
Proceeds from disposal of assets................... 3 -- --
-------- ------- -------
Net cash used in investing activities.......... (5,150) (388) (78)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock...... 10,158 2,984 5,189
Proceeds from issuance of bridge loans............. 1,610 1,674 2,263
Payments of bridge loans........................... -- -- (403)
Principal payments under capital leases............ (469) (286) (153)
Payments under notes payable....................... -- -- (24)
Net proceeds from sale of common stock............. 13,675 7 3
Proceeds from sale/leaseback of capital equipment.. 303 583 --
-------- ------- -------
Net cash provided by financing activities...... 25,277 4,962 6,875
-------- ------- -------
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... 7,671 (2,086) 2,280
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR....... 907 2,993 713
-------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR............. $ 8,578 $ 907 $ 2,993
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for interest............. $ 122 $ 49 $ 43
======== ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Equipment acquired under capital leases............ $ 845 $ 746 $ 286
======== ======= =======
Conversion of various related party payables,
bridge loans and capital lease obligations and
related accrued interest to convertible preferred
stock............................................. -- $ 574 $ 2,199
======== ======= =======
</TABLE>
F-6
<PAGE>
CARDIMA, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Cardima, Inc., (the "Company" or "Cardima"), 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"), a division of Boston
Scientific Corporation.
Through 1996, the Company was in the development stage. During fiscal 1997,
the Company recognized increasing revenues associated with its product
approvals in the United States. Consequently, the Company is no longer
considered to be in the development stage. In June 1997, the Company completed
an initial public offering of 2,275,000 shares of Common Stock at an initial
price to the public of $7.00 per share, resulting in net proceeds to the
Company (after deducting underwriting discounts and commissions and offering
expenses) of approximately $13.6 million.
The Company has sustained continuing operating losses and expects such
losses to continue over the next several years. Management plans to continue
to finance the operations with a combination of stock sales, product revenue
and other financing facilities. In that regard, in February and March 1998,
the Company secured a $1.5 million lease line and a firm commitment letter for
a $3.0 million line of credit, respectively (see Note 8). 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, including
eliminating 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.
REVENUE RECOGNITION
Revenues are recognized when products are shipped. To date, product sales
have been direct to customers in the United States and to distributors
primarily in Europe, Japan and South America. No one distributor or direct
customer accounted for more than 10% of the Company's net sales and export
sales represented 31% of net sales for the year ended December 31, 1997. Of
the export sales in 1997, 32% were to Japan, 58% were to Europe and 10% were
to the rest of the world. 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. All of the
Company's sales from inception to December 31, 1996 were export sales.
Provisions for doubtful accounts were $119,000 and $11,000 for the years end
December 31, 1997 and 1996, respectively. When necessary, estimated provisions
for product returns are recorded.
RESEARCH AND DEVELOPMENT
Research and development costs, which include clinical and regulatory costs,
are charged to expense as incurred.
F-7
<PAGE>
CARDIMA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statements No. 128,
"Earnings Per Share." SFAS 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effect of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been restated to
conform to the SFAS 128 requirements. Effective February 3, 1998, Staff
Accounting Bulletin No. 98 ("SAB 98") was issued and amends the existing SEC
staff guidance primarily to give effect to SFAS 128. Topic 4.D of SAB 98
essentially eliminates the cheap stock (convertible preferred stock,
redeemable convertible preferred stock, common stock and common equivalent
shares issued by the Company at prices below the initial public offering price
during the twelve-month period prior to the offering) calculation from an
initial public offering.
The Company has excluded all convertible debt, convertible preferred stock,
warrants, and employee stock options from the computation of basic and diluted
earnings per share because all such securities are anti-dilutive for all
periods presented.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT FOR
PER SHARE DATA)
--------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Net loss........................................ $12,272 $ 7,754 $ 5,200
======= ======== =======
Weighted average shares outstanding........... 4,642 72 69
Weighted average unvested common shares issued
subject to repurchase agreements............. -- -- (7)
------- -------- -------
Shares used to compute basic and diluted net
loss per share................................. 4,642 72 62
======= ======== =======
Basic and diluted net loss per share............ $ (2.64) $(107.69) $(83.87)
======= ======== =======
</TABLE>
Pro forma net loss per share for 1997 and 1996 has been computed as
described above and also gives effect, pursuant to SEC staff policy, to the
conversion of convertible preferred shares not included above that were
converted upon completion of the Company's initial public offering (using the
"if converted" method) from the original date of issuance.
Pro forma basic and diluted net loss per share information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT FOR PER
SHARE DATA)
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Shares used in computing basic and diluted
net loss per share......................... 4,642 72
-------------- --------------
Adjusted to reflect assumed conversion of
preferred stock from the date of issuance
through the initial public offering in June
1997....................................... 1,454 3,312
-------------- --------------
Shares used in computing pro forma basic and
diluted loss per share..................... 6,096 3,384
============== ==============
Pro forma basic and diluted net loss per
share...................................... $ (2.01) $ (2.29)
============== ==============
</TABLE>
F-8
<PAGE>
CARDIMA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers investments in highly liquid instruments purchased
with an original maturity of 90 days or less to be cash equivalents. All of
the Company's cash equivalents and short-term investments, consisting
principally of commercial paper and government securities and are classified
as available-for-sale as of the balance sheet date. The aggregate purchases
and sales of available for sale securities amounted to $33.8 million and $6.4
million, respectively, in fiscal year 1997. There were no realized gains or
losses experienced in each of the years ended December 31, 1997, 1996 and
1995. These securities are recorded at fair value, which approximates
amortized cost. The fair value of investments is based on quoted market prices
at December 31, 1997. All available-for-sale investments generally mature in
one year or less. The fair value of these securities approximated the
amortized cost at December 31, 1997. In 1996, all amounts consisted of cash.
There were no short-term investments.
Cash, cash equivalents and short-term investments at December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents:
Cash........................................................ $ 310
Money market funds.......................................... 3,044
-------
3,354
Available for sale securities commercial paper.............. 5,224
-------
Total cash and cash equivalents........................... $ 8,578
=======
Short-term investments:
Commercial paper.............................................. $ 2,233
Corporate notes............................................... 1,278
-------
Available for sale securities............................... 3,511
Certificate of deposit........................................ 759
-------
Total short-term investments................................ $ 4,270
=======
Restricted investments:
Restricted certificate of deposit........................... $ 192
=======
</TABLE>
The restricted certificate of deposit is being held as collateral by a
financial institution against a letter of credit for the Company's primary
facilities in Fremont, California.
INVENTORY
Inventories are stated at the lower if cost or market. Cost is based on
actual costs computed on a first-in, first-out basis. Inventories consist of
the following:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
DECEMBER 31,
-------------
1997 1996
------ ------
<S> <C> <C>
Inventories:
Raw materials................................................. $ 209 $ 145
Work-in-process............................................... 119 131
Finished goods................................................ 204 101
------ -----
$ 532 $ 377
====== =====
</TABLE>
F-9
<PAGE>
CARDIMA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, are
carried at cost less accumulated depreciation and amortization. Property and
equipment are depreciated using the straight-line method over estimated useful
lives, generally three to five years. Leasehold improvements are amortized
using the straight-line method over the shorter of the estimated useful life
of the asset or the remaining term of the lease. Depreciation expense includes
amortization of capital leases and leasehold improvements.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
---------------
1997 1996
------- ------
<S> <C> <C>
Property and equipment:
Equipment................................................. $ 3,715 $2,008
Leasehold improvements.................................... 99 93
------- ------
3,814 2,101
Less accumulated depreciation............................. (1,326) (701)
------- ------
$ 2,488 $1,400
======= ======
</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 $2,357,000 and $1,523,000 at December 31, 1997 and 1996, respectively.
Accumulated amortization related to leased assets was $1,072,000 and $564,000
at December 31, 1997 and 1996, respectively. Amortization related to capital
leases are included in depreciation expense.
The Company examines the carrying value of its long-lived assets to
determine whether there are any impairment losses. If indicators of impairment
were present in long-lived assets used in operations and future cash flows
were not sufficient to recover the assets' carrying amount, an impairment loss
would be charged to expenses in the period identified. No event has been
identified that would impair the value of long-lived assets recorded in the
accompanying financial statements.
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 supplies. 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'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
Patent costs deemed to have future benefits are amortized using the
straight-line method over estimated useful lives of seven years, beginning at
their effective dates or over the remainder of such periods from the dates
acquired.
The Company examines the carrying value of its long-lived intangible assets
to determine whether there are any impairment losses. If indicators of
impairment were present in long-lived intangible assets used in operations
F-10
<PAGE>
CARDIMA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
and future cash flows were not sufficient to recover the assets' carrying
amount, an impairment loss would be charged to expenses in the period
identified. No event has been identified that would impair the value of long-
lived intangible assets recorded in the accompanying financial statements.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform with current
period presentation. Such reclassifications had no effect on the results of
operations or accumulated deficit.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
("SFAS 130"), which establishes standards for reporting and display of income
and its components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS 130 is effective January 1, 1998
and is not expected to have a material impact on the Company's results of
operations, cash flows or financial position.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information ("SFAS 131") which changes the way public
companies report information about operating segments. SFAS 131, which is
based on the management approach to segment reporting, established
requirements to report selected segment information quarterly and to report
entity wide disclosures about products and services, major customers and the
material countries in which the entity holds assets and reports revenue. SFAS
131 is effective January 1, 1998 and additional disclosures will be required
as the Company expands its international operations. The Company does not
expect SFAS 131 to have a material impact on the Company's results of
operations, cash flows or financial position.
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, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
OPERATING LEASES CAPITAL LEASES
---------------- --------------
<S> <C> <C>
Years ending December 31:
1998....................................... $360 $ 708
1999....................................... 314 666
2000....................................... -- 253
2001....................................... -- --
---- ------
Total minimum payments required.............. $674 $1,627
====
Less amount representing interest............ (200)
------
Present value of future lease payments....... 1,427
Less current portion......................... (587)
------
Noncurrent portion........................... $ 840
======
</TABLE>
Rent expense, net of rental income was approximately $316,000 in 1997,
$295,000 in 1996 and $312,000 in 1995. In connection with its facilities lease
arrangements, the Company issued letters of credit to lessors which
F-11
<PAGE>
CARDIMA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
are collateralized by certificates of deposit totaling approximately $192,000
at December 31, 1997. Accordingly, this restricted cash amount has been
classified as a noncurrent asset.
In April 1997, the Company entered into a lease line agreement with a
stockholder for $1,600,000 to finance capital expenditures, approximately
$784,000 of which was outstanding as of December 31, 1997. As partial
consideration for this arrangement, a warrant to purchase 13,937 shares of
common stock was issued to the stockholder. The warrant is exercisable at
$5.74 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. The
warrant is outstanding as of December 31, 1997.
3. STOCKHOLDERS' EQUITY
Initial Public Offering
In June of 1997, upon completion of the Company's initial public offering,
Series A, B, C, D and E preferred stock converted into 5,726,538 shares of
common stock.
In March and June 1997, the Company amended and restated its certificate of
incorporation to increase the total number of shares authorized to 30,000,000.
Of the shares authorized, 25,000,000 are designated for issuance of common
stock and 5,000,000 are designated for issuance of preferred stock.
Common Stock
In June 1997, the Company completed its initial public offering and issued
2,275,000 shares of its Common Stock at a price of $7.00 per share. The
Company received approximately $13.6 million in cash, net of underwriting
discounts, commission and other offering costs.
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.
1993 Stock Option Plan
During 1993, the board of directors adopted the 1993 Stock Option Plan (the
"Plan") and, as amended, has reserved 1,300,000 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 granted prior to the initial public offering shares 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. Subsequent to the initial public offering, only fully vested shares
are exercisable. 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.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Activity under the 1993 Stock Option Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------------------
NUMBER OF PRICE WEIGHTED-AVERAGE
SHARES AVAILABLE SHARES PER SHARE EXERCISE PRICE
---------------- --------- ------------ ----------------
<S> <C> <C> <C> <C>
Balance at December 31,
1994................... 133,200 129,906 $0.70--$2.10 $0.9753
Options granted......... (41,903) 41,903 $0.56--$2.10 0.9705
Options exercised....... -- (3,631) $0.70--$1.05 0.9368
Options canceled........ 19,923 (19,923) $0.70--$1.05 0.9368
-------- ---------
Balance at December 31,
1995................... 111,220 148,255 $0.56--$2.10 0.9705
Additional shares
reserved............... 640,079 -- -- --
Options granted......... (733,778) 733,778 $0.56--$1.75 1.2485
Options exercised....... -- (4,708) $0.56--$2.10 1.2534
Options canceled........ 66,635 (66,635) $0.56--$2.10 1.2534
-------- ---------
Balance at December 31,
1996................... 84,156 810,690 $0.56--$2.10 1.2534
Additional shares
reserved............... 396,825 -- -- --
Options granted......... (438,162) 438,162 $1.75--$7.00 4.2533
Options exercised....... -- (27,338) $0.56--$7.00 2.3861
Options canceled........ 80,899 (80,899) $0.56--$5.88 2.3681
-------- ---------
Balance at December 31,
1997................... 123,718 1,140,615 $0.56--$5.88 2.3681
======== =========
</TABLE>
From April 1996 to April 1997, options to purchase a total of 835,928 shares
were granted at prices ranging from $0.56 to $5.74 per share. Deferred
compensation of approximately $1,012,000 was recorded for these option grants
based on the deemed fair value of common stock (ranging from $1.00 to $8.00
per share).
At December 31, 1997, 1996 and 1995 approximately 827,920, 810,685 and
145,944 options, respectively, were exercisable under the plan. Of the options
granted in 1997, 69,268 were granted below fair value and 368,894 were granted
at fair value.
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. At December 31, 1997 no shares had
been issued under this plan.
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. As of December 31, 1997, no shares were issued under this
purchase plan.
Warrants
At December 31, 1997, 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 to purchase
1,428 shares of common stock at $7.00 per share issued in connection with the
facility lease; warrants to purchase 1,905 shares of common stock at $7.00 per
share and 2,142 shares of common stock at $5.11 per share issued in connection
with a letter of credit; warrants to purchase 23,776 shares of common stock
F-13
<PAGE>
CARDIMA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
at $5.11 per share issued in connection with a capital lease; and warrants to
purchase 17,543 shares of common 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 10,427 shares of the Company's common 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.
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 common stock at a price of $5.74
per share. The warrant expires five years from the date of issuance.
The Company has reserved 527,681 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.
Pro forma information regarding net loss and loss per share is required by
Statement 123, which also requires that the information be determined as if
the Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using the minimum
value method for 1996 and 1995 and the Black Scholes option pricing model for
1997 with the following weighted-average assumptions for 1997, 1996 and 1995,
respectively; risk-free interest rates of approximately 6.0%, 7.0% and 7.0%;
dividend yields of 0%, volatility factors of the expected market price of the
Company's Common Stock of 0.6, 0.0 and 0.0 as the Company was not public in
1996 and 1995; and a weighted-average expected life of the options of four
years.
The option valuation models were developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
F-14
<PAGE>
CARDIMA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net loss -- as reported........................ $(12,272) $ (7,754) $(5,200)
======== ======== =======
Net loss -- pro forma.......................... $(12,526) $ (7,776) $(5,201)
======== ======== =======
Net loss -- per share as reported.............. $ (2.64) $(107.69) $(83.87)
======== ======== =======
Net loss -- per share pro forma................ $ (2.70) $(108.00) $(83.89)
======== ======== =======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
NUMBER OF WEIGHTED- NUMBER OF WEIGHTED-
RANGE OF SHARES WEIGHTED-AVERAGE AVERAGE SHARES AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE AS EXERCISE
PRICES AS OF 12/31/97 CONTRACTUAL LIFE PRICE OF 12/31/97 PRICE
-------- -------------- ---------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.56 -- $0.70 139,018 7.51 $0.6010 139,018 $0.6010
1.05 -- 1.40 557,290 8.20 1.3428 557,290 1.3428
1.75 -- 3.75 121,700 9.10 1.9995 109,200 1.7991
5.00 -- 5.50 300,363 8.03 5.0340 20,834 5.0000
5.88 -- 5.88 17,400 9.58 5.8800 986 5.8800
6.09 -- 7.00 4,844 9.54 6.6243 592 7.0000
--------- -------
$0.56 -- $7.00 1,140,615 8.19 $2.3861 827,920 $1.3799
========= =======
</TABLE>
Pro forma information regarding net loss and loss 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.
4. NOTES RECEIVABLE
In December 1997, the Company entered into a $300,000 note receivable
agreement with Phillip C. Radlick, Ph.D., its President and Chief Executive
Officer to facilitate the purchase of a principal residence in the Bay Area.
The note bears interest at the minimum Applicable Federal Rate (6.45% at
December 31, 1997) and is due and payable in a single lump sum forty-eight
months from the note date. As security for the note, Dr. Radlick granted
Cardima a security interest in his vested stock options.
5. INCOME TAXES
As of December 31, 1997 and December 31, 1996, the Company had federal net
operating loss carryforwards of approximately $29,500,000 and $10,100,000,
respectively. The Company also had federal research and development tax credit
carryforwards of approximately $200,000 as of December 31, 1997 and 1996. The
net operating loss and credit carryforwards will expire at various dates
beginning on December 31, 2008 through December 31, 2012, if not utilized.
F-15
<PAGE>
CARDIMA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred tax assets as of December
31 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Net operating loss carryforwards.......................... $ 10,800 $ 6,500
Research credits carryforwards (federal and state)........ 500 300
Capitalized research and development...................... 300 500
Other, net................................................ 300 200
-------- -------
Total deferred tax assets................................. 11,900 7,500
Valuation allowance for deferred tax assets............... (11,900) (7,500)
-------- -------
$ -- $ --
-------- -------
</TABLE>
The valuation allowance increased by $3,050,000 in 1996.
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 neuroradiology, interventional radiology, 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
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
F-16
<PAGE>
CARDIMA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
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.
Stock Transactions
In December 1994, the Company issued 24,110 shares of common 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. In January 1995, the Company issued an
additional 10,714 shares of common 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 common 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 common stock to Target at $5.11 per share in exchange for the
conversion of outstanding capital lease obligations.
Operations and Facilities
In May 1993, in the Company entered into an agreement with Target whereby
Target agreed to supply and 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.
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, 1997, $28,000 has been paid and nothing is owed to Target
under these arrangements (approximately $234,000 and $152,000 was paid and
$38,000 and $31,000 owed at December 31, 1996 and 1995, respectively. Target
owed approximately $17,000 and $21,000 at December 31, 1996 and 1995,
respectively).
Target had sublet certain facilities from the Company which can be renewed
annually. Net monthly rental income was approximately $4,500. In November
1997, this sublease arrangement was terminated.
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. In connection with this lease
line agreement, the Company issued to Target a warrant to purchase 10,427
shares of the Company's common stock. In December 1995 and February 1996, the
outstanding capital lease obligation, plus accrued interest, was converted
into shares of Series D convertible preferred stock, which was converted into
254,403 shares of common stock upon completion of the initial public offering.
8. SUBSEQUENT EVENTS
In February 1998, the Company entered into a lease agreement with a lessor
that allows for the Company to borrow up to $1.5 million under a lease line
arrangement. The lease line agreement provides for financing of office and
manufacturing equipment, software, custom built equipment and molds for a 48
month term. The lease line agreement will expire December 31, 1998.
In March 1998, the Company secured a firm commitment letter for a $3.0
million line of credit which may be used for general working capital purposes.
The payment of the lease line is interest only for the first six months,
interest and principal for months seven through thirty-six and a balloon
payment at the end of the lease, if fully utilized.
F-17
