<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- ----Act of 1934
For the quarterly period ended June 30, 1996.
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: 0-27330
HEARTSTREAM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1577477
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2401 4TH AVENUE, SUITE 300
SEATTLE, WA 98121
(Address of principal executive offices, including zip code)
(206) 443-7630
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
At July 31, 1996, there were 11,524,251 shares of the Registrant's Common Stock
outstanding.
<PAGE>
HEARTSTREAM, INC.
(A DEVELOPMENT STAGE COMPANY)
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 1996 (Unaudited)
and December 31, 1995 . . . . . . . . . . . . . . . . . . 3
Statements of Operations (Unaudited) for the
three and six months ended June 30, 1996 and 1995 . . . . 4
Statements of Cash Flows (Unaudited) for the six
months ended June 30, 1996 and 1995 . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . 18
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
INDEX TO EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTSTREAM, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1996 1995
-------------- --------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,370,934 $ 5,970,768
Securities available-for-sale 53,475,661 7,867,929
Inventories 1,024,816 602,462
Prepaid expenses 300,431 104,445
------------- -------------
Total current assets 59,171,842 14,545,604
Property and equipment, net 2,127,199 1,965,984
Deferred offering costs - 301,806
Other assets 137,381 50,486
------------- -------------
$ 61,436,422 $ 16,863,880
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 925,966 $ 523,649
Accrued compensation and benefits 320,683 108,531
Other accrued expenses 136,117 245,636
Current portion of long-term obligations 360,188 313,249
------------- -------------
Total current liabilities 1,742,954 1,191,065
Long-term obligations, less current portion 420,730 618,741
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.001 par value
Authorized shares -
5,000,000 at June 30, 1996 and 6,264,000 at
December 31, 1995
Issued and outstanding shares -
no shares at June 30, 1996 and 6,190,341 at
December 31, 1995 - 6,190
Common stock, $0.001 par value
Authorized shares -
30,000,000 at June 30, 1996 and 15,000,000 at
December 31, 1995
Issued and outstanding -
11,524,251 at June 30, 1996 and 967,307 at
December 31, 1995 11,524 967
Additional paid-in-capital 77,029,451 28,010,289
Deficit accumulated during the development stage (17,674,043) (12,757,351)
Deferred compensation (94,194) (206,021)
------------- -------------
Total stockholders' equity 59,272,738 15,054,074
------------- -------------
$ 61,436,422 $ 16,863,880
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
HEARTSTREAM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
December 8, 1992
Three Months Six Months (Date of
Ended June 30, Ended June 30, Incorporation)
---------------------------- ---------------------------- to June 30,
1996 1995 1996 1995 1996
------------- ------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development. . . $ 1,612,801 $ 1,152,799 $ 2,960,667 $ 2,156,131 $ 11,632,122
General and administrative. . 1,270,378 422,190 2,187,159 793,580 5,795,157
Marketing . . . . . . . . . . 642,766 149,779 982,797 294,899 2,186,077
------------- ------------- ------------- ------------- --------------
Loss from operations . . . (3,525,945) (1,724,768) (6,130,623) (3,244,610) (19,613,356)
Interest income. . . . . . . . 778,254 276,694 1,326,924 344,480 2,321,416
Interest expense . . . . . . . (31,938) (33,962) (66,822) (63,548) (322,202)
Other expense. . . . . . . . . - - - - (18,748)
------------- ------------- ------------- ------------- --------------
Net loss . . . . . . . . . . . $ (2,779,629) $ (1,482,036) $ (4,870,521) $ (2,963,678) $ (17,632,890)
------------- ------------- ------------- ------------- --------------
------------- ------------- ------------- ------------- --------------
Net loss per share, historical $ (0.24) $ (0.55) $ (0.49) $ (1.09)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares used to calculate
historical net loss per share 11,427,645 2,708,523 9,976,584 2,708,428
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss per share, pro forma $ (0.24) $ (0.19) $ (0.45) $ (0.42)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares used to calculate
pro forma net loss per share 11,427,645 7,663,630 10,793,360 7,111,523
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
HEARTSTREAM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
December 8, 1992
(Date of
Six Months Ended June 30, Incorporation)
----------------------------- to June 30,
1996 1995 1996
------------- ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,870,521) $ (2,963,678) $(17,632,890)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 347,040 185,138 1,059,462
Amortization of deferred compensation . . . . . . . . . . . . . . 111,827 - 739,840
Amortization of premiums and (accretion) of
discounts on securities . . . . . . . . . . . . . . . . . . . . 106,778 (1,056) (182)
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . - - 18,748
Changes in:
Increase in inventories . . . . . . . . . . . . . . . . . . . . . (422,354) - (1,024,816)
Increase in prepaid expenses. . . . . . . . . . . . . . . . . . . (195,986) (31,374) (300,431)
Increase in other assets. . . . . . . . . . . . . . . . . . . . . (86,895) (54,076) (137,381)
Increase in accounts payable and accrued expenses . . . . . . . . 504,950 120,379 1,382,766
------------- ------------- ------------
Net cash used in operating activities. . . . . . . . . . . . . . . (4,505,161) (2,744,667) (15,894,884)
INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . . . . . . . (508,255) (837,238) (2,560,310)
Purchase of securities . . . . . . . . . . . . . . . . . . . . . . (52,470,841) - (68,626,792)
Sales of securities. . . . . . . . . . . . . . . . . . . . . . . . 2,700,000 - 4,200,000
Maturities of securities . . . . . . . . . . . . . . . . . . . . . 4,010,160 1,500,000 10,910,160
------------- ------------- ------------
Net cash (used in)/provided by investing activities. . . . . . . . (46,268,936) 662,762 (56,076,942)
FINANCING ACTIVITIES:
Proceeds from investor notes . . . . . . . . . . . . . . . . . . . - - 530,000
Proceeds from financing agreements . . . . . . . . . . . . . . . . - 457,185 629,354
Deferred offering costs. . . . . . . . . . . . . . . . . . . . . . 301,806 85,344 -
Principal payments on capitalized lease obligations. . . . . . . . (151,072) (101,322) (493,535)
Issuance of common stock, net of issuance costs. . . . . . . . . . 49,023,529 5,099 49,065,539
Issuance of preferred stock, net of issuance costs . . . . . . . . - 18,030,460 26,611,402
------------- ------------- ------------
Net cash provided by financing activities. . . . . . . . . . . . . 49,174,263 18,476,766 76,342,760
------------- ------------- ------------
Net (decrease)/increase in cash and cash equivalents . . . . . . . (1,599,834) 16,394,861 4,370,934
Cash and cash equivalents, beginning of period . . . . . . . . . . 5,970,768 2,041,496 -
------------- ------------- ------------
Cash and cash equivalents, end of period . . . . . . . . . . . . . $ 4,370,934 $ 18,436,357 $ 4,370,934
------------- ------------- ------------
------------- ------------- ------------
NONCASH TRANSACTION AND SUPPLEMENTAL DISCLOSURES:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . $ 66,822 $ 63,548 $ 322,202
------------- ------------- ------------
------------- ------------- ------------
Property and equipment acquired through capital
lease agreements. . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ 645,099
------------- ------------- ------------
------------- ------------- ------------
Conversion of note payable to common stock . . . . . . . . . . . . $ - $ - $ 530,000
------------- ------------- ------------
------------- ------------- ------------
Conversion of preferred stock to common stock. . . . . . . . . . . $ 6,190 $ - $ 6,190
------------- ------------- ------------
------------- ------------- ------------
Deferred compensation on stock option grants . . . . . . . . . . . $ - $ - $ 834,034
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
HEARTSTREAM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
Heartstream, Inc. ("Heartstream" or the "Company") according to the rules
and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles. In the opinion of management,
the financial statements reflect all adjustments, which include only normal
and recurring items, necessary for fair presentation of the interim periods
presented. The results for the six months ended June 30, 1996, may not
necessarily be indicative of the results for the year ending December 31,
1996. These financial statements and related notes should be read in
conjunction with the Company's audited financial statements for the year
ended December 31, 1995, included in its Registration Statement on Form S-1
(No. 33-99908) filed with the Securities and Exchange Commission.
2. INITIAL PUBLIC OFFERING
On February 5, 1996, the Company completed an initial public offering,
selling 4,140,000 shares of common stock at $13 per share. In conjunction
with the closing of this offering, the Company's Board of Directors
approved an increase in the total number of authorized shares to
35,000,000, of which 30,000,000 are for common stock and 5,000,000 are for
preferred stock. In addition, all of the Company's preferred stock
converted to 6,190,341 shares of common stock.
3. SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale at June 30, 1996 consist of the following:
<TABLE>
<CAPTION>
Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Government-backed securities $ 13,631,364 $ - $ (14,330) $ 13,617,034
Corporate debt obligations 39,885,450 - (26,823) 39,858,627
-------------- -------------- ------------- --------------
$ 53,516,814 $ - $ (41,153) $ 53,475,661
-------------- -------------- ------------- --------------
-------------- -------------- ------------- --------------
</TABLE>
Securities available-for-sale at December 31, 1995 consisted of the
following:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Government-backed securities $ 1,005,559 $ 892 $ - $ 1,006,451
Corporate debt obligations 6,857,352 4,126 - 6,861,478
-------------- -------------- -------------- --------------
$ 7,862,911 $ 5,018 $ - $ 7,867,929
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
6
<PAGE>
HEARTSTREAM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
There were no realized gains or losses on sales of securities
available-for-sale for the periods ended June 30, 1996 or 1995. The
maturities of securities available-for-sale at June 30, 1996 are as
follows:
Fair
Cost Value
-------------- --------------
Due within one year $ 34,663,531 $ 34,612,318
Due between one and two years 14,308,236 14,308,328
Due after ten years 4,545,047 4,555,015
-------------- --------------
$ 53,516,814 $ 53,475,661
-------------- --------------
-------------- --------------
4. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market and consist primarily of component parts to be used in the Company's
product.
5. NET LOSS PER SHARE
Historical net loss per share is computed based on the weighted
average number of shares of common shares outstanding and gives effect to
the following adjustments: common equivalent shares are not included in
the per-share calculation where the effect of their inclusion would be
antidilutive, except that, in accordance with Securities and Exchange
Commission requirements, common and common equivalent shares issued during
the 12-month period prior to the filing of an initial public offering have
been included in the calculation as if they were outstanding for all
periods using the treasury stock method and the initial public price of $13
per share even though their inclusion would be antidilutive.
The pro forma net loss per share is computed based on the historical
net loss per share adjusted for the assumed conversion of all outstanding
shares of convertible preferred stock into common stock at the time of
issuance.
7
<PAGE>
HEARTSTREAM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
6. LITIGATION
In 1995, Physio-Control Corporation ("Physio-Control") filed a lawsuit
in Washington state court alleging trade secret misappropriation and
tortious interference with business relations against the Company and five
of its employees and their spouses in connection with the development of
the ForeRunner. These employees were founders of Heartstream and former
employees of Physio-Control, and the complaint includes related allegations
that they breached proprietary information agreements with Physio-Control.
The complaint seeks injunctive relief, unspecified monetary damages, and
an order declaring Physio-Control the owner of certain patent applications
filed by the Company and any patents that may issue from those
applications. The Company has conducted a review of its technology in light
of the Physio-Control claims and, after consultation with its intellectual
property and litigation counsels, believes that the Company should prevail
in the litigation based on several defenses including, among other things,
the Company's conclusion that it has independently developed the technology
at issue. However, litigation is subject to inherent uncertainties,
especially cases such as this where complex technical issues may be decided
by a lay jury. Adverse determinations in the litigation with Physio-Control
could have a material adverse effect on the Company's business, financial
condition and results of operations.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Heartstream was founded in December 1992 and to date has engaged
primarily in organizational, research and product development efforts and
clinical trials. Heartstream has never generated any revenues and, accordingly,
has experienced operating losses since its inception. As of June 30, 1996, the
Company had an accumulated deficit of approximately $17.7 million. Heartstream
expects to continue to incur operating losses at least through 1997. Further,
Heartstream expects operating expenses and losses to increase as it completes
development of its automatic external defibrillator, the ForeRunner, seeks
regulatory clearance for its products, expands its sales and marketing efforts
in contemplation of product introduction and market development, initiates new
research and development projects, and increases administrative activities to
support growth of the Company.
The Company received its CE mark under the European Medical Device
Directives Annex II process in May 1996, allowing it to market the ForeRunner
defibrillator and its accessories in the 18 countries of the European Economic
Area. However, the Company does not have experience in manufacturing, marketing
or selling its products in commercial quantities and there can be no assurance
that the Company's development efforts will result in a commercially available
product, or that it will be successful in introducing the ForeRunner. Further,
there can be no assurance that required regulatory approvals in other
jurisdictions will be obtained in a timely manner, or at all, or that the
ForeRunner defibrillator will ever gain commercial acceptance or that the
Company will ever generate revenues or achieve profitability.
The following paragraph contains forward-looking statements concerning
the Company's expectations regarding receipt of regulatory approval to market
the ForeRunner and its related accessories in the United States. In December
1995, the Company filed a 510(k) premarket notification with the U.S. Food and
Drug Administration ("FDA") in order to seek clearance from the FDA to market
the ForeRunner and its related accessories in the United States. Since this
time and as part of the regulatory clearance process, the Company has had a
number of discussions with the FDA and provided additional information to the
FDA. In addition, the Company is undergoing a Good Manufacturing Practices
("GMP") inspection of its facilities. Based on its interactions and
activities to date, the Company believes that the FDA may clear its premarket
notification submission by the end of 1996. However, the actual timing and
circumstances regarding regulatory clearance may differ materially from those
anticipated by the Company for a variety of factors, including the results of
the Company's GMP inspection, possible requests by the FDA for additional
information, timing and work flow at the FDA, and other factors set forth below
under "Risk Factors - Lack of Regulatory Approvals" and "-Continuing Government
Regulation."
In 1995, Physio-Control Corporation ("Physio-Control"), a competitor of
the Company, filed a lawsuit in Washington state court alleging trade secret
misappropriation and tortious interference with business relations against the
Company and five of its employees and their spouses in connection with
development of the ForeRunner. These employees were founders of Heartstream and
former employees of Physio-Control, and the complaint includes related
allegations that they breached proprietary information agreements with
Physio-Control. The complaint seeks injunctive relief, unspecified monetary
damages and an order declaring Physio-Control the owner of certain patent
applications filed by the Company and any patents that may issue from those
applications. Heartstream has filed counterclaims against Physio-Control. The
pending litigation has resulted and will continue to result in substantial
expense to the Company and significant diversion of effort by the Company's
technical and management personnel. If the court finds against the Company, the
Company could be enjoined from manufacturing or commercializing the ForeRunner,
the Company could be required to seek licenses from Physio-Control, and the
Company could also be held liable for damages. The Company has conducted a
review of its technology in light of the Physio-Control claims and, after
consultation with its intellectual
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
property and litigation counsels, believes that the Company should prevail in
the litigation based on several defenses including, among other things, the
Company's conclusion that it has independently developed the technology at
issue. However, litigation is subject to inherent uncertainties, especially in
cases such as this where complex technical issues may be decided by a lay jury.
Adverse determinations in the litigation with Physio-Control could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RESULTS OF OPERATIONS
Research and development expenses, which include clinical trial,
regulatory submission, and patent legal expenses, for the three months ended
June 30, 1996 were $1.6 million, an increase of $0.5 million from the prior
year. The increase was due primarily to the increased size of the development
team, which is currently focused on the final validation and qualification
efforts on the ForeRunner defibrillator, and related personnel costs. Research
and development expenses represent 46% of the loss from operations in the second
quarter of 1996 and 67% of the loss from operations in the same period of 1995.
Research and development expenses for the six months ended June 30, 1996 were
$3.0 million, compared to $2.2 million for the six months ended June 30, 1995.
The Company expects research and development expenses in the remainder of 1996
to increase slightly over 1995 expenditures as development of the ForeRunner is
completed, new projects are undertaken and patent filing activities increase.
General and administrative expenses for the three months ended June 30,
1996 were $1.3 million, an increase of $0.8 million over the three months ended
June 30, 1995. The increase was due to increased personnel and facilities costs
and legal costs to support the Physio-Control litigation. General and
administrative expenses were $2.2 million for the six months ended June 30,
1996, compared to $0.8 million in the same six month period of the prior year.
General and administrative expenses are expected to increase in 1996 to support
the ongoing litigation with Physio-Control, the addition of personnel and the
increasing scope of business activities.
Marketing expenses totaled $0.6 million for the three months ended June
30, 1996 compared with $0.1 million for the three months ended June 30, 1995,
primarily due to increased headcount and promotional activities. Marketing
expenses were $1.0 million for the six months ended June 30, 1996, compared to
$0.3 million for the six months ended June 30, 1995. Sales and marketing
expenses are expected to increase significantly in 1996 with the hiring of
additional direct sales personnel, establishment of domestic and international
distribution channels, continued advertising and promotional campaigns, and
other efforts directed toward launch of the ForeRunner defibrillator.
Interest income on cash, cash equivalents and securities
available-for-sale was $0.8 million for the three month period ended June 30,
1996 compared to $0.3 million for the same period in 1995. Interest income for
the six months ended June 30, 1996 was $1.3 million, compared to $0.3 million in
the six months ended June 30, 1995. The increase was primarily due to increased
cash, cash equivalents and securities available-for-sale resulting from the
completion of the Company's initial public offering in February 1996.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
INCOME TAXES
The Company has not generated any net income to date and therefore has
not paid any federal income taxes since inception. At June 30, 1996, the
Company had net operating loss carryforwards of approximately $16.4 million and
research and development credit carryforwards of approximately $0.4 million, net
of carryforwards expected to expire before their complete utilization. The
operating loss carryforwards and research and development carryforwards begin to
expire in the year 2008. Utilization of federal income tax carryforwards is
subject to certain limitations under Section 382, of the Internal Revenue Code
of 1986, as amended. The Company's past sales of preferred and common stock
have resulted in "ownership changes" as defined under Section 382, resulting in
limitations on the future use of carryforwards. These limitations are expected
to result in the expiration of approximately $0.5 million of net operating loss
carryforwards and approximately $0.1 million research and development credit
carryforwards before their complete utilization.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company's cash, cash equivalents and securities
available-for-sale were $57.8 million, compared to $13.8 million at December 31,
1995. On February 5, 1996, the Company completed an initial public offering of
4,140,000 shares of common stock at a price of $13.00 per share. The net
proceeds to the Company from the offering were approximately $49 million.
Cash used in operating activities increased from $2.7 million for the
six months ended June 30, 1995 to $4.5 million in the six months ended June 30,
1996, reflecting increasing net losses from ongoing research and development and
general growth in size and scale of operations as well as purchases of inventory
for future production.
The Company expects to continue to incur substantial expenses in support
of research and development activities, growth of its sales and marketing
organization and support for ongoing litigation and administrative activities.
The Company believes that its existing cash, cash equivalents and securities
available-for-sale will be sufficient to fund its operations through 1997,
although there can be no assurance that the Company will not require additional
funding within two years. The Company's capital requirements may vary
materially from those planned because of results of research and development
programs, competitive and technological advances, FDA or other regulatory
processes, changes in the Company's marketing and distribution strategy, and
other factors. There can be no assurance that additional financing, if
required, will be available on satisfactory terms, or at all.
RISK FACTORS
This quarterly report on Form 10-Q contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated by such forward-looking statements as a
result of certain factors including those set forth below.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE
LOSSES. The Company was founded in December 1992 and to date has engaged
primarily in organizational, research and product development efforts and
clinical trials. The Company has never generated revenues and, as of
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
June 30, 1996, the Company had an accumulated deficit of approximately $17.7
million. Heartstream expects to continue to incur operating losses at least
through 1997. Further, Heartstream expects operating expenses and losses to
increase as it completes development of its automatic external defibrillator,
the ForeRunner, seeks regulatory clearance for its products, expands its sales
and marketing efforts in contemplation of product introduction and market
development, initiates new research and development projects, and increases
administrative activities to support growth of the Company. There can be no
assurance that the Company's development efforts will result in a commercially
available product, that the Company will be successful in introducing the
ForeRunner, or that required regulatory approvals will be obtained in a timely
manner, or at all. Further, the Company does not have experience in
manufacturing, marketing or selling its products in commercial quantities.
There can be no assurance that the ForeRunner will ever gain commercial
acceptance or that the Company will ever generate revenues or achieve
profitability.
DEPENDENCE UPON FORERUNNER. The ForeRunner and its related accessories
are currently the Company's only products. These products will require further
development and regulatory approvals before they can be marketed in the United
States or internationally. The Company has never sold any products, and there
can be no assurance that the Company's development efforts will be successful or
that the ForeRunner and its related accessories or any other product developed
by the Company will be safe or effective, capable of being manufactured in
commercial quantities at acceptable costs, approved by regulatory authorities or
successfully marketed. The Company expects that the ForeRunner and its related
accessories, if commercialized, will account for substantially all of the
Company's revenues for the foreseeable future. Furthermore, because the
ForeRunner currently represents the Company's sole product focus, if the
ForeRunner is not successfully commercialized, the Company's business, financial
condition and results of operation could be materially adversely affected.
LACK OF REGULATORY APPROVALS. The design, manufacturing, labeling,
distribution and marketing of the Company's products are subject to extensive
and rigorous government regulation in the United States and certain other
countries where the process of obtaining required regulatory approvals is
lengthy, expensive and uncertain. In order for the Company to market the
ForeRunner and related accessories in the United States, the Company must obtain
clearance or approval from the United States FDA. The Company is seeking
clearance to market the ForeRunner and its related accessories through a 510(k)
premarket notification, which the Company submitted for filing in December 1995.
There can be no assurance that the FDA will act favorably or quickly on the
Company's 510(k) submission, and significant difficulties and cost may be
encountered by the Company in its efforts to obtain FDA clearance that could
delay or preclude the Company from selling its products in the United States.
Furthermore, there can be no assurance that the FDA will not request additional
data, require that the Company conduct further clinical studies or require a
more extensive regulatory submission known as a premarket approval application
("PMA"), causing the Company to incur substantial cost and delay. In addition,
there can be no assurance that the FDA will not impose strict labeling
requirements, onerous operator training requirements or other requirements as a
condition of its 501(k) clearance or PMA approval, any of which could limit the
Company's ability to market the ForeRunner, particularly in the first responder
market. Further, if a company wishes to modify a product after FDA clearance of
a 510(k) premarket notification of approval or a PMA, including changes in
indications or other modifications that could affect safety and efficacy,
additional clearances or approvals will be required from the FDA. Failure to
receive or delay in receipt of FDA clearances or approvals, including the need
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
for additional clinical trials or data as a prerequisite to clearance or
approval, or any FDA conditions that limit the ability of the Company to market
the ForeRunner, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company received its CE mark under the European Medical Device
Directives Annex II process in May 1996, allowing it to market the ForeRunner
defibrillator and its accessories in the 18 countries of the European Economic
Area. However, in order for the Company to market the ForeRunner and its
related accessories in certain foreign jurisdictions, the Company and its
distributors and agents must obtain required regulatory approvals and clearances
and otherwise comply with extensive regulations regarding safety 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. There can be no assurance that 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. Delays in
receipt of approvals to market the Company's products, failure to receive these
approvals, or future loss of previously received approvals could have a material
adverse effect on the Company's business, financial condition and results of
operations.
CONTINUING GOVERNMENT REGULATION. Regulatory approvals, if granted, may
include significant limitations on the indicated uses for which the product may
be marketed. FDA enforcement policy strictly prohibits the marketing of
approved medical devices for unapproved uses. In addition, the Company's
manufacturing processes will be required to comply with the GMP regulations of
the FDA. These regulations include design, testing, production, control,
documentation and other requirements. Enforcement of GMP regulations has
increased significantly in the last several years, and the FDA has publicly
stated that compliance will be more strictly scrutinized. The Company's
facilities and manufacturing processes, as well as those of certain of the
Company's third party suppliers, are subject to periodic inspection by the FDA
and other agencies. Failure to comply with these and other applicable
regulatory requirements could result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal of the government to grant premarket
clearance or premarket approval for devices, withdrawal of approvals and
criminal prosecution, any of which could have material adverse effect on the
Company's business, financial condition and results of operations.
Several states have enacted laws and regulations which govern the
delivery of emergency medical services, including the use of external
defibrillators. These laws and regulations in many cases currently restrict use
of these devices to specified categories of trained personnel, mandate levels of
operator training and, in some cases, require that certain features be
incorporated into external defibrillators, including features such as an ECG
strip chart printer which are not currently incorporated into the ForeRunner.
Accordingly, market acceptance of the ForeRunner will be significantly dependent
upon the Company's ability to convince state and local government bodies and
medical directors of the safety and efficacy of the ForeRunner and its potential
for widespread deployment. There can be no assurance that such restrictions on
the use of automatic external defibrillators ("AEDs") will be eased or removed,
which could have a material adverse effect on the Company's ability to market
the ForeRunner.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
UNCERTAINTY OF MARKET ACCEPTANCE AND DEPENDENCE ON MARKET DEVELOPMENT.
The Company's success is substantially dependent upon market acceptance of the
ForeRunner. Currently, all commercially available AEDs utilize a monophasic
waveform and utilize 200 to 360 Joules of energy in delivering their
defibrillation therapy. Many of these AEDs have been marketed for several
years, comply with the American Heart Association ("AHA") recommended guideline
for external defibrillation therapy and have been extensively used in this
field. The current AHA recommended guideline for external defibrillation calls
for an initial shock of 200 Joules, a second shock, if required, of 200-300
Joules, and a third shock, if required, of 200-360 Joules. The Company's
ForeRunner AED utilizes a biphasic waveform delivered at energy levels lower
than that specified in the AHA guideline. There can be no assurance that the
AHA will amend its recommended guideline to include the Company's lower energy
biphasic waveform protocol. The failure of the ForeRunner's defibrillation
protocol to be included in the AHA's recommended guideline in a timely fashion,
or at all, could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, individual elements
of the ForeRunner have only been tested in a laboratory setting, and the
complete, finished product has not been subjected to the rigors of field use.
There can be no assurance the ForeRunner will demonstrate acceptable
effectiveness or that it will demonstrate benefits in ease of use, maintenance
and safety or will achieve acceptance in its target markets.
The Company's success is also substantially dependent upon market
development and expansion. AEDs are currently marketed by a number of companies
into the existing professional emergency medical technician ("EMT") market, the
Company's initial target market. The Company's future success depends upon
substantially increasing the number of AEDs sold into the professional EMT
market segment, as well as the emerging first responder market. Development of
the first responder market will depend in large part on the Company's ability to
demonstrate to physicians and potential customers the benefits, safety, efficacy
and cost-effectiveness of widespread use of its AED by responders who are less
trained than EMTs. There can be no assurance that the ForeRunner will gain
market acceptance or that market demand for the ForeRunner will be sufficient to
allow profitable operations.
COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE. The domestic and
international markets for external defibrillators are highly competitive, and
most of the Company's competitors have substantial installed bases of products
and significantly greater financial, technical, research and development, and
marketing or sales resources than the Company. Accordingly, the Company's
competitors may be able to bring new product offerings to market quickly and may
be able to increase sales of their products by leveraging their installed bases
and established distribution channels. The Company believes that its primary
competitors are companies that currently market AEDs into the professional EMT
segment of the market. This market segment is dominated by Laerdal Medical,
Inc. ("Laerdal") and Physio-Control. Other competitors that sell products into
this market segment include Marquette Electronics, Inc., SurVivaLink Corporation
("SurVivaLink") and Zoll Medical, Inc. Laerdal, Physio-Control and SurVivaLink
have either introduced or announced plans to introduce new AEDs that appear
to be targeted at markets similar to those targeted by the ForeRunner
defibrillator. The Company believes that the principal competitive factors for
AEDs in the professional EMT and first responder market segments are maintenance
and training requirements, ease of use, safety and reliability, cost-
effectiveness and size. There can be no assurance that the Company's products
will compete favorably with the products offered by its competitors with respect
to these factors. In addition, a number of companies may be engaged in the
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
development of approaches for the treatment of sudden cardiac arrest other than
those utilized by the Company. There can be no assurance that superior
defibrillation technologies will not be developed by these competitors or
others, or that alternative therapies or approaches, including pharmaceutical or
other alternatives, will not render the Company's technology or products under
development obsolete or noncompetitive, which would have material adverse effect
on the Company's business, financial condition and results of operations.
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE. The Company
currently has no commercial sales and has a small sales and marketing
organization. In the United States, the Company intends to sell its products
primarily through a direct sales force and through distributors. In
international markets, the Company intends to sell its products primarily
through distributors. There can be no assurance that the sales and marketing
organization will be cost-effective, or that the Company's sales and marketing
efforts will be successful. In addition, the Company has only had discussions
with a limited number of domestic and international distributors and, to date,
has entered into agreements with two international distributors covering a
limited number of European countries. There can be no assurance that the
Company will be able to enter into agreements with desired distributors on a
timely basis or at all, or that such distributors will devote adequate resources
to selling the Company's products. Failure to establish appropriate
distribution relationships could have a material adverse effect on the Company's
business, financial condition and results of operations. Further, the Company
expects that the initial purchasers of its products will be composed of state
and local governments and medical service provided under contract to such
entities, and that sales of the ForeRunner may be characterized by long sales
cycles.
DEPENDENCE UPON PATENTS AND PROPRIETARY TECHNOLOGY; RELATED LITIGATION.
The Company's success will depend in part on its ability to obtain patent
protection for its products and processes, to preserve its trade secrets and to
operate without infringing 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 that it believes to be proprietary and
that offers a potential competitive advantage for its products. However, no
assurance can be given that any patents from pending patent applications or from
any future patent application will be issued, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the Company's patents 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 by the Company. In addition, the laws of
certain foreign countries do not protect the Company's intellectual property
rights to the same extent as do the laws of the United States. Litigation or
regulatory proceedings, which could result in substantial cost and uncertainty
to the Company, may also be necessary to enforce patent or other intellectual
property rights of the Company or to determine the scope and validity of other
parties' proprietary rights. There can be no assurance that the third parties
will not assert infringement claims in the future with respect to the Company's
current or future products or that any such claims will not require the Company
to enter into license arrangements or result in litigation, regardless of the
merits of such claims. No assurance can be given that any necessary licenses
can be obtained on commercially reasonable terms, or at all. Should litigation
with respect to any such claims commence, such litigation could be extremely
expensive and time consuming and could have a material adverse effect on the
Company's business, financial condition and results of operations regardless of
the outcome of such litigation.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The medical device market has been characterized by extensive litigation
regarding patents, trade secrets and other intellectual property rights. On
November 13, 1995, Physio-Control filed a lawsuit in Washington state court
alleging trade secret misappropriation and tortious interference with business
relations against the Company and five of its employees and their spouses in
connection with the development of the ForeRunner. These employees were
founders of Heartstream and former employees of Physio-Control, and the
complaint includes related allegations that they breached propriety information
agreements with Physio-Control. The pending litigation has resulted and will
continue to result in substantial expense to the Company and significant
diversion of effort by the Company's technical and management personnel. If the
court finds against the Company, the Company could be enjoined from
manufacturing or commercializing the ForeRunner, the Company could be required
to seek licenses from Physio-Control, and the Company could also be held liable
for damages. The Company has conducted a review of its technology in light of
the Physio-Control claims and, after consultation with its intellectual property
and litigation counsels, believes that the Company should prevail in the
litigation based on several defenses including, among other things, the
Company's conclusion that it has independently developed the technology at
issue. However, litigation is subject to inherent uncertainties, especially in
cases such as this where complex technical issues may be decided by a lay jury.
Accordingly, no assurance can be given that the lawsuit will not be decided
against the Company. Adverse determinations in the litigation with Physio-
Control could have a material adverse effect on the Company's business,
financial condition and results of operations.
While the Company generally enters into confidentiality agreements with
its employees and consultants, there can be no assurance that the Company's
trade secrets or proprietary technology will not become known or be
independently developed by competitors in such a manner that the Company has no
practical recourse.
LIMITED MANUFACTURING EXPERIENCE. To date, the Company has only
manufactured limited quantities of devices. As a result, 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 can be established or
maintained at commercially reasonable costs. The Company may encounter
difficulties in scaling up production of ForeRunner devices, including problems
involving quality control and assurance, and shortages of qualified personnel.
In addition, the Company's manufacturing facilities are subject to GMP
regulations, international quality standards and other regulatory requirements.
Failure by the Company to maintain its facilities in accordance with GMP
regulations, international quality standards or other regulatory requirements
may entail a delay or termination of production, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON SOLE SOURCES OF SUPPLY.
The Company expects to manufacture its products based on forecasted product
orders, and intends to purchase subassemblies and components prior to receipt of
purchase orders from customers. Lead times for materials and components ordered
by the Company vary significantly, and depend upon factors such as the specific
supplier, contract terms and demand for a component at a given time. In
addition, certain components used in the Company's products, such as flash
memory chips and other electronic components, have long
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
lead times and have been in short supply. The Company has acquired an inventory
of flash memory chips and certain other components in anticipation of possible
shortages, and may continue this practice for these or other components in the
future. If orders do not match forecasts, the Company may have excess or
inadequate inventory of certain materials and components. In addition, the
Company purchases some key components, such as the main energy storage capacitor
and the LCD display screen used in the ForeRunner, from sole source suppliers.
For certain components, including the ForeRunner's batteries and
microprocessors, there are relatively few sources of supply. There can be no
assurance that establishment of additional or replacement suppliers for these
components can be accomplished quickly, or at all. Any significant component
supply delay or interruption could require the Company to qualify new sources of
supply, if available, and could have a material adverse effect on the Company's
ability to manufacture its products and therefore on its business, financial
condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL. The Company's ability to operate
successfully depends in significant part upon the continued service of certain
key scientific, technical and managerial personnel, and its continuing ability
to attract and retain additional highly qualified scientific, technical and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company can retain such personnel or that it can
attract or retain other highly qualified personnel in the future. The loss of
key personnel or the inability to hire or retain qualified personnel could have
a material adverse effect upon the Company's business, financial condition and
results of operations. In addition, many employees of the Company, including a
number of its key scientific, technical and managerial personnel, are subject to
the terms of confidentiality agreements with respect to proprietary information
of their former employers. The failure of these employees to comply with the
terms of their agreements with, or other obligations to, such former employers
could result in assertion of claims against the Company and such employees,
which, if successful, could restrict their role with the Company and have a
material adverse effect on the Company's business, financial condition and
results of operations.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1996 Annual Meeting on June 14, 1996 with two matters
submitted to stockholders for vote. At the record date, April 19, 1996, there
were 11,405,638 shares of the Company's Common Stock issued and outstanding.
Stockholders representing 8,349,383 shares were present at said meeting, either
in person or by proxy.
The first matter submitted to vote was the election of two nominees to the
Company's Board of Directors, to hold office for a term of three years. The
nominees were elected with the following results:
Votes Cast Percent of Votes Percent of
Nominee For Outstanding Withheld Outstanding
- ---------------------- ---------- ----------- -------- -----------
Michael J. Levinthal 8,344,420 73.16% 4,963 0.04%
Mark B. Knudson 8,344,420 73.16% 4,963 0.04%
The Company's Board of Directors is comprised of those elected at the meeting as
well as the following directors completing their terms: Alan J. Levy, Ellen M.
Feeney, Frank M. Fischer, Wende S. Hutton, and Kurt C. Wheeler
The second matter submitted for vote was the ratification of Ernst & Young, LLP,
as the Company's independent auditors for 1996. The proposal was ratified with
the following votes:
Votes Votes Broker
Cast For Cast Against Abstentions Non-Votes
---------- ------------- ------------ ----------
Number 8,344,870 3,263 1,250 0
Percent of Outstanding 73.16% 0.03% 0.01% 0.0%
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 3.1+ Restated Certificate of Incorporation of Registrant,
as in effect prior to initial public offering.
3.2+ Restated Certificate of Incorporation, as currently
in effect.
3.3+ Bylaws.
4.1+ Specimen Common Stock Certificate.
10.1+ Form of Indemnification Agreement between the Company
and each of its directors and officers.
10.2+ 1993 Employee and Consultant Stock Plan and form of
Stock Option Agreement thereunder.
10.3+ 1995 Director Option Plan and form of Stock Option
Agreement thereunder.
10.4+ 1995 Employee Stock Purchase Plan and forms of
agreements thereunder.
10.5+ Lease dated May 25, 1994 between the Registrant and
Martin Selig.
10.6+ Restated Investors Rights Agreement dated March 16,
1995 between the Registrant and certain holders of
the Registrant's securities.
10.7+ Agreement dated August 3, 1995 between the Registrant
and Oki Semiconductor.
10.8+# International Distributor Agreement (undated) between
the Registrant and Schiller AG.
10.9+ Employment Agreement dated November 8, 1993 between
the Registrant and Alan J. Levy.
10.10+# International Distributor Agreement dated January
1996 between the Registrant and Nellcor
Puritan-Bennett Europe B.V.
11.1 Calculation of earnings per share.
27 Financial Data Schedules
--------------
+ Incorporated by reference to the same numbered
exhibit previously filed with the Company's
Registration Statement on Form S-1 (No. 33-99908).
# Confidential treatment requested.
(b) Reports on Form 8-K
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTSTREAM, INC.
(Registrant)
Date August 12, 1996 /s/ Gary Onn
-------------------------- -------------------------------------------
Gary Onn
Director of Finance and Administration
(Principal Financial and Accounting Officer)
Date August 12, 1996 /s/ Alan Levy
-------------------------- -------------------------------------------
Alan Levy
President and Chief Executive Officer
and Director
(Principal Executive Officer)
20
<PAGE>
HEARTSTREAM, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO EXHIBITS
EXHIBIT NO.
3.1+ Restated Certificate of Incorporation of Registrant, as in effect prior
to initial public offering.
3.2+ Restated Certificate of Incorporation, as currently in effect.
3.3+ Bylaws.
4.1+ Specimen Common Stock Certificate.
10.1+ Form of Indemnification Agreement between the Company and each of its
directors and officers.
10.2+ 1993 Employee and Consultant Stock Plan and form of Stock Option
Agreement thereunder.
10.3+ 1995 Director Option Plan and form of Stock Option Agreement
thereunder.
10.4+ 1995 Employee Stock Purchase Plan and forms of agreements thereunder.
10.5+ Lease dated May 25, 1994 between the Registrant and Martin Selig.
10.6+ Restated Investors Rights Agreement dated March 16, 1995 between the
Registrant and certain holders of the Registrant's securities.
10.7+ Agreement dated August 3, 1995 between the Registrant and Oki
Semiconductor.
10.8+# International Distributor Agreement (undated) between the Registrant
and Schiller AG.
10.9+ Employment Agreement dated November 8, 1993 between the Registrant and
Alan J. Levy.
10.10+# International Distributor Agreement dated January 1996 between the
Registrant and Nellcor Puritan-Bennett Europe B.V.
11.1 Calculation of earnings per share.
27 Financial Data Schedules
- -----------
+ Incorporated by reference to the same numbered exhibit previously filed
with the Company's Registration Statement on Form S-1 (No. 33-99908).
# Confidential treatment requested.
21
<PAGE>
EXHIBIT 11.1
HEARTSTREAM, INC.
(A DEVELOPMENT STAGE COMPANY)
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss . . . . . . . . . . . . . . . . . . . . $ (2,779,629) $ (1,482,036) $ (4,870,521) $ (2,963,678)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares used in calculating historical net loss per
share:
Weighted average shares outstanding . . . . . . 11,427,645 772,632 9,697,880 763,504
Net effect of preferred stock issued, after giving
effect to the conversion into stock, at less than the
offering price during the 12 months prior to the
Company's filing of its initial public offering,
calculated using the treasury stock method at an
offering price of $13 per share, and treated as
outstanding for all periods prior to the closing
date of the Company's initial public offering - 1,235,234 203,610 1,235,234
Net effect of stock options granted or exercised at less
than the offering price during the 12 months prior
to the Company's filing of its initial public offering,
calculated using the treasury stock method at an
offering price of $13 per share, and treated as
outstanding for all periods prior to the closing
date of the Company's initial public offering - 700,657 75,094 709,690
Shares used in computation of historical net loss per
share . . . . . . . . . . . . . . . . . . . . . 11,427,645 2,708,523 9,976,584 2,708,428
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Historical net loss per share. . . . . . . . . . $ (0.24) $ (0.55) $ (0.49) $ (1.09)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss. . . . . . . . . . . . . . . . . . . . $ (2,779,629) $ (1,482,036) $ (4,870,521) $ (2,963,678)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares used in calculating pro forma net loss
per share:
Weighted average shares outstanding . . . . . 11,427,645 772,632 9,697,880 763,504
Weighted average common shares giving effect to
the conversion of preferred stock into common for
all periods subsequent to issuance. . . . . . - 6,190,341 1,020,386 5,088,831
Net effect of preferred stock issued, after giving effect to
the conversion into common stock, at less than the
offering price during the 12 months prior to the
Company's filing of its initial public offering,
calculated using the treasury stock method at an offering
price of $13 per share, and treated as outstanding for all
periods prior to issuance . . . . . . . . . . - - - 549,498
Net effect of stock options granted or exercised at less than
the offering price during the 12 months prior to the
Company's filing of its initial public offering, calculated
using the treasury stock method at an offering price of
$13 per share, and treated as outstanding for all periods
prior to the closing date of the Company's initial
public offering . . . . . . . . . . . . . . . - 700,657 75,094 709,690
Shares used in computation of pro forma net loss
per share . . . . . . . . . . . . . . . . . . . 11,427,645 7,663,630 10,793,360 7,111,523
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma net loss per share . . . . . . . . . . $ (0.24) $ (0.19) $ (0.45) $ (0.42)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT JUNE 30, 1996 (UNAUDITED), THE STATEMENTS OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND THE STATEMENTS OF CASH FLOW FOR THE
SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,370,934
<SECURITIES> 53,475,661
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,024,816
<CURRENT-ASSETS> 59,171,842
<PP&E> 2,127,199
<DEPRECIATION> 0
<TOTAL-ASSETS> 61,436,422
<CURRENT-LIABILITIES> 1,742,954
<BONDS> 420,730
0
0
<COMMON> 11,524
<OTHER-SE> 59,261,214
<TOTAL-LIABILITY-AND-EQUITY> 61,436,422
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,130,623
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,822
<INCOME-PRETAX> (4,870,521)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,870,521)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,870,521)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> 0
</TABLE>
