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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the fiscal year ended December 31, 1999 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)
DELAWARE 94-3177883
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
47266 BENICIA STREET, FREMONT, CA 94538-7330
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(Address of Principal Executive Offices) (Zip Code)
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 $77,825,589 based on the last reported sales price of the Common
Stock on the Nasdaq National Market on March 13, 2000.
As of March 13, 2000, there were 21,233,587 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 25, 2000.
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CARDIMA, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2000
INDEX
PAGE NO.
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PART I......................................................................................................................3
ITEM 1. BUSINESS........................................................................................................3
ITEM 2. PROPERTIES.....................................................................................................29
ITEM 3. LEGAL PROCEEDINGS..............................................................................................29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................................29
PART II....................................................................................................................30
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................................30
ITEM 6. SELECTED FINANCIAL DATA........................................................................................31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................................41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................................41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................41
PART III...................................................................................................................42
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................................42
ITEM 11. EXECUTIVE COMPENSATION........................................................................................43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................................43
PART IV....................................................................................................................44
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..............................................44
SIGNATURES.................................................................................................................46
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PART I
ITEM 1. BUSINESS
Overview
Cardima, Inc., (the "Company" or "Cardima"), 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 at the distal end of the catheter that are
designed to record electrical signals for mapping purposes and, with some
products, to emit RF energy for ablation; thereby allowing physicians to both
map and ablate using the same 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.
The Company marketed its diagnostic microcatheter system for VT and AF,
including the Pathfinder, Tracer (approved in May 1999) and Revelation
microcatheters, along with the Naviport, Vueport and Venaport lines of guiding
catheters in the U.S. through January 31, 2000. On January 26, 2000, the Company
signed an exclusive three year distribution agreement with St. Jude Medical
Corporation ("St. Jude") whereby St. Jude's Daig Division will distribute
Cardima's diagnostic products in the U.S. The distribution agreement included an
equity investment by St. Jude. The Company retains the rights for all other
geographic areas and maintains worldwide control of its therapeutic products.
The Company continues to market its diagnostic microcatheter system for VT and
AF in Europe, Japan, Australia, Canada and other countries throughout the world.
The Company currently continues to increase patient enrollment in two
therapeutic clinical trials: For AF, the Revelation Tx microcatheter system and
for VT, the Therastream microcatheter system. The Revelation Tx, along with the
Revelation, are both approved in the European Union (EU) for treating AF.
Discussion of the Heart and Arrhythmic Disorders
The heart is an electromechanical 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
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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. 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. In a
systematically timed sequence, this conduction system carries electrical signals
to the muscle cells throughout the heart. This electrical conduction cycle
results in a normal heart beat that originates in the right atrium, commencing
in a specialized group of cells called the Sino-Atrial ("SA") node.
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 reaches the Atrio-Ventricular
("AV") node and is delayed momentarily. This momentary delay provides enough
time for the atria to fill the ventricles with blood before they contract.
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 rest of the body (while the atria only pump blood to the
ventricles), the ventricles are surrounded bya 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 rhythmically 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:
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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 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 hospital 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
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 can affect 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 all forms of AF because currently
available competitor's catheters are inadequate to map the right and left atrium
simultaneously.
Current AF treatments are directed at trying to reestablish a normal heartbeat
and prevent stroke, and are primarily supportive and palliative. 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, limiting the
pooling action of the blood therefore reducing or eliminating the potential of
the natural clotting mechanism of the blood to take effect. However,
antiarrhythmic drug therapy often becomes less effective over time, with
approximately half of the patients eventually developing resistance to the
drugs. In addition, antiarrhythmic drugs have potentially 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 attempting to re-organize the
heart's electrical activity. This treatment is usually effective for a limited
period of time as well. Implantable atrial defibrillators ("IAD's") are being
investigated to detect the onset of AF internally and then deliver an
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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
with IAD's including pain tolerance, reversion to AF and creation of VT as a
result of the electrical shock. Another alternative treatment is the purposeful
destruction of the AV node followed by implantation of a pacemaker which is
typically considered a treatment of last resort for AF patients, but does not
cure or treat the AF itself. The patient also is dependent on the pacemaker for
life. Pacemakers are battery-powered devices and typically require replacement
approximately every seven to ten years depending on manufacturer, type of device
and amount of electrical energy delivered. Since atrial function remains poor
following the procedure, chronic anticoagulant therapy, which increases risk of
hemorraghic stroke, is generally required.
The Company believes that the only curative therapy for AF used today is an open
heart, open chest operation commonly known as the "maze" procedure whereby 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
chaotic impulses in the atrium through scar creation is generally considered
effective in controlling AF.
Electrophysiologists are also experimenting with minimally invasive,
catheter-based ablation procedures that attempt to mimic the results of the maze
procedure. Although catheters offer the benefit of a minimally invasive
approach, the procedures can be difficult to perform because of the shortcomings
of a majority of existing catheter technology and some appear unable to create
lesions that effectively isolate portions of the atria where the arrhythmia
causing tissue is located.
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 can result in the formation of a
scar or electrical barrier inside the ventricular wall, leading to 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 reducing the amount of oxygenated
blood pumped 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 extrememly 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 through immediate external
electrical cardioversion or defibrillation.
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%
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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, 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.
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, and in some
circumstances may actually induce VT. The Multicenter Automatic Defibrillator
Implantation Trial ("MADIT") has demonstrated that the implantable cardiac
defibrillator ("ICD") is a more effective treatment for VT than antiarrhythmic
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, the
risks associated with implanting foreign objects in the body and significantly
impaired quality of life for the patient. In addition, the ICD 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 and
there is a competitive product approved to treat VT's in the U.S. that has had
limited acceptance in the market that the Company believes is due to its ability
to access VT sites endocardially and the requirement to deliver high power
levels to attempt to ablate the tissue deep in the ventricular walls. Therefore,
the Company believes current catheter size 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
arrhythmias. 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, sometimes requiring the use of large amounts of RF energy to reach
the arrhythmogenic foci. As a consequence, the endocardial approach generates
larger, less focused lesions, increasing the amount of ventricular tissue
destroyed in the procedure and potentially reducing heart muscle function.
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
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technology. The catheters currently used are relatively large, typically six to
eight French (French is a medical term used to denote catheter size; i.e., 1 mm
= 1 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 adjacent to 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 and ablate closest to the
foci, the user must mechanically manipulate the catheter within the rapid blood
flow of a heart in VT at up to 300 beats per minute, which can be very
difficult. As a result, an endocardial electrophysiology procedure with this
existing technology 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 require significant additional
investment in that competitor's proprietary 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 tissue causing the
AF. 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 tissue causing the VT with
minimal trauma to normal rhythm-conduction of the heart's tissue.
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 is working to achieve this goal by
designing microcatheter systems which provide 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:
o MINIMALLY INVASIVE APPROACH. The Cardima microcatheter systems are
designed to provide better access in a minimally invasive procedure to
treat both AF and VT. This increased access results in decreased procedure
time, shorter hospital stays, lower procedure costs and fewer
complications than the surgical procedures currently in use.
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o SINGLE CATHETER FOR RAPID MAPPING AND ABLATION. Initially, the Company has
developed microcathers which are capable of only diagnosing arrhythmias.
The next generation microcatheters, including the Revelation Tx and
Therastream are capable of both mapping and ablating. 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.
o ENHANCED ACCESS TO THE VASCULATURE OF THE HEART. Cardima's microcatheters
feature a significantly smaller diameter, approximately one half the size
of standard electrophysiology catheters, and incorporate Target variable
stiffness technology utilizing a central core guidewire and a highly
flexible distal tip. As a result, the Company's microcatheters are more
torqueable and flexible than standard electrophysiology catheters and have
varying degrees of flexibility at the distal end to allow enhanced and
less traumatic 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.
o 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.
o CURATIVE TREATMENT FOR AF. The Cardima Revelation and Revelation Tx
microcatheter systems are 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 these thinner lesions will result in a significant
improvement in atrial function and a reduction in the risk of blood
clotting, reducing or possibly eliminating the need for chronic
anticoagulant therapy. The Company has also designed the Revelation Tx
microcatheter with temperature-sensing bands between each electrode that
are designed to be in direct contact with the atrial tissue thereby giving
a more accurate temperature reading during ablation. Competitive systems
utilize temperature sensors positioned under their electrodes that are not
in direct contact with the tissue. The Company believes the direct contact
design and more accurate temperature monitoring during an ablation is an
important competitive feature due to the concern of creating coagulum
during an ablation procedure. 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.
o CURATIVE APPROACH FOR VT. The Company's Pathfinder, Pathfinder mini and
Tracer microcatheter systems for mapping VT and the Therastream
microcatheter system for both mapping and ablation of
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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 reduced
destruction of surrounding healthy tissue, thus maximizing and optimizing
the normal function of the heart after the procedure. The Company is aware
of at least one other epicardial mapping catheter in addition to the
Cardima Pathfinder, Pathfinder mini, Tracer and Therastream under
development.
o 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 with a system that is compatible with standard laboratory
equipment, the Company believes its products will be rapidly adopted by
electrophysiologists.
o 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
fluoroscopy, 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 due to shorter procedure
times than those using standard electrophysiology catheters, thereby
reducing procedure costs and the risk of disease resulting from extended
exposure to x-ray fluoroscopy.
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
is designing systems which incorporate 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
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diagnostic and therapeutic 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 developing relationships with
medical centers in Europe and Japan, to perform clinical trials of its
microcatheter systems for the diagnosis and treatment of AF and VT. Based on the
initial feasibility results, Cardima has obtained FDA approval to expand to a
larger multi-center trial with nine investigative centers. 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. 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.
STRATEGIC PARTNERING WITH ST. JUDE MEDICAL CORPORATION FOR DISTRIBUTION OF
CARDIMA'S DIAGNOSTIC PRODUCTS IN THE U.S. AND CONTINUED PROGRESS ON THERAPEUTIC
TRIALS IN THE U.S. On January 26, 2000, the Company signed an exclusive three
year distribution agreement with St. Jude Medical Corporation ("St. Jude")
whereby St. Jude's Daig Division will distribute Cardima's diagnostic products
in the U.S. The distribution agreement included an equity investment by St.
Jude. The Company retains the rights for all other geographic areas and
maintains worldwide control of its therapeutic products. The Company continues
to enroll patients in its AF study and intends to further expand the study into
a pivotal study and use the data as the basis for the Premarket Approval
application ("PMA") submission with the FDA.
INCREASE SALES BY FURTHER PENETRATING INTERNATIONAL MARKETS. The Company intends
to continue to increase international sales through expansion of its network of
international distributors to further penetrate international markets, given
their substantial size and the relatively lower regulatory barriers. The Company
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 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 the United States, Europe, Japan and Australia for the
Cardima Revelation microcatheter system for mapping AF. In addition, Cardima
received CE mark approval for marketing the Revelation and Revelation Tx
ablation microcatheter systems to treat AF in the European Union in August and
December 1998, respectively.
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PRODUCTS
Cardima is developing 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. For VT, these systems are
designed to provide intravascular access to the heart to map and ablate within
the wall of the ventricles. All of the Company's microcatheters are available
with a variety of electrode numbers, electrode spacing configurations and outer
diameters. The series of electrodes at the distal ends can, depending on the
particular product, may both receive electrical signals for mapping and emit RF
energy for ablation. In addition, 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. The Company's microcatheters are designed for single use.
The Company is designing its products to be used with existing electrophysiology
recording systems and RF ablation generators. The Company's ancillary products,
including guiding catheters, guidewires, electrical switch boxes and connecting
cables, support these microcatheter systems.
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>
Revelation Fixed-wire multi-electrode Mapping 510(k) clearance obtained. Approved in European
microcatheter system Union (CE Mark) and
designed to map in both Japan.
right and left atria.
Also can be used for Ablation Approved in the
ablation in approved markets. European Union (CE
Mark) for ablation.
Revelation Tx Fixed-wire multi-electrode Mapping and Phase II IDE approved; Approved in European
microcatheter system with Ablation clinical trial in progress. Union (CE Mark).
temperature sensors designed
to map and create long, thin,
continuous, linear, transmural
lesions inthe right atrium.
Revelation T-Flex Steerable fixed-wire multi- Mapping and Approved in European
electrode microcatheter Ablation
system with temperature
sensors designed to map and
create long, thin, continous,
linear, transmural lesions in
the right atrium.
VT PRODUCTS
- -------------------
Cardima Pathfinder Fixed-wire multi-electrode Mapping 510(k) clearance obtained. Approved in European
microcatheter system Union (CE Mark) and
designed for accessing Japan.
coronary sinus vasculature
to locate arrhythmia causing
tissue.
Pathfinder MINI Smallest Cardima Pathfinder Mapping 510(k) clearance obtained. Approved in European
microcatheter (1.5 French) Union (CE Mark) and
designed to provide access Japan.
to more distal, smaller
coronary veins
</TABLE>
12
<PAGE>
<TABLE>
INTERNATIONAL
VT PRODUCTS DESCRIPTION INDICATION U.S. REGULATORY STATUS(1) REGULATORY STATUS(1)
- ------------------- ------------------------------ ---------------- ----------------------------- -------------------------
<S> <C> <C> <C> <C>
Tracer Over-the-wire Mapping 510(k) clearance obtained. Approved in European
multi-electrode Union (CE Mark) and
microcatheter system Japan.
designed to be used in the
veins of the heart wall over
a guidewire.
Therastream Over-the-wire multi-electrode Ablation IDE approved for feasibility Study Planned for at least
microcatheter system designed trial. Expected completion Q1 one center in European
for mapping and ablation from 2000 Union.
within the veins of the heart
hall.
SUPPORT
PRODUCTS
- -------------------
Venaport Coronary sinus guiding Venous access 510(k) clearance obtained. Approved in European
catheters with a family of Union (CE Mark) and
curve shapes and lengths. Japan.
Designed to deliver Cardima
microcatheters.
Vueport Balloon-tipped coronary sinus Venous access 510(k) clearance obtained Approved in European
guiding catheter designed to delivery of EP Union (CE Mark).
facilitate delivery of catheters,
electrophysiology (EP) venography
catheters and provide occlusive
venography.
Naviport Deflectable guiding catheter EP catheter 510(k) clearance obtained Approved in European
designed to facilitate delivery and Union (CE Mark).
delivery of EP catheters. support
EP Select Switch box designed to Connectivity 510(k) clearance obtained. Approved in European
interface with existing for pacing and Union (CE Mark).
electrophysiology lab eletrophysiol-
equipment and multi-electrode ogy recording.
catheters.
Tx Select Switch box designed to Connectivity Approved in European
interface with existing for pacing, Union (CE Mark).
electrophysiology lab electrophysiol-ogy
equipment and multi-electrode recording and
catheters. radio
frequency
ablation.
</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
United States, Europe and 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 the Company's "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Factors Affecting Future
Results" and elsewhere in this Annual Report on Form 10-K.
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<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 REVELATION FOR AF MAPPING. The Revelation microcatheter system is
designed to facilitate mapping of the atria. The Revelation is a thin, flexible,
eight electrode microcatheter. The Revelation microcatheter system is a 3.3
French diameter microcatheter that incorporates variable stiffness technology
that permits access to any area of the atria and has three millimeter long
platinum coil electrodes for added flexibility to enhance contact to surrounding
heart tissue. This microcatheter system is being sold for mapping AF in the
United States, Europe and Japan. The Revelation is also approved for treatment
of AF in the European Union.
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 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 REVELATION TX FOR AF ABLATION. The Revelation Tx is a thin, flexible,
eight electrode microcatheter. The Revelation Tx microcatheter system is a 3.7
French diameter microcatheter that incorporates variable stiffness technology
that permits access to any area of the atria and has six millimeter long
platinum coil electrodes for added flexibility to enhance contact to surrounding
heart tissue. The Company's animal studies have demonstrated the ability of the
Revelation Tx to create these thin continuous transmural linear lesions. The
Revelation Tx also has temperature sensing thermocouples placed between each
coiled electrode to monitor tissue temperature during ablation. The eight
electrodes 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 Revelation Tx 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 at a significantly
reduced expense. Unlike other 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
Revelation Tx may have the ability to more effectively and rapidly isolate the
arrhythmia causing tissue.
The Revelation Tx microcatheter is designed with narrow electrodes that are able
to deliver ablation energy to the atrial tissue at much lower power settings
than documented with standard electrophysiology catheters. The Company has
designed its Revelation Tx microcatheter system to be used with leading cardiac
electrophysiology RF generators and electrophysiology mapping computer systems.
The Company submitted an IDE for an expanded feasibility study to treat AF in
the United States and received approval in December 1998. The Company believes
that PMA approval will be required before the Cardima Revelation Tx can be
marketed in the United States to treat AF. 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, PATHFINDER MINI AND TRACER FOR VT MAPPING. The Company's
microcatheter systems used for diagnosing VT are designed to be positioned
within the coronary vasculature using a guiding catheter or guidewire, similar
to those used in angioplasty procedures, and which 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 even access the small veins located at the apex (lower tip) of the
heart. The Cardima Pathfinder and Tracer microcatheter systems are configured
with either four, eight or 16 electrodes, which 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 Pathfinder MINI,
the Company's smallest microcatheter system, was developed for VT mapping in the
venous system. The Pathfinder MINI is 1.5 French in diameter (the typical
catheter is six to eight French) and provides more distal access to smaller
vasculature of the heart. Similar to the Pathfinder microcatheter, the
Pathfinder MINI microcatheter is constructed around a finely ground core-wire to
provide the steerability necessary to access distal vasculature. The Pathfinder
MINI microcatheter has a flexible platinum tip coil and contains a variable
number of electrodes with different spacing options.
In July, 1998, The Company received 510(k) clearance and CE Mark approval for
the Cardima Pathfinder microcatheter system for mapping VT. The Company sells
the Cardima Pathfinder for VT mapping in the United States through its
Distribution Agreement with St. Jude which commenced on February 1, 2000, and in
Europe through a small direct sales force and an expanding network of
distributors. Products in Japan, Australia and Canada are sold through the
Company's distributor networks in each country. The Cardima Pathfinder can
safely map VT via the coronary veins and up to four Cardima Pathfinders have
been placed in various vessels of the coronary system simultaneously, thereby
aiding in the diagnosis of VT.
THERASTREAM 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, if
delivered in the left side of the heart's ventricles 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
16
<PAGE>
ablation accuracy using less RF energy. The Company is not aware of any
epicardial RF ablation catheter to treat VT other than its Therastream
microcatheter system under development.
The Therastream microcatheter tracks over a guidewire in the coronary veins and
can access the important distal vasculature regions of the heart and deliver RF
energy in the epicardium. The Therastream is designed to map, locate and ablate
the VT focus using RF energy directly applied through the veins. The Company has
completed animal studies to demonstrate the ability of the Therastream to access
the distal venous system and safely deliver RF energy with no damage to the
adjacent arteries. In these experiments the Therastream has required
significantly less energy to ablate VT than standard endocardial catheters.
The Company has received approval of an IDE for the Therastream microcatheter
system in the second half of 1999 and has begun a preliminary feasibility
clinical trial. The Company must receive PMA approval before the Therastream can
be marketed in the United States for VT ablation. See "--Government Regulation."
The Company's intravascular electrophysiology microcatheters, exclusive of the
guiding 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 product functionality. 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.
The Cardima Pathfinder and Pathfinder MINI microcatheter systems for venous
mapping of VT have received 510(k) clearances from the FDA, as well as the
Venaport, Vueport and Naviport families of guiding catheters. The Company's
other microcatheter systems for mapping or ablation of VT 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
ablation studies will validate the results of its animal studies. The Company
has received approval to begin an IDE feasibility clinical trial. There can be
no assurance that this trial will be completed with the desired results for VT
treatment, that the FDA will allow any further trials or that the Therastream
product will ever be approved for VT ablation. See "-- 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.
Research and development expenses for the years ended December 31, 1999, 1998
and 1997, were $5.7 million $7.2 million and $5.3 million, respectively. The
Company announced a workforce reduction in January 1999, which affected all
functional areas, including research and development. The Company focused
efforts on specific projects, which have reduced research and development
expenses for 1999.
17
<PAGE>
MARKETING AND DISTRIBUTION
The Company has marketed and sold its microcatheter systems through a direct
sales force in the United States, France and Germany, and medical device
distributors in other countries throughout 1999. In January 2000, the Company
signed an exclusive three year Distribution Agreement with St. Jude Medical
Corporation to distribute the Company's diagnostic products in the United States
through its Daig Division sales force.
The Company has maintained direct sales rights in one specific territory and has
two field managers to interface and assist the Daig sales force in its efforts
to sell the Company's products. In December 1999, the Company restructured its
European sales force, specifically in France, the Mediterranean area and Germany
to reduce expenditures in line with sales in those particularregions. The
Company is in the process of selecting a distributor in France. The Company
still maintains a sales manager and a Clinical Specialist in Europe, where we
have products approved for ablation. 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. However, there can be no assurance that
the Distribution Agreement with St. Jude will result in successful growth or
commercialization of the Company's products.
The Company currently has a limited international sales organization. The
Company currently has one sales manager/representative in Germany. The Company's
Vice President of World Wide Sales, in conjunction with the European Manager,
manage distributor relationships on a worldwide basis.
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 written agreements with existing distributors or that any such
distributors will devote adequate resources to selling the Company's products.
MANUFACTURING
The Company fabricates certain proprietary components of its 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.
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<PAGE>
Catheter manufacturing involves complex operations with 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 testing and packaging purchased units. 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. 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.
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 laminate tubing, core wire 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 laminate tubing, could not be accomplished quickly,
which would 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 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. The Company has
obtained ISO 9001 (EN 46001) Quality Systems certification from TUV and has
obtained the right to affix the CE Mark to certain of its electrophysiology
mapping and ablation catheters and accessories. The Company is subject to
periodic inspections by the FDA and California Department of Heath Services. The
Company's facilities and manufacturing processes have recently undergone a
successful annual recertification inspection by TUV in December 1998. There can
be no assurance that the Company's manufacturing facilities will meet such
compliance standards or if met, maintain such standards. 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. The Company holds 21 issued United States
patents and has filed 10 pending United States patent applications, of which two
have been allowed. The Company has also filed 45 patent applications in major
international markets. No assurance can be given that these patent
19
<PAGE>
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 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 to this exclusive license to use Target's technology to
develop products for electrophysiological diseases, 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 by 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 requirement, although the Company has not confirmed this
belief in writing with Target.
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 neuroradiology,
interventional radiology, 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.
Target is a subsidiary of Boston Scientific and, as a result of the acquisition,
Boston Scientific exercises control over approximately 4.7% of the Company's
outstanding Common Stock as of December 31, 1999. 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.
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<PAGE>
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
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 are maintained in secrecy until patents issue or, in the
case of patent applications in foreign countries 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. Although there are no claims against the Company, any
such claims, 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 third party patent claims 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 such 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 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
21
<PAGE>
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 the Company does not
believe that it infringes patents known to it, 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 United States patent laws exempt medical practitioners and
related health care entities from infringement liability for medical and
surgical procedures in certain circumstances. The Company cannot predict whether
this exception 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
diagnosing and treating 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, open heart surgery and purposeful destruction of the AV node,
followed by implantation of a pacemaker. Several competitors are also developing
new approaches and new products for the mapping and ablation of AF and VT. These
approaches include mapping systems using contact mapping, single-point spacial
mapping and non-contact, multi-site 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 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
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<PAGE>
regulatory approvals, and manufacturing, marketing and distributing products.
The Company has entered into an exclusive three-year distribution agreement with
St. Jude Medical, Inc., through its Daig division, whereby St. Jude will
distribute the Company's line of diagnostic products in the U.S. Other companies
are developing proprietary systems for the diagnosis and treatment of cardiac
arrhythmias, including Biosense, Inc., a division of Johnson & Johnson, 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., a subsidiary of St. Jude Medical
Inc., 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.
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.
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 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. All class II and some class I devices require 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 "pre-amendment" 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. During this
process, the FDA may determine that it needs additional information or that
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<PAGE>
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 510(k) 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 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.
To date, the Company has received 510(k) clearances from the FDA for its Cardima
Pathfinder, Pathfinder MINI and Tracer over-the-wire microcatheter systems for
mapping VT and Revelation microcatheter system for mapping AF. In addition,
510(k) clearance has been received for marketing its line of Venaport, Vueport
and Naviport guiding catheters used for introducing electrophysiology catheters
into the heart.
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, design 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 conditions are 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 post approval 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
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<PAGE>
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
Revelation Tx and Therastream, 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 in 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 termination of the IDE and an
inability to obtain marketing clearance or approval for its products.
The Company received 510(k) clearance for Revelation microcatheter system for
mapping of AF. The Company also received approval to begin various phases for
its expanded clinical trial in May and December 1998, and in June 1999, with the
Cardima Revelation Tx product. An IDE for its Therastream VT ablation
microcatheter system was approved by the FDA in November 1999. 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 is subject to inspection by
the FDA and the California Department of Health Services and has 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.
25
<PAGE>
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, good 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. The Company received ISO 9001 (EN 46001)
Quality Systems certification for its manufacturing facilities in Fremont,
California. In December 1998, the Company received ISO 9001 re-certification.
This certification is required in order to affix the CE Mark to applicable
products.
The Company has received CE Mark for the Revelation and Revelation Tx
microcatheters for treatment of AF. The Company intends to seek international
approvals for its other ablation products, however, 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. There can be no assurance that such
approvals will ever be obtained. In such event, the Company would be materially
and adversely affected.
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
26
<PAGE>
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
United States 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. 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 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.
There is also 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 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, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
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.
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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. Two claims were filed against
the Company in 1999. The Company is pursuing voluntary dismissal of one claim,
while the second claim is still under investigation with a $30,000 settlement
requested. 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.
EMPLOYEES
At December 31, 1999, the Company had 85 employees, 11 of whom were engaged
directly in research and new product development, 10 in regulatory affairs,
quality assurance and clinical activities, 37 in manufacturing, 15 in sales and
marketing and 12 in finance and administration.
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The Company maintains compensation, benefits, 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - We are dependent
upon our key personnel and will need to hire additional key personnel in the
future."
ITEM 2. PROPERTIES
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 facility master lease expired in November 1999. In November 1999, the master
lease was amended to allow for an additional three year facility lease, expiring
in November 2002. The Company believes this facility will be adequate to meet
its requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company, through
solicitation of proxies or otherwise, during the last quarter of the Company's
fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has been traded on the Nasdaq National Market
under the symbol CRDM since the Company's initial public offering in June 1997.
Prior to that time there was no public market for the Common Stock. The
following table sets forth for the periods indicated the high and low sale
prices of the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1999
First Quarter ........................................................ $4.750 $2.031
Second Quarter ....................................................... 3.375 1.938
Third Quarter......................................................... 2.750 1.281
Fourth Quarter........................................................ 2.703 0.781
HIGH LOW
------- -------
YEAR ENDED DECEMBER 31, 1998
First Quarter ........................................................ $5.875 $3.125
Second Quarter...................................................... 5.750 2.500
Third Quarter......................................................... 10.875 2.125
Fourth Quarter........................................................ 6.500 1.750
</TABLE>
As of March 10, 2000, there were approximately 237 holders of record of the
Common Stock.
The Company has never declared or paid cash dividends on its capital stock. The
Company currently expects to retain its future earnings for use in the operation
and expansion of its business and does not anticipate paying any cash dividends
in the foreseeable future.
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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-18.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- -------------- ------------- ------------- ----------------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales $ 3,495 $ 2,499 $ 1,261 $ 593 $ 362
Cost of goods sold 3,384 2,962 2,011 1,413 830
--------------- -------------- ------------- ------------- ----------------
Gross profit (loss) 111 (463) (750) (820) (468)
Operating expenses:
Research and development 5,694 7,230 5,320 3,319 2,581
Selling, general and administrative 8,173 8,556 6,656 3,690 2,046
--------------- -------------- ------------- ------------- ----------------
Total operating expenses 13,867 15,786 11,976 7,009 4,627
--------------- -------------- ------------- ------------- ----------------
Operating loss (13,756) (16,249) (12,726) (7,829) (5,095)
Interest and other income 250 359 602 132 12
Interest expense (522) (296) (148) (57) (117)
--------------- -------------- ------------- ------------- ----------------
Net loss $(14,028) $(16,186) $(12,272) $ (7,754) $ (5,200)
=============== ============== ============= ============= ================
Basic and diluted net loss per share $(0.89) $(1.96) $(2.64) $(107.69) $ (83.87)
=============== ============== ============= ============= ================
Shares used in computing basic and diluted net loss
per share 15,746 8,239 4,642 72 62
=============== ============== ============= ============= ================
DECEMBER 31,
------------------------------------------------------------------------
1999(1) 1998 1997 1996 1995
------------ ------------ ------------ ------------ ----------------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEETS DATA:
Cash, cash equivalents and short-term investments $920 $645 $12,848 $907 $2,993
Working capital (deficit) (1,293) (1,614) 11,609 (2,150) 2,647
Total assets 6,089 7,283 17,674 3,964 4,735
Capital lease obligation, noncurrent portion 1,012 1,120 840 722 317
Line of credit obligation, noncurrent portion 1,095 2,183 -- -- --
Accumulated deficit (60,636) (46,608) (30,422) (18,150) (10,396)
Total stockholders' equity (net capital deficiency) (420) (1,176) (14,444) (10,368) (2,675)
(1) In February 2000, the Company sold a total of 4,666,611 shares of common stock at $2.25 per share in a private placement
transaction resulting in net proceeds of approximately $10.0 million. See Note 7 of Notes to Financial Statements
for related proforma information as of December 31, 1999.
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS DISCUSSION AND ANALYSIS CONTAINS 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 "--FACTORS AFFECTING FUTURE RESULTS" AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. 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 THE
ANNUAL REPORT ON FORM 10-K.
OVERVIEW
Since its incorporation in November 1992, Cardima has been engaged in the
design, research, development, manufacturing and testing of microcatheter
systems for the mapping (diagnosis) and ablation (treatment) of cardiac
arrhythmias. Cardima has generated revenues of approximately $8.3 million from
inception to December 31, 1999. Until January 1997, these revenues were
primarily in Europe and Japan from sales of the Cardima Pathfinder and Tracer
microcatheter systems for diagnosing VT and the Revelation microcatheter system
for diagnosing AF, as well as ancillary products such as the Venaport guiding
catheters. Subsequent to 1997, United States sales consists primarily of
Pathfinder and Revelation lines of microcatheters for diagnosis of VT and AF
following FDA 510(k) clearance. To date, the Company's international sales have
been made primarily through distributors who sell the Company's products to
physicians and hospitals. European sales consist primarily of the Revelation and
Revelation Tx microcatheters for treatment of AF following receipt of CE Marking
in August 1998.
Revenues are recognized when products are shipped. In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). We are all evaluating
the effects, if any, that the adoption of SAB 101, in the second quarter of
2000, may have on the results of our operations or our financial position.
The Company has obtained the right to affix the CE Mark to its Cardima
Pathfinder, Pathfinder MINI and Tracer microcatheter systems for mapping VT and
its Revelation and Revelation Tx microcatheter systems for both mapping and
ablation of AF, permitting the Company to market these products in the member
countries of the EU. The Company received 510(k) clearances for the Revelation
microcatheter for mapping of AF and the Pathfinder MINI microcatheter for
mapping VT and for the Vueport balloon guiding catheter in July 1998. The
Company currently is seeking 510(k) clearance for its Tracer mapping catheter
and its Naviport deflectable tip guiding catheter. The Company will be required
to conduct clinical trials, demonstrate safety and effectiveness and obtain PMA
approval from the FDA in order to sell any of the Company's products designed
for treatment of AF or VT in the United States. Specifically, PMA approval will
be required prior to the introduction in the United States of the Revelation Tx
microcatheter system for treatment of AF or Therastream microcatheter system for
treatment of VT.
The Company has a limited history of operations and has experienced significant
operating losses since inception. The Company expects that its operating losses
will continue for the foreseeable future as the
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Company continues to invest substantial resources in product development,
preclinical and clinical trials, obtaining regulatory approval, sales and
marketing and manufacturing.
RESULTS OF OPERATIONS - YEARS ENDED 1999 AND 1998
Net Sales
Net sales for 1999 increased 40% to $3,495,000 from $2,499,000 for 1998. The
majority of the increase in sales in 1999 is attributable to sales in the United
States and Europe. United States sales for 1999 increased 11% to $1,915,000 from
$1,722,000 in 1998. The increase in United States sales is due primarily to the
sales of Pathfinder and Revelation lines of microcatheters for diagnosis of VT
and AF following FDA 510(k). European sales for 1999 increased 103% to
$1,127,000 from $554,000 for 1998. The increase in European sales is due
primarily to sales of the Revelation and Revelation Tx microcatheters for
treatment of AF following receipt of CE Marking in August 1998.
Cost of Goods Sold
Cost of goods sold primarily includes raw materials costs, catheter fabrication
costs, system assembly, test costs and manufacturing overhead. Cost of goods
sold for 1999 increased 14% to $3,384,000 from $2,962,000 for 1998. The decrease
of cost of goods sold as a percent of net revenue is due primarily to the
purchase of several pieces of capital equipment to manufacture some components
in-house, rather than purchase the components from outside vendors. Although
this equipment was not fully functional until the second half of 1999, the
Company expects costs per unit to continue to decrease as it transitions from
outside vendors to its internal production. In addition, the internal production
will provide greater flexibility in production of its microcatheter systems.
Research and Development Expenses
Research and development expenses for 1999 decreased 21% to $5,694,000 from
$7,230,000 in 1998. The decrease in research and development expenses is due
primarily to staff reductions in research and development as a result of the
Company restructuring in January 1999 and the transition of all animal studies
from out of state to a local firm which significantly reduced costs for research
and development product testing.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1999 decreased 4% to $8,173,000
from $8,556,000 in 1998. Selling expenses for 1999 increased 16% to $4,376,000
from $3,788,000 in 1998. The increase is due primarily to costs associated with
the expansion of the Company's United States sales force, the ongoing
establishment of a direct sales force in several major markets in Europe and the
commencement of clinical trials, which requires training of participating
physicians by sales and clinical specialists. General and administrative
expenses for 1999 increased 1% to $2,878,000 from $2,844,000 in 1998. Marketing
expenses for 1999 decreased 52% to $919,000 from $1,924,000 in 1998. The
decrease in marketing expenses is due primarily to staffing reductions from the
Company's restructuring in January 1999, the development of marketing materials
and programs in-house, and fewer exhibits attended in 1999.
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Interest and Other Income, Interest Expense
Interest and other income for 1999 decreased by $109,000 to $250,000 from
$359,000 in 1998. The decrease is due primarily to lower cash, cash equivalent
and short-term investment balances. Interest expense for 1999 increased by
$226,000 to $522,000 from $296,000 in 1998. The increase is due primarily to
higher borrowing levels for purchases of capital equipment and interest expense
associated with borrowings under the Company's $3.0 million line of credit.
RESULTS OF OPERATIONS - YEARS ENDED 1998 AND 1997
Net Sales
Net sales for 1998 increased 98% to $2,499,000 from $1,261,000 for 1997. The
increase in sales in 1998 is attributable to sales in the United States and
Europe. United States sales for 1998 increased 91% to $1,722,000 from $902,000
in 1997. The increase in United States sales is due primarily to the sales of
Cardima Pathfinder and Revelation lines of microcatheters for diagnosis of VT
and AF following FDA 510(k) clearance and sales of two new products, the
Vueport, a balloon occlusion guiding catheter and the Pathfinder MINI
microcatheter for diagnosis of VT following FDA 510(k) clearance in July 1998.
European sales for 1998 increased 147% to $554,000 from $224,000 for 1997. The
increase in European sales is due primarily to sales of the Cardima Revelation
microcatheter for treatment of AF following receipt of CE Marking in August
1998.
Cost of Goods Sold
Cost of goods sold primarily includes raw materials costs, catheter fabrication
costs, system assembly, test costs and manufacturing overhead. Cost of goods
sold for 1998 increased 47% to $2,962,000 from $2,011,000 for 1997. The increase
in cost of goods sold is due primarily to the growth of the Company's sales and
associated manufacturing staff additions. In addition, product costs were higher
due to training personnel on new products and installation of new equipment and
related depreciation. During 1998, the Company purchased several pieces of
capital equipment to manufacture some components in-house, rather than purchase
from outside vendors. The benefit of this new equipment in reducing cost of
goods sold as a percent of net revenue was realized in the second half of 1999.
Research and Development Expenses
Research and development expenses for 1998 increased 36% to $7,230,000 from
$5,320,000 in 1997. The increase in research and development expenses is due
primarily to expenses associated with staff additions in research and
development and clinical and regulatory areas for product testing and approvals
which were incurred as the Company increased expenses to meet development
program goals and increased clinical trial activity in both Europe and the
United States.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1998 increased 29% to
$8,556,000 from $6,656,000 in 1997. Selling expenses for 1998 increased 46% to
$3,788,000 from $2,600,000 in 1997. The increase is due primarily to costs
associated with the expansion of the Company's United States sales force, the
ongoing establishment of a direct sales force in several major markets in Europe
and the commencement of clinical trials, which requires training of
participating physicians by sales and clinical specialists. General and
administrative expenses for 1998 increased 20% to $2,844,000 from $2,370,000 in
1997. The increase is due primarily to additional staff and expenses related to
the requirements of a public company. Marketing expenses for 1998 increased 14%
to $1,924,000 from $1,686,000 in 1997. The increase is due primarily to expenses
related to the development of marketing materials and programs to address new
product introductions.
Interest and Other Income, Interest Expense
Interest and other income for 1998 decreased by $243,000 to $359,000 from
$602,000 in 1997. The decrease is due primarily to lower cash, cash equivalent
and short-term investment balances. Interest expense for 1998 increased by
$148,000 to $296,000 from $148,000 in 1997. The increase is due primarily to
higher borrowing levels for purchases of capital equipment and interest expense
associated with borrowings under the Company's $3.0 million line of credit.
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 $46,800,000
through December 31, 1999, an initial public offering of Common Stock in June
1997, which resulted in net proceeds of approximately $13,600,000, together
with interest income on such proceeds, borrowings under a $3,000,000 line of
credit, and equipment leases to finance certain capital equipment which have
provided proceeds in the amount of $4,500,000. As of December 31, 1999, the
Company had approximately $920,000 in cash, cash equivalents and short-term
investments.
Net cash used in operating activities was approximately $12,800,000, $16,000,000
and $12,500,000 for the years ended December 31, 1999, 1998 and 1997,
respectively, resulting primarily from operating losses incurred. Net cash of
$731,000 and $5,150,000 used in investing activities for the years ended
December 31, 1999 and 1997, respectively, is attributable primarily to the
purchases of short-term investments. Net cash provided by investing activities
of $4,249,000 for the year ended December 31, 1998 is attributable primarily to
the maturities of short-term investments. Net cash provided by financing
activities was approximately $13,300,000, $3,800,000 and $25,300,000 for the
years ended December 31, 1999, 1998 and 1997, respectively, resulting primarily
from the Company's initial public offering, the sale of equity securities in
private placement transactions and proceeds from bridge loans and borrowings
under the line of credit during such periods.
In June 1998, the Company secured a $3,000,000 line of credit which may be
used for general working capital purposes. As of December 31, 1998, the
Company had drawn the entire $3,000,000 line of credit. In May 1999, the
Company entered into an equipment lease that permits the Company to borrow up
to $1,000,000 for the purchase of office and manufacturing equipment,
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software and custom-built equipment. As of December 31, 1999, the Company has
drawn $541,000 against the equipment leaseline. In January and February 1999,
the Company sold a total of 7,500,000 shares of common stock at $2.00 per
share in a private placement transaction to accredited investors. As
commission, the Company issued 354,806 shares of its common stock to the
placement agent and paid $490,388. In addition the Company issued 750,000
warrants, exercisable for 750,000 shares of common stock at an exercise price
of $2.20 as a commission for the transaction. The Company's net proceeds,
after expenses of the placement, were $14,300,000. In February 2000, the
Company sold a total of 4,666,611 shares of common stock at $2.25 per share in
a private placement transaction to accredited investors. The transaction
included warrants to investors exercisable for 933,322 shares of common stock
at an exercise price of $2.48 per share. As commission for the transaction,
the Company paid $524,891 in cash. In addition, the Company issued warrants,
exercisable for 233,329 shares of common stock at an exercise price of $2.48
per share as commission for the transaction. The Company's net proceeds, after
expenses of the placement, were approximately $10,000,000.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including sales and marketing activities, 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, the extent to which the
Company's products gain market acceptance, and competitive developments. The
Company believes that available cash along with proceeds from the private
placement completed in February 2000 will be sufficient to meet the Company's
cash requirements at least through 2000. 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. The Company may seek to raise additional
funds through public or private financing, collaborative relationships or other
arrangements. There can be no assurance that such additional capital will be
available on terms acceptable to the Company, or at all. Furthermore, any
additional equity financing is expected to 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 will have a
material adverse effect on the Company's business, financial condition and
results of operations.
FACTORS AFFECTING FUTURE RESULTS
WE HAVE A HISTORY OF LOSSES. OUR ABILITY TO ACHIEVE OR, IF ACHIEVED, SUSTAIN
PROFITABILITY, IS HIGHLY UNCERTAIN.
We have experienced losses since we began our operations and we expect to
experience substantial net losses for the foreseeable future. To date, sales of
our microcatheter systems have been limited. We had net losses of approximately
$14.0 million, $16.2 million and $12.3 million for the fiscal years ended 1999,
1998 and 1997, respectively. As of December 31, 1999, we had an accumulated
deficit of approximately $60.6 million. We expect to incur substantial net
operating 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 we further develop, seek regulatory approvals, test
and distribute our products. Our limited operating history makes accurate
prediction of future operating
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results difficult or impossible. There can be no assurance that we will
ever generate substantial revenue or achieve profitability on a sustained
basis. Our failure to generate substantial revenues would have a material
adverse effect on our business, results of operations and financial condition.
WE WILL NEED TO RAISE CAPITAL IN THE FUTURE. FUTURE FINANCINGS COULD HAVE A
DILUTIVE EFFECT ON OUR STOCKHOLDERS.
Our future capital uses and requirements will depend on numerous factors,
including:
o the progress of our clinical research and product development
programs,
o the time required to obtain and the receipt of regulatory
clearances and approvals,
o the costs and timing of product development, manufacturing and
sales and marketing activities,
o the extent to which our products gain market acceptance,
o competitive developments, and
o the cost of filing, prosecuting, and enforcing patent claims and
other intellectual property rights.
In order to commercialize our products, we will require additional capital that
may not be available on terms acceptable to us, or at all. In addition, if
unforeseen difficulties arise in the course of developing our products,
performing clinical trials, obtaining necessary regulatory clearances and
approvals or other aspects of our business, we may be required to spend
greater-than-anticipated funds. As a consequence, we will be required to raise
additional capital through public or private equity or debt financings,
collaborative relationships, bank facilities or other arrangements. There can be
no assurance that such additional capital will be available on terms acceptable
to us, or at all. Any additional equity financing is expected to be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants. We have financed our operations to date primarily through private
sales of equity securities, proceeds from our initial public offering in June
1997, and loan-facilities. As of February 29, 2000, cash, cash equivalents and
short-term investments totaled $9.3 million. We believe that our existing cash,
cash equivalents and short-term investments along with cash generated from the
sales of our products and from financings, will be sufficient to fund our
operating expenses, debt obligations and capital requirements through December
31, 2000.
Our future capital uses and requirements depend on numerous factors,
including:
o our ability to establish collaborative arrangements,
o the level of product revenues,
o the possible acquisition of new products and technologies, and
o the development of commercialization activities.
There can be no assurance that additional funding will be available for us to
finance our ongoing operations when needed or that adequate funds for our
operations, whether from financial markets, collaborative or other arrangements
with corporate partners or from other sources, will be available when needed, if
at all, or on terms attractive to us. Our inability to obtain sufficient funds
may require us to delay, scale back or eliminate some or all of our research and
product development programs, to limit the marketing of our products, or to
license to third parties the rights to commercialize products or
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technologies that we would otherwise seek to develop and market ourselves. This
would have a material adverse effect on our business, financial condition and
results of operations.
OUR STOCK PRICE MAY BE VOLATILE.
There can be no assurance that there will be an active trading market for our
common stock or that the market price of the common stock will not decline below
its present market price. The market prices for securities of biotechnology
companies have been, and are likely to continue to be, highly volatile. Factors
that have had, and are expected to continue to have, a significant impact on the
market price of our common stock include:
o announcements regarding the results of regulatory approval filings,
o our clinical studies or other testing,
o our technological innovations or new commercial products or those
of our competitors,
o government regulations, developments concerning proprietary rights,
o public concern as to safety of technology, and
o variations in operating results.
WE DO NOT INTEND TO PAY CASH DIVIDENDS ON OUR STOCK.
We have never paid cash dividends on our capital stock and do not anticipate
paying cash dividends in the foreseeable future. Instead, we intend to retain
future earnings for reinvestment in our business. Our credit agreement requires
the approval of our bank to declare or pay cash dividends.
OUR OPERATING RESULTS MAY FLUCTUATE FROM PERIOD TO PERIOD IN THE FUTURE.
We believe that a quarter to quarter or annual comparison of our operating
results is not a good indication of our future performance. It is likely that at
some future time our results will be below market expectations. As a result, our
common stock price will likely fall. Our results of operations have fluctuated
significantly in the past and we expect them to vary significantly from quarter
to quarter or year to year depending upon a number of factors, including:
o actions relating to regulatory matters,
o progress of pre-clinical and clinical trials,
o the extent to which our products gain market acceptance,
o the scale-up of manufacturing capabilities,
o the expansion of sales and marketing activities,
o competition,
o the timing of new product introductions by us or our competitors,
o our ability to successfully market our products in the United
States and internationally, and
o general economic conditions and economic conditions specific to the
biotechnology field.
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Although all microcatheter systems are labeled for single use only, we are aware
that some physicians are reusing these products. Reuse of our microcatheter
systems would reduce revenues from product sales and could have a material
adverse effect on our future performance and periodic operating results. Due to
such fluctuations in operating results, period to period comparisons of our
revenues and operating results are not necessarily meaningful and should not be
relied upon as indicators of likely future performance or annual operating
results.
THERE ARE RISKS ASSOCIATED WITH INTERNATIONAL SALES OF OUR PRODUCTS.
A number of risks are inherent in international transactions. International
sales may be limited or disrupted by
o the imposition of government product or currency controls,
o export license requirements,
o economic or political instability,
o domestic or international trade restrictions,
o changes in tariffs,
o exchange rate fluctuation, or
o difficulties in staffing and management.
The financial condition, expertise and performance of our international
distributors and any future international distributors could affect sales of our
products internationally and could have a material adverse effect on our
business, financial condition and results of operations. 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 a material adverse effect on our 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 our international business and our financial condition and results of
operations. In addition, the laws of certain foreign countries do not protect
our intellectual property rights to the same extent as do the laws of the United
States. There can be no assurance that we will be able to successfully manage a
remote sales force, comply with such foreign laws or regulations, or protect our
intellectual property. There also can be no assurance that we will be able to
successfully commercialize any of our current microcatheter products, including
the Cardima Pathfinder, Pathfinder MINI, Revelation, Revelation Tx and Tracer
microcatheter systems, or any future products in any foreign market, which could
have a material adverse effect on our business, financial condition and results
of operations.
THE ADOPTION OF THE EURO PRESENTS UNCERTAINTIES FOR OUR INTERNATIONAL BUSINESS.
In January 1999, the new "Euro" currency was introduced in certain European
countries that are part of the European Monetary Union ("EMU"). Beginning in
2003, all EMU countries are expected to be operating with the Euro as their
single currency. A significant amount of uncertainty exists as to the effect the
Euro will have on the marketplace generally. In particular, the participating
countries' adoption of a single currency may likely result in greater price
transparency, making the EMU a more competitive environment for our products. In
addition, some of the rules and regulations relating to the governance of
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the currency have not yet been defined and finalized. As a result, companies
operating in or conducting business in Europe will need to ensure that their
financial and other software systems are capable of processing transactions and
properly handling the Euro.
We are currently assessing the effect the introduction of the Euro will have on
our internal accounting systems and the potential sales of our products. We will
take appropriate corrective actions based on the results of such assessment. We
have not yet determined the costs related to addressing this issue. This issue
and its related costs could have a material adverse effect on our business,
financial condition and results of operations.
WE ARE DEPENDENT UPON OUR KEY PERSONNEL AND WILL NEED TO HIRE ADDITIONAL KEY
PERSONNEL IN THE FUTURE.
Our ability to operate successfully depends in significant part upon the
continued service of certain key scientific, technical, clinical, regulatory and
managerial personnel, and our 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. There can be no
assurance that we can retain such personnel or that we can attract or retain
other highly qualified scientific, technical, clinical, regulatory and
managerial personnel in the future, including key sales and marketing personnel.
IMPACT OF THE YEAR 2000 ISSUE ON THE COMPANY'S OPERATIONS
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
estimates that it expensed approximately $10,000 during 1999 in connection with
remediating its systems. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. The Company will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the Company had minimal short-term investments and a fixed interest rate
line of credit obligation as of December 31, 1999, the Company does not have any
material quantitative or qualitative disclosures about market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and the report of independent auditors appear
on pages F-1 through F-18 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part below and the remainder is
contained in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 25, 2000 (the "1999 Proxy Statement") under the
caption "Election of Directors" and is incorporated herein by reference.
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.
MR. PHILLIP RADLICK, PH.D. (age 62) 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, Mr. Radlick was the President
and Chief Executive Officer of Hepatix, Inc., a start-up medical device company.
From November 1986 until November 1992, Mr. Radlick was the President of Edwards
Cardiovascular Surgery Division, a division of Baxter Healthcare responsible for
the development, manufacture and sale of cardiovascular products. Mr. Radlick
received a B.S. in Chemistry and a Ph.D. in Organic Chemistry from University of
California, Los Angeles.
MR. GABRIEL VEGH (age 60), 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.
MR. ALLAN ABATI, PH.D. (age 55) has been the Vice President, Regulatory Affairs,
Clinical Programs and Quality Assurance of Cardima since February 1996. Prior to
joining the Company, from February 1992 until February 1996, Mr. Abati was the
Vice President, Regulatory Affairs and Quality Assurance of Johnson & Johnson
Professional, Inc., a manufacturer of neurosurgical and orthopedic medical
devices. From August 1989 until February 1992, Mr. 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, Mr. 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. Mr. 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.
MR. VICTOR J. BARAJAS (age 36) has been the Vice President of Operations of
Cardima since August 1997 and is responsible for all operations and
manufacturing activity. From September 1995 until August 1997, Mr. Barajas was
the Director of Operations, from May 1994 until September 1995, Mr. Barajas was
the Manager of Operations, and from June 1993 until May 1994, Mr. Barajas was a
senior engineer for Cardima. Prior to joining the company, from 1990 until June
1993, Mr. Barajas was Process
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Development Engineer and then Project Leader and Manager of the Engineering
Department for Target Therapeutics, Inc. From 1988 until 1990, Mr. Barajas was
employed by Critikon, Inc. as an R&D/Manufacturing Engineer in the medical
disposables area. Mr. Barajas received his B.S. degree in Industrial Technology
from San Jose State University.
MR. RONALD BOURQUIN (age 49) 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 EP Technologies,
Inc. ("EPT"), an electrophysiology catheter manufacturer that was acquired by
Boston Scientific in January 1996. From April 1993 until July 1993, Mr. Bourquin
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. ERIC CHAN, PH.D. (age 42) has been the Vice President of Product Development
of Cardima since June 1998. Prior to joining the Company, from August 1991 to
March 1993, Mr. Chan was the Director of Engineering and from April 1993 to May
1998, Vice President of Engineering at Arrhythmia Research Technology, Inc.
where he coordinated and directed the development of computerized cardiac
electrophysiology, high resolution ECG and cathlab systems. Mr. Chan received
his B.S.E.E. from Purdue University, his M.S.E. in Biomedical Engineering from
the University of Texas at Austin, and his Ph.D. in Biomedical Engineering from
the University of Texas at Austin.
MR. DAVID SMITH (age 46) 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.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is contained in the Proxy Statement under the caption
"Compensation of Directors" and "Compensation of Executive Officers," and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is contained in the 1999 Proxy Statement under the
caption "Common Stock Ownership of Certain Beneficial Owners and Management,"
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is contained in the 1999 Proxy Statement under the
caption "Transactions with Management," and is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The Company's financial statements are indexed on page F-1.
(a) 2. FINANCIAL STATEMENT SCHEDULES
All applicable information is readily determinable from the
notes to the Company's financial statements or the schedule is
not applicable, therefore, the schedules have been omitted.
(a) 3. LISTING OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
<S> <C>
3.1 (1) Certificate of Incorporation, as amended, of the
Registrant.
3.2 (1) Bylaws of Registrant.
3.3 (1) Form of Amended and Restated Certificate of Incorporation
of Registrant.
4.1 (1) Form of Common Stock Certificate.
10.1 1993 Stock Option Plan, as amended.
10.2 (1) 1997 Directors' Stock Option Plan.
10.3 (1) 1997 Employee Stock Purchase Plan.
10.4 (1) Form of Indemnification Agreement.
10.5 (1) Fourth Amended and Restated Stockholders' Rights
Agreement dated March 7, 1997, between Registrant and
certain stockholders of Registrant.
10.6 (1) License Agreement dated May 21, 1993, between Registrant
and Target Therapeutics, Inc.
10.7 (1) Lease dated April 25, 1994, between Registrant and State
of California Public Employees' Retirement System.
10.8 (1) Sublease dated November 14, 1996, between Registrant and
Target Therapeutics, Inc.
10.9 (2) Master Lease Agreement dated January 26, 1996, between
Registrant and Comdisco, Inc., together with Equipment
schedules VL-1, VL-2 and VL-3.
10.10 (1) Warrant Purchase Agreement dated December 9, 1993,
between Registrant and Target Therapeutics, Inc.,
together with the series A Preferred Stock Warrant.
10.11 (1) Series A Preferred Stock Warrant dated June 10, 1994,
issued to Silicon Valley Bank.
10.12 (1) Warrant Purchase Agreement dated July 1, 1994, between
Registrant and California Public Employees' Retirement
System, together with the Common Stock Warrant.
10.13 (1) Series A Preferred Stock Warrant dated October 26, 1994,
issued to Silicon Valley Bank.
10.14 (1) Form of Series A Preferred Stock Warrant issued to
certain investors in December 1994.
10.15 (1) Series D Preferred Stock Warrant dated October 31, 1995,
issued to Silicon Valley Bank.
10.16 (1) Form of Common Stock Warrant issued to certain investors
from April 1995 to December 1995.
</TABLE>
44
<PAGE>
10.17 (1) Warrant Agreement dated January 23, 1996, between
Registrant and Comdisco, Inc., together with the Series D
Preferred Stock Warrant.
10.18 (1) Electrophysiology Catheter License Agreement dated May
17, 1994, between Registrant and BSI Corporation,
together with the Credit Pool Agreement of same date.
10.19 (1) Distribution Agreement dated June 15, 1995, between
Registrant and Paramedic Co., Ltd.
10.20 (1) Distribution Agreement dated July 14, 1995, between
Registrant and Werfen Distribution AG, together with the
May 15, 1996 letter amendment.
10.21 (1) Employment Agreement dated May 21, 1993, between
Registrant and Gabriel B. Vegh.
10.22 (1) Employment Letter Agreement dated October 31, 1994,
between Registrant and Phillip C. Radlick, Ph.D.
10.23 (1) Warrant Agreement dated April 7, 1997, between Registrant
and Comdisco, Inc.
10.24 (1) Distribution Agreement dated April 1, 1997, between
Registrant and Cardiologic, GmbH.
10.25 (3) Master Loan and Security Agreement dated June, 1998,
between Registrant and Transamerica Business Credit Corp.
10.26 (4) (10.1) Form of Subscription Agreement between Registrant
and certain investors
10.27 (4) (4.1) Form of Share Purchase Warrant issued to Sunrise
Securities, Inc.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
(1) Incorporated by reference to the same exhibits filed with the
Registrant's Registration Statement on Form S-1 (File No. 33-23209)
declared effective on June 5, 1997.
(2) Equipment Schedule VL-3 dated February 13, 1998 to the Master Lease
Agreement dated January 23, 1996 is filed with this Annual Report on Form
10-K.
(3) Incorporated by reference to the same exhibit filed with the Registrant's
Statement on Form 10-Q for the Quarter ended June 30, 1998 (File No. 000-
22419).
(4) Incorporated by reference to Exhibits noted in parentheticals which were
filed with the Registrant's Report on Form 8-K filed with the Commission
on February 2, 1999.
45
<PAGE>
SIGNATURES
for Form 10-K
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: March 30, 2000 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>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
/s/ Phillip C. Radlick, Ph.D. President, Chief Executive Officer and Director 03/30/00
- ----------------------------------------------- --------------
Phillip C. Radlick, Ph.D. (Principal Executive Officer)
/s/ Ronald E. Bourquin Vice President and Chief Financial Officer 03/30/00
- ----------------------------------------------- --------------
Ronald E. Bourquin (Principal Financial and Accounting Officer)
/s/ Neville J. Jeharajah Director 03/30/00
- ----------------------------------------------- --------------
Neville J. Jeharajah
/s/ Rudolfo C. Quijano Director 03/30/00
- ----------------------------------------------- --------------
Rudolfo C. Quijano
Executive Vice President, Chief Operating Officer
/s/ Gabriel B. Vegh and Director 03/30/00
- ----------------------------------------------- --------------
Gabriel B. Vegh
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
CARDIMA, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............................................................F-2
Balance Sheets at December 31, 1999 and 1998.................................................................F-3
Statements of Operations for the years ended December 31, 1999, 1998, and 1997...............................F-4
Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders' Equity
(Net Capital Deficiency) for the years ended December 31, 1999, 1998, and 1997..........................F-5
Statements of Cash Flows for the years ended December 31, 1999, 1998, and 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, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted
in the United States. 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,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 2, 2000, except for note 7,
as to which date is February 18, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
CARDIMA, INC.
BALANCE SHEETS
(In thousands except per share amounts)
December 31,
------------------------------------
ASSETS 1999 1998
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 423 $ 645
Short-term investments.............................................. 497 ---
Accounts receivable, net of allowances for doubtful accounts
of $92 and $41 at December 31, 1999 and 1998, respectively 669 512
Inventories......................................................... 1,268 1,977
Other current assets................................................ 251 366
-------------- --------------
Total current assets............................................ 3,108 3,500
Property and equipment, net.............................................. 2,512 2,998
Restricted cash.......................................................... --- 105
Notes receivable......................................................... 365 320
Other assets............................................................. 104 360
-------------- --------------
$ 6,089 $ 7,283
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable.................................................... $ 1,436 $ 2,286
Accrued compensation................................................ 1,041 1,032
Other current liabilities........................................... 60 76
Capital lease obligation - current portion.......................... 776 903
Line of credit obligation - current portion......................... 1,088 817
-------------- --------------
Total current liabilities................................... 4,401 5,114
Deferred rent............................................................ 1 42
Capital lease obligation - noncurrent portion............................ 1,012 1,120
Line of credit obligation - noncurrent portion........................... 1,095 2,183
Commitments
Stockholders' equity (net capital deficiency):
Common stock, $0.001 par value; 25,000,000 shares authorized,
16,356,355 shares issued and outstanding at December 31, 1999,
8,352,296 as of December 31, 1998; at amount paid in 60,441 45,910
Deferred compensation.................................................... (225) (478)
Accumulated deficit...................................................... (60,636) (46,608)
-------------- --------------
Total stockholders' equity (net capital deficiency)................. (420) (1,176)
-------------- --------------
$ 6,089 $ 7,283
============== ==============
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
CARDIMA, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales $ 3,495 $ 2,499 $ 1,261
Cost of goods sold 3,384 2,962 2,011
---------------- ---------------- ----------------
Gross profit (loss) 111 (463) (750)
Operating expenses:
Research and development 5,694 7,230 5,320
Selling, general and administrative 8,173 8,556 6,656
---------------- ---------------- ----------------
.........Total operating expenses 13,867 15,786 11,976
---------------- ---------------- ----------------
Operating loss (13,756) (16,249) (12,726)
Interest and other income 250 359 602
Interest expense (522) (296) (148)
---------------- ---------------- ----------------
Net loss $ (14,028) $ (16,186) $ (12,272)
================ ================ ================
Basic and diluted net loss per share $ (0.89) $ (1.96) $(2.64)
================ ================ ================
Shares used in computing basic and diluted net loss per
share 15,746 8,239 4,642
================ ================ ================
See accompanying notes to financial statements
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
CARDIMA, INC.
Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders' Equity (Net Capital Deficiency)
(In thousands, except share and per share amounts)
STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
-------------------------------------
SERIES D SERIES E
REDEEMABLE REDEEMABLE SERIES A SERIES B
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED PREFERRED PREFERRED
STOCK STOCK STOCK STOCK
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1996 ........................................... $ 9,740 $ -- $ 2,949 $ --
Issuance of 2,356,741 share of Series E redeemable
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 through the initial public offering, net of commissions
and issuance costs of $2,286 ......................................... -- -- -- --
Conversion of redeemable convertible and convertible preferred
stock in connection with the Company's initial public offering (9,740) (13,342) (2,949) -- (4,764)
Issuance of 27,338 shares of common stock for cash upon exercise
of employee stock option at $0.56 - $1.75 per share .................. -- -- -- --
Deferred compensation related to grant of stock options ................. -- -- -- --
Amortization of deferred compensation ................................... -- -- -- --
Net loss ................................................................ -- -- -- --
-------- -------- -------- --------
Balances at December 31, 1997 ........................................... -- -- -- --
Issuance of 78,409 shares of common stock for net issuance
exercise of warrants at $1.05 per share .............................. -- -- -- --
Issuance of 37,301 shares of common stock for exercise of warrants
at$1.05 per share .................................................... -- -- -- --
Issuance of 94,289 shares of common stock for cash upon exercise of
employee stock options at $0.56 - $1.75 per share .................... -- -- -- --
Issuance of 38,423 shares of common stock for cash in employee stock
purchase plan at $4.24 and $3.56 per share ........................... -- -- -- --
Amortization of deferred compensation ................................... -- -- -- --
Net loss ................................................................ -- -- -- --
-------- -------- -------- --------
Balances at December 31, 1998 ........................................... -- -- -- --
Issuance of 7,500,000 shares of common stock at $2.00 per share in
January and February 1999 through private placement, and 354,806
shares issued in lieu of commissions, net of issuance costs
of $686 .............................................................. -- -- -- --
Issuance of 91,834 shares of common stock, net of 45 repurchased
shares, for cash upon exercise of employee stock options
at $0.56 - $1.75 per share ........................................... -- -- -- --
Issuance of 57,419 shares of common stock for cash in employee
stock Purchase plan at $2.24 and $1.49 per share ..................... -- -- -- --
Amortization of deferred compensation ................................... -- -- -- --
Net loss ................................................................ -- -- -- --
-------- -------- -------- --------
Balances at December 31, 1999 ........................................... $ -- $ -- $ -- $ --
======== ======== ======== ========
STOCKHOLDERS' EQUITY (NET OF CAPITAL DEFICIENCY)
--------------------------------------------------------
TOTAL
SERIES C STOCKHOLDERS'
CONVERTIBLE DEFERRED ACCUMU- EQUITY (NET
PREFERRED COMMON COMPEN- LATED CAPITAL
STOCK STOCK SATION DEFICIT DEFICIENCY)
------------ ---------- --------- ------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996 ........................................... $ 4,764 $ 595 $ (526) $(18,150) $(10,368)
Issuance of 2,356,741 share of Series E redeemable
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 ................................................ -- -- -- -- --
Issuance of 2,275,000 shares of common stock at $7.00 per
share 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) 30,895 -- -- 23,182
Issuance of 27,338 shares of common stock for cash upon exercise
of employee stock option at $0.56 - $1.75 per share .................. -- 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
Issuance of 78,409 shares of common stock for net issuance
exercise of warrants at $1.05 per share .............................. -- -- -- -- --
Issuance of 37,301 shares of common stock for exercise of warrants
at$1.05 per share .................................................... -- 39 -- -- 39
Issuance of 94,289 shares of common stock for cash upon exercise of
employee stock options at $0.56 - $1.75 per share .................... -- 121 -- -- 121
Issuance of 38,423 shares of common stock for cash in employee stock
purchase plan at $4.24 and $3.56 per share ........................... -- 153 -- -- 153
Amortization of deferred compensation ................................... -- -- 253 -- 253
Net loss ................................................................ -- -- -- (16,186) (16,186)
-------- -------- -------- -------- --------
Balances at December 31, 1998 ........................................... -- 45,910 (478) (46,608) (1,176)
Issuance of 7,500,000 shares of common stock at $2.00 per share in
January and February 1999 through private placement, and 354,806
shares issued in lieu of commissions, net of issuance costs
of $686 .............................................................. -- 14,314 -- -- 14,314
Issuance of 91,834 shares of common stock, net of 45 repurchased
shares, for cash upon exercise of employee stock options
at $0.56 - $1.75 per share ........................................... -- 114 -- -- 114
Issuance of 57,419 shares of common stock for cash in employee
stock Purchase plan at $2.24 and $1.49 per share ..................... -- 103 -- -- 103
Amortization of deferred compensation ................................... -- -- 253 -- 253
Net loss ................................................................ -- -- -- (14,028) (14,028)
-------- -------- -------- -------- --------
Balances at December 31, 1999 ........................................... $ -- $ 60,441 $ (225) $(60,636) $ (420)
======== ======== ======== ======== ========
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
CARDIMA, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (14,028) $(16,186) $(12,272)
Adjustments to reconcile net loss to net cash provided by operations:
Depreciation and amortization 1,196 928 703
Amortization of deferred compensation 253 253 227
Loss on disposal of assets 15 6 --
Changes in operating assets and liabilities:
Accounts receivable (157) (244) (200)
Inventories 709 (1,445) (155)
Other current assets 115 (105) (32)
Restricted cash 105 87 83
Notes receivable (45) (19) (301)
Other assets (104) (905) (446)
Accounts payable (850) 1,388 (257)
Accrued employee compensation 9 279 240
Other current liabilities (16) 21 3
Deferred rent (41) (48) (49)
------------ ------------ ------------
Net cash used in operating activities (12,839) (15,990) (12,456)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (19,057) (517) (4,270)
Maturities and sales of short-term investments 18,560 4,786 --
Capital expenditures (248) (45) (883)
Proceeds from disposal of assets 14 25 3
------------ ------------ ------------
Net cash (used) provided in investing activities (731) 4,249 (5,150)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock -- -- 10,158
Proceeds from issuance of bridge loans -- -- 1,610
Principal payments under capital leases (993) (745) (469)
Principal payments under credit line (817) -- --
Payments under notes payable -- (7) --
Proceeds under line of credit -- 3,000 --
Net proceeds from sale of common stock 14,531 313 13,675
Proceeds from sale/leaseback of capital equipment 627 1,247 303
------------ ------------ ------------
Net cash provided by financing activities 13,348 3,808 25,277
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (222) (7,933) 7,671
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 645 8,578 907
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 423 $ 645 $ 8,578
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for interest $ 211 $ 298 $ 122
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Equipment acquired under capital leases $ 771 $ 1,341 $ 845
============ ============ ============
</TABLE>
F-6
<PAGE>
CARDIMA, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The 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 stockholder, Target Therapeutics.
The Company has incurred 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 February 2000, the Company sold a total of
4,666,611 shares of common stock at $2.25 per share in a private placement
transaction to accredited investors. The transaction included warrants to
investors exercisable for 933,322 shares of common stock at an exercise price
of $2.48 per share. As commission for the transaction, the Company paid
$524,891 in cash. In addition, the Company issued warrants, exercisable for
233,329 shares of common stock at an exercise price of $2.48 per share, as
commission for the transaction. The Company's net proceeds, after expenses of
the placement, were approximately $10,000,000.
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. In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). We are all evaluating
the effects, if any, that the adoption of SAB 101, in the second quarter of
2000, may have on the results of our operations or our financial position.
RESEARCH AND DEVELOPMENT
Research and development costs, which include clinical and regulatory costs, are
charged to expense as incurred.
F-7
<PAGE>
NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the weighted
average number of shares of common stock outstanding during the period. The
Company has excluded all convertible debt, convertible preferred stock,
warrants, and stock options from the computation of diluted earnings per share
because all such securities are anti-dilutive for all periods presented.
Pro forma net loss per share for 1997 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 (in
thousands except per share data):
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
--------------------------
<S> <C>
Shares used in computing basic and diluted net loss per share............................. 4,642
Adjusted to reflect assumed conversion of preferred stock from the date of
issuance through the initial public offering in June 1997............................. 1,454
--------------------------
6,096
Shares used in computing pro forma basic and diluted loss per share.......................
==========================
Pro forma basic and diluted net loss per share............................................ $ (2.01)
==========================
</TABLE>
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers investments in highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. All other
liquid investments are classified as short-term investments. All of the
Company's cash equivalents and short-term investments, consisting principally of
commercial paper, are classified as available-for-sale as of December 31, 1999.
Available-for-sale securities were carried at fair value with unrealized gains
and losses reported as a separate component of stockholders' equity. To date,
the Company has not experienced any significant unrealized gains or losses on
available-for-sale securities and accordingly, no adjustments have been made to
other comprehensive income or stockholders' equity. Realized gains and losses
and declines in value judged to be other than temporary on available-for-sale
securities are included in investment income. The fair value of investments is
based on quoted market prices at December 31, 1999. The fair value of these
securities approximated the amortized cost at December 31, 1999. Cash, cash
equivalents and short-term investments at December 31, 1999 consist of the
following (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash and cash equivalents: Short-term investments:
Cash................................... $ 254 Commercial paper.......................... $ 497
Money market funds..................... 169 Total short-term investments.............. $ 497
------------ ============
Total cash and cash equivalents......... $ 423
============
</TABLE>
F-8
<PAGE>
INVENTORIES
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,
--------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Raw materials.............................. $ 616 $ 502
Work-in-process............................ 107 217
Finished goods............................. 545 1,258
----------------- -----------------
$ 1,268 $ 1,977
================= =================
</TABLE>
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 the 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 (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Equipment..................................... $ 5,492 $ 5,054
Leasehold improvements........................ 109 107
----------------- -----------------
5,601 5,161
Less accumulated depreciation................. (3,089) (2,163)
----------------- -----------------
$ 2,512 $ 2,998
================= =================
</TABLE>
Property and equipment financed under a capital leases were $4,205,000 and
$3,660,000 at December 31, 1999 and 1998, respectively. Accumulated amortization
related to leased assets was $2,476,000 and $1,764,000 at December 31, 1999 and
1998, respectively.
CONCENTRATIONS OF RISK
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
F-9
<PAGE>
customer accounted for more than 10% of the Company's net sales and export sales
represented 45% of net sales for the year ended December 31, 1999. Of the export
sales in 1999, 22% were to Japan, 71% were to Europe and 7% were to the rest of
the world. Provisions for doubtful accounts were $55,000 and $29,000 for the
years ended December 31, 1999 and 1998, respectively. When necessary, estimated
provisions for product returns are recorded. The geographic distribution of net
sales was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
----------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $1,915 55% $ 1,722 69% $ 902 71%
Europe 1,127 32% 554 22% 224 18%
Japan 341 10% 177 7% 123 10%
Rest of World 112 3% 46 2% 12 1%
-------------- --------------- ---------------
TOTAL NET SALES: $3,495 $ 2,499 $ 1,261
============== =============== ===============
</TABLE>
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 capitalized and 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 patents to determine whether
there are any impairment losses. If indicators of impairment are present in
these 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 patents recorded in the accompanying financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Financial
F-10
<PAGE>
Instruments and for Hedging Activities, which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. SFAS No. 133, as delayed by SFAS No. 137, is effective for
years beginning after June 15, 2000, and is not anticipated to have a
significant impact on the Company's results of operations or financial condition
when adopted.
2. COMMITMENTS
The Company leases facilities under an operating lease which commenced in
November 1999 and expires November 2002. The Company also leases certain
equipment under noncancelable capital leases (see Note 6). Following is a
schedule of future minimum lease payments under both operating and capital
leases at December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Lease Leases
-------------- --------------
<S> <C> <C>
Year ending December 31:
2000.............................................................. $ 567 $ 900
2001.............................................................. 590 643
2002.............................................................. 533 419
2003.............................................................. --- 131
-------------- --------------
Total minimum payments required............................................ $1,690 2,093
==============
Less amount representing interest.......................................... (305)
--------------
Present value of future lease payments..................................... 1,788
Less current portion....................................................... (776)
--------------
Noncurrent portion......................................................... $ 1,012
==============
</TABLE>
Rent expense, net of rental income, was approximately $391,000 in 1999, $363,000
in 1998 and $316,000 in 1997. In connection with its facilities lease
arrangements, the Company issued letters of credit to lessors collateralized by
certificates of deposit which totaled approximately $105,000 at December 31,
1998. In November of 1999, these letters of credit and their respective
certificates of deposits expired.
3. STOCKHOLDERS' EQUITY
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.
F-11
<PAGE>
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 market
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 were 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 42 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.
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------------------------------------
Shares Number of Price Weighted-Average
Available Shares Per Share Exercise Price
--------------- ------------------ --------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996...................... 84,156 810,690 $0.56 - $2.10 $1.25
Additional shares reserved........................ 396,825 --- ---
Options granted................................... (438,162) 438,162 $1.75 - $7.00 $4.25
Options exercised................................. --- (27,338) $0.56 - $7.00 $2.39
Options forfeited................................. 80,899 (80,899) $0.56 - $5.88 $2.37
------ --------
Balance at December 31, 1997 123,718 1,140,615 $0.56 - $5.88 $2.37
Additional shares reserved........................ 243,117 --- --- ---
Options granted................................... (290,508) 290,508 $2.88 - $5.56 $4.38
Options exercised................................. --- (94,289) $0.56 - $1.75 $1.28
Options forfeited................................. 59,742 (59,742) $0.56 - $7.00 $3.59
------ --------
Balance at December 31, 1998 136,069 1,277,092 $0.56 - $7.00 $2.87
Additional shares reserved........................ 2,250,569 --- --- ---
Options granted................................... (715,239) 715,239 $1.41 - $2.56 $1.99
Options repurchased............................... 45 --- $0.56 - $0.56 $0.56
Options exercised................................. --- (91,879) $0.56 - $1.75 $1.24
Options forfeited................................. 139,601 (139,601) $0.56 - $7.00 $4.79
------- ---------
Balance at December 31, 1999...................... 1,811,045 1,760,851 $0.56 - $7.00 $2.44
--------- ---------
</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
F-12
<PAGE>
$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, 1999, 1998 and 1997 approximately 920,665, 881,606 and 827,920
options, respectively, were exercisable under the Plan. All options granted in
1999 were granted at fair value. The weighted average exercise price for all
options granted in 1999 is $2.00.
1997 DIRECTORS' STOCK OPTION PLAN
In March 1997, the board of directors adopted the 1997 Directors' Stock Option
Plan. A total of 200,000 shares of common stock have been reserved for issuance
under this plan. This Plan provides for the grant of nonstatutory stock options
to nonemployee directors of the Company. At December 31, 1999, options to
purchase 86,000 shares were granted at prices ranging from $1.91 to $2.13 per
share, with an average exercise price of $2.07. All options granted in 1999 were
granted at fair value. A total of 86,000 shares are outstanding 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"). A total of 250,000 shares of common stock has been
reserved for issuance under the Purchase Plan. As of December 31, 1999, 95,842
shares had been issued under this purchase plan.
WARRANTS
At December 31, 1999, the Company had the following warrants outstanding:
warrants to purchase 308,512 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 at $5.11
per share, 13,937 shares of common stock at $5.74 per share, and 19,513 shares
of common stock at $2.56 issued in connection with a capital lease; warrants to
purchase 17,543 shares of common stock at $7.00 per share issued to certain
investors in connection with bridge financings and warrants to purchase 75,000
shares of common stock at $4.00 per share issued in connection with a line of
credit. 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 January and February 1999, the Company sold a total of 7,500,000 shares of
common stock at $2.00 per share in a private placement transaction to accredited
investors. The
F-13
<PAGE>
Company issued 750,000 warrants, exercisable for 750,000 shares of common stock
at an exercise price of $2.20 as a commission for the 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
expired on December 9, 1998.
The Company has reserved 1,213,756 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 Black Scholes
option pricing model for 1997, 1998 and 1999 with the following weighted-average
assumptions for 1999, 1998 and 1997, respectively; risk-free interest rates of
approximately 6.0%, 6.0% and 6.0%; dividend yields of 0.0%, volatility factors
of the expected market price of the Company's common stock of 0.6, 0.6 and 0.6;
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>
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>
Year Ended December 31,
-----------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net loss - as reported....................................... $ (14,028) $ (16,186) $ (12,272)
================= ================= =================
Net loss - pro forma......................................... $ (14,269) $ (16,439) $ (12,526)
================= ================= =================
Net loss per share - as reported............................. $ (0.89) $ (1.96) $ (2.64)
================= ================= =================
Net loss per share - pro forma............................... $ (0.91) $ (2.00) $ (2.70)
================= ================= =================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------------
Weighted
Average Weighted Weighted-
Number of Remaining Average Number of Average
shares Contractual Exercise shares Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- --------------------------------- ---------------- --------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
$0.56 - $1.05 177,376 5.62 $0.78 177,376 $0.78
1.40 - 1.40 327,684 6.41 1.40 327,684 1.40
1.41 - 1.75 332,136 9.04 1.49 91,636 1.69
1.91 - 2.56 453,778 9.30 2.31 53,065 2.49
2.88 - 5.00 365,513 8.01 4.33 220,321 4.39
5.25 - 7.00 104,364 8.37 5.53 46,518 5.52
---------------- -----------------
$0.56 - $7.00 1,760,851 8.09 $2.44 916,600 $2.30
================ =================
</TABLE>
F-15
<PAGE>
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 of 6.45% at the time the note
was issued 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 and his principal residence. At December
31, 1999, approximately $39,000 of interest has accrued. The note receivable and
accrued interest are included in the accompanying balance sheet.
In August 1999, the Company entered into a $25,000 note receivable agreement
with David Carner, its Director of AF Systems to facilitate the purchase of a
principal residence in the Bay Area. The note bears interest at the minimum
Applicable Federal Rate of 5.30% at the time the note was issued and is due and
payable in a single lump sum twenty-four months from the note date. At December
31, 1999, approximately $400 of interest has accrued. The note receivable and
accrued interest are included in the accompanying balance sheet.
5. INCOME TAXES
As of December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $57,300,000. The Company also had federal
research and development tax credit carryforwards of approximately $600,000 as
of December 31, 1999. The net
F-16
<PAGE>
operating loss and credit carryforwards will expire beginning in 2008 through
2019, if not utilized.
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.
Significant components of the Company's deferred tax assets for federal and
state income taxes as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Net operating loss carryforwards.................................. $20,800 $ 16,100
Research credits carryforwards (federal and state)................ 900 800
Manufacturing investment credit carryforwards..................... 100 100
Capitalized research and development.............................. 700 500
Other, net........................................................ 900 600
----------- ------------
Total deferred tax assets 23,400 18,100
Valuation allowance for deferred tax assets (23,400) (18,100)
------------ -------------
$ ----- $ -----
------------- -------------
</TABLE>
The net valuation allowance increased by $5,300,000, $6,200,000 and $4,400,000
during the years ended December 31, 1999, 1998 and 1997, respectively.
6. RELATED PARTY TRANSACTIONS
LICENSE RIGHTS
In May 1993, in exchange for an equity interest in the Company, 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
F-17
<PAGE>
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.
7. SUBSEQUENT EVENTS
In February 2000, the Company sold a total of 4,666,611 shares of common stock
at $2.25 per share in a private placement transaction to accredited investors.
The transaction included warrants to investors exercisable for 933,322 shares
of common stock at an exercise price of $2.48 per share. As commission for the
transaction, the Company paid $524,891 in cash. In addition, the Company
issued warrants, exercisable for 233,329 shares of common stock at an exercise
price of $2.48 per share, as commission for the transaction. The Company's net
proceeds, after expenses of the placement, were approximately $10.0 million.
Unaudited proforma information, assuming the private placement had been
completed on December 31, 1999, is as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Proforma
Actual (unaudited)
------ -----------
<S> <C> <C>
Cash and cash equivalents................................. $ 423 $10,378
Total assets: ............................... 6,089 16,044
Common Stock.............................................. 60,441 70,396
Total stockholders' equity (net capital deficiency).. (420) 9,535
</TABLE>
F-18
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-32545) pertaining to the 1997 Employee Stock Purchase Plan, 1993
Stock Option Plan, and the 1997 Directors' Stock Option Plan of Cardima, Inc. of
our report dated February 2, 2000, except for Note 7, as to which the date is
February 18, 2000, with respect to the financial statements of Cardima, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Palo Alto, California
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 423 645
<SECURITIES> 497 0
<RECEIVABLES> 761 553
<ALLOWANCES> (92) (41)
<INVENTORY> 1,268 1,977
<CURRENT-ASSETS> 3,108 3,500
<PP&E> 5,600 5,161
<DEPRECIATION> (3,088) (2,163)
<TOTAL-ASSETS> 6,089 7,283
<CURRENT-LIABILITIES> 4,401 5,114
<BONDS> 0 0
0 0
0 0
<COMMON> 60,441 45,910
<OTHER-SE> (60,861) (47,086)
<TOTAL-LIABILITY-AND-EQUITY> 6,089 7,283
<SALES> 3,495 2,499
<TOTAL-REVENUES> 3,495 2,499
<CGS> 3,384 2,962
<TOTAL-COSTS> 3,384 2,962
<OTHER-EXPENSES> 13,867 15,786
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (522) (296)
<INCOME-PRETAX> (14,028) (16,186)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (14,028) (16,186)
<EPS-BASIC> (0.89) (1.96)
<EPS-DILUTED> (0.89) (1.96)
</TABLE>
