<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Heartstream, Inc.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Heartstream, Inc.
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE>
HEARTSTREAM, INC.
------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 14, 1996
---------------------
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
Heartstream, Inc. (the "Company") will be held on Friday, June 14, 1996 at 9:00
a.m., local time, at the offices of the Company, 2401 4th Avenue, Suite 300,
Seattle, Washington 98121, for the following purposes:
1. To elect two Class I directors to serve a three-year term expiring upon
the 1999 Annual Meeting of Stockholders, or until their successors are
duly elected and qualified.
2. To ratify the appointment of Ernst & Young LLP as independent auditors
of the Company for the fiscal year ending December 31, 1996.
3. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on April 19, 1996 are
entitled to notice of and to vote at the annual meeting.
All stockholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed proxy card as promptly as possible in the
enclosed self-addressed stamped envelope. Any stockholder attending the meeting
may vote in person even if he or she returned a proxy.
FOR THE BOARD OF DIRECTORS
JAMES R. SHAY
CHIEF LEGAL COUNSEL AND SECRETARY
Seattle, Washington
May 13, 1996
<PAGE>
HEARTSTREAM, INC.
------------------
PROXY STATEMENT
The enclosed Proxy is solicited on behalf of Heartstream, Inc., a Delaware
corporation (the "Company"), for use at the Annual Meeting of Stockholders to be
held Friday, June 14, 1996, at 9:00 a.m., local time, at the offices of the
Company, 2401 4th Avenue, Suite 300, Seattle, Washington 98121, or at any
adjournment thereof, for the purposes set forth herein and in the accompanying
Notice of Annual Meeting of Stockholders. The principal executive offices of the
Company are located at 2401 4th Avenue, Suite 300, Seattle, Washington 98121.
The Company's telephone number at that location is (206) 443-7630.
These proxy solicitation materials were mailed on or about May 13, 1996 to
all shareholders entitled to vote at the meeting.
INFORMATION CONCERNING SOLICITATION AND VOTING
RECORD DATE AND SHARE OWNERSHIP
Only stockholders of record at the close of business on April 19, 1996 (the
"Record Date") are entitled to notice of and to vote at the annual meeting. At
the Record Date, 11,405,638 shares of the Company's Common Stock were issued and
outstanding.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company (Attention:
James R. Shay, Chief Legal Counsel and Secretary) a written notice of revocation
or a duly executed proxy bearing a later date or by attending the meeting and
voting in person.
VOTING AND SOLICITATION
Each share of Common Stock outstanding on the Record Date is entitled to one
vote. Stockholders do not have the right to cumulate votes in the election of
directors. The required quorum for the transaction of business at the annual
meeting is a majority of the votes eligible to be cast by holders of shares of
Common Stock issued and outstanding on the Record Date. For purposes of
determining the presence of a quorum, abstentions and broker non-votes will be
counted by the Company as present at the meeting. Abstentions will also be
counted by the Company in determining the total number of votes cast with
respect to a proposal (other than the election of directors). Broker non-votes
will not be counted in determining the number of votes cast with respect to a
proposal.
The cost of soliciting Proxies will be borne by the Company. Proxies may be
solicited by certain of the Company's directors, officers and regular employees,
without additional compensation, in person or by telephone or facsimile. In
addition, the Company intends to retain the services of one or more firms to
assist in the solicitation of proxies for an estimated fee of $2,000 plus
reimbursement of expenses. In addition, the Company may reimburse brokerage
firms and other persons representing beneficial owners of shares for their
expenses in forwarding solicitation materials to such beneficial owners.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of the Record
Date by (i) each person known by the
<PAGE>
Company to beneficially own more than 5% of the Company's Common Stock, (ii)
each of the Company's directors, (iii) each executive officer named in the
Summary Compensation Table appearing herein, and (iv) all directors and
executive officers of the Company as a group:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NAME OF BENEFICIAL OWNER SHARES (1) CLASS OWNED
- - -------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
Entities affiliated with Mayfield Fund (2) ......................... 2,310,714 20.3%
2800 Sand Hill Road
Menlo Park, CA 94025
Entities affiliated with Oak Investment Partners (3) ............... 714,286 6.3%
One Gorham Island
Westport, CT 06880
Entities affiliated with Weiss, Peck & Greer (4) ................... 642,857 5.6%
555 California Street, #4760
San Francisco, CA 94104
Alan J. Levy (5).................................................... 204,011 1.8%
Keith M. Serzen (6)................................................. 42,000 *
James R. Shay....................................................... -- *
Michael J. Levinthal (7)............................................ 2,314,325 20.3%
Ellen M. Feeney (8)................................................. 643,968 5.6%
Frank M. Fischer (9)................................................ 5,173 *
Wende S. Hutton (10)................................................ 2,333,025 20.4%
Mark B. Knudson (11)................................................ 518,968 4.5%
Kurt C. Wheeler (12)................................................ 17,778 *
All directors and executive officers as a group (10 persons)(13).... 3,952,958 33.2%
</TABLE>
- - ------------------------
* Less than 1%
(1) Except as otherwise indicated in the footnotes to this table and pursuant
to applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common Stock.
(2) Includes 2,203,428 shares held by Mayfield VII and 107,286 shares held by
Mayfield Associates Fund II. Excludes shares and shares issuable upon
exercise of stock options exercisable within 60 days of the Record Date held
by Michael J. Levinthal and Wende S. Hutton. See Note 7 and Note 10.
(3) Includes 698,000 shares held by Oak Investment Partners VI, a Limited
Partnership, and 16,286 shares held by Oak VI Affiliates Fund, Limited
Partnership.
(4) Includes 246,985 shares held by Weiss, Peck & Greer Venture Associates II,
L.P., 54,129 shares held by Weiss, Peck & Greer Venture Associates II
(Overseas), L.P. and 341,743 shares held by WPG Enterprise Fund, L.P.
Excludes shares issuable upon exercise of stock options exercisable with 60
days of the Record Date held by Ellen M. Feeney. See Note 8.
(5) Includes 119,011 shares issuable upon exercise of stock options exercisable
within 60 days of the Record Date.
(6) Includes 42,000 shares issuable upon exercise of stock options exercisable
within 60 days of the Record Date.
2
<PAGE>
(7) Includes 2,203,428 shares held by Mayfield VII and 107,286 shares held by
Mayfield Associates Fund II. Mr. Levinthal is a general partner of both
Mayfield VII and Mayfield Associates Fund II and disclaims beneficial
ownership of the shares held by such entities except to the extent of his
proportionate partnership interests therein. Also includes 1,111 shares
issuable upon exercise of stock options exercisable within 60 days of the
Record Date.
(8) Includes 246,985 shares held by Weiss, Peck & Greer Venture Associates II,
L.P., 54,129 shares held by Weiss, Peck & Greer Venture Associates II
(Overseas), L.P. and 341,743 shares held by WPG Enterprise Fund, L.P. Ms.
Feeney is a general partner of the general partner of Weiss, Peck & Greer
Venture Associates II, L.P., WPG Enterprise Fund, L.P., and Weiss, Peck &
Greer Venture Associates II (Overseas), L.P., and disclaims beneficial
ownership of the shares held by such entities except to the extent of her
proportionate partnership interest therein. Also includes 1,111 shares
issuable upon exercise of stock options exercisable within 60 days of the
Record Date.
(9) Includes 5,173 shares issuable upon exercise of stock options exercisable
within 60 days of the Record Date.
(10) Includes 2,203,428 shares held by Mayfield VII and 107,286 shares held by
Mayfield Associates Fund II. Ms. Hutton is a venture partner of Mayfield VII
and a limited partner of Mayfield Associates Fund II, and disclaims
beneficial ownership of the shares held by such entities except to the
extent of her proportionate partnership interest therein. Also includes
21,111 shares issuable upon exercise of stock options exercisable within 60
days of the Record Date.
(11) Includes 517,857 shares held by Medical Innovation Fund II, L.P. Mr.
Knudson is a general partner of the general partner of Medical Innovation
Fund II, L.P., and disclaims beneficial ownership of the shares held by
Medical Innovation Fund II, L.P. except to the extent of his proportionate
partnership interest therein. Also includes 1,111 shares issuable upon
exercise of stock options exercisable within 60 days of Record Date
(12) Includes 4,445 shares issuable upon exercise of stock options exercisable
within 60 days of the Record Date.
(13) Includes 195,073 shares issuable upon exercise of stock options exercisable
within 60 days of the Record Date.
PROPOSAL NO. 1:
ELECTION OF DIRECTORS
NOMINEES
The Company currently has seven directors divided among three classes: Class
I, whose term will expire at the annual meeting of stockholders to which this
proxy statement relates; Class II, whose term will expire at the annual meeting
of stockholders to be held in 1997; and Class III, whose term will expire at the
annual meeting of stockholders to be held in 1998. The Class I directors are
Michael J. Levinthal and Mark B. Knudson, the Class II directors are Ellen M.
Feeney and Kurt C. Wheeler, and the Class III directors are Alan J. Levy, Frank
M. Fischer and Wende S. Hutton.
Two Class I directors are to be elected at the annual meeting for a
three-year term ending at the annual meeting of stockholders to be held in 1999.
The Board of Directors has nominated Michael J. Levinthal and Mark B. Knudson
for election as a Class I director, each of whom is currently a director of the
Company. Unless otherwise instructed, the proxy holders will vote the proxies
received by them for Mr. Levinthal and Mr. Knudson. In the event that Mr.
Levinthal or Mr. Knudson is unable or declines to serve as a director at the
time of the annual meeting, the proxies will be voted for any nominee who shall
be designated by the present Board of Directors to fill the vacancy. The Company
is not aware of any reason why Mr. Levinthal or Mr. Knudson will be unable or
will decline to serve as a director.
3
<PAGE>
Certain information regarding the nominees and the incumbent members of the
Board of Directors is set forth below:
<TABLE>
<CAPTION>
DIRECTOR
NAME OF DIRECTOR OR NOMINEE AGE PRINCIPAL OCCUPATION SINCE
- - --------------------------------- --- --------------------------------- -----------
<S> <C> <C> <C>
Alan J. Levy 58 President and Chief Executive 1993
Officer of the Company
Michael J. Levinthal 41 General Partner of Mayfield Fund 1993
Ellen M. Feeney 36 General Partner of Weiss, Peck & 1994
Greer Venture Partners
Frank M. Fischer 54 President and Chief Executive 1995
Officer of Ventritex, Inc.
Wende S. Hutton 36 General Partner of Mayfield Fund 1993
Mark B. Knudson 47 General Partner of Medical 1994
Innovation Fund II
Kurt C. Wheeler 42 President and Chief Executive 1993
Officer of InControl, Inc.
</TABLE>
DR. LEVY joined the Company in November 1993 as President, Chief Executive
Officer and a director. From 1989 to 1993, he was President of Heart Technology,
Inc., a company that develops, manufacturers and markets devices for removing
plaque from coronary arteries. Before joining Heart Technology, Dr. Levy was
Vice President of Research and New Technology and a member of the Board of
Directors of Johnson & Johnson's Ethicon division, a manufacturer of medical
devices. Dr. Levy is a director of Gynecare, Inc.
MR. LEVINTHAL has been a general partner of Mayfield Fund, a venture capital
investment firm, since 1984. Mr. Levinthal serves on the Board of Directors of
InControl, Inc. and several privately held companies.
MS. FEENEY has been a general partner of Weiss, Peck & Greer Venture
Partners, L.L.C., a venture capital investment firm, since October 1989. From
July 1986 to October 1989, she was an associate partner of the Hambrecht & Quist
Life Sciences Fund, also a venture capital investment firm. Ms. Feeney has
served as a founder of and currently serves as a director of several privately
held companies.
MR. FISCHER has been the President, Chief Executive Officer and a director
of Ventritex, Inc., a manufacturer of implantable cardiac defibrillators, since
July 1987. From May 1977 until joining Ventritex, Mr. Fischer held various
positions with Cordis Corporation, a manufacturer of medical products including
cardiac pacemakers, serving most recently as President of the Implantable
Products Division. Mr. Fischer is a director of Heartport.
MS. HUTTON served as the Company's Vice President of Marketing from February
1993 until November 1993. From July 1993 until March 1995, Ms. Hutton was a
venture partner, and since March 1995 has been a general partner of Mayfield
Fund. From March 1991 to January 1993, she was General Manager of the Transgenic
Laboratory Products division of GenPharm International, Inc., a biotechnology
company. From August 1986 to March 1991, Ms. Hutton was employed by Nellcor,
Inc., where she held various senior positions in international marketing and
business development.
4
<PAGE>
DR. KNUDSON was a founder of Arden Medical Systems, Inc., a medical
diagnostics company, and served as President and Chairman of the Board until its
acquisition by Johnson & Johnson, Inc. He then served as President of Johnson &
Johnson Professional Diagnostics through 1989. Since 1989, Dr. Knudson has been
a special limited partner of Medical Innovation Fund, a venture capital
investment partnership, and, since 1993, a general partner of Medical Innovation
Fund II. Dr. Knudson is a director of InControl, Inc. and Diametrics Medical,
Inc.
MR. WHEELER has served as President, Chief Executive Officer and a director
of InControl, Inc. since December 1990. From 1989 to April 1992, he was a
principal with Mayfield Fund. Mr. Wheeler has been involved in the start-up of
four life sciences technology companies and previously was employed by Eli Lilly
& Company.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held seven meetings during the year
ended December 31, 1995 and acted twice by unanimous written consent. The Board
of Directors has an Audit Committee and a Compensation Committee. It does not
have a nominating committee or a committee performing the functions of a
nominating committee. From time to time, the Board has created various ad hoc
committees for special purposes. No such committee is currently functioning.
The Audit Committee currently consists of directors Ellen M. Feeney, Wende
S. Hutton and Mark B. Knudson. The Audit Committee was formed in November 1995
and did not hold any meetings during the last fiscal year. The Audit Committee
reviews the internal accounting procedures of the Company and consults with and
reviews the services provided by the Company's independent auditors.
The Compensation Committee currently consists of directors Michael J.
Levinthal, Frank M. Fischer and Kurt C. Wheeler. The Compensation Committee was
formed in November 1995 and did not hold any meetings during the last fiscal
year. The Compensation Committee reviews and recommends to the Board the
compensation and benefits of all officers of the Company and establishes and
reviews general policies relating to compensation and benefits of employees of
the Company.
No director serving in the year ended December 31, 1995, attended fewer than
75% of the aggregate number of meetings of the Board of Directors and meetings
of the committees of the Board on which he or she serves.
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain expenses in connection with attendance at Board and
Committee meetings. Under the Company's 1995 Director Option Plan (the "Director
Plan"), each director who is not an employee of the Company receives an option
to purchase 10,000 shares of Common Stock upon joining the Board of Directors
and, beginning on the first business day of 1997, an annual grant of an option
to purchase 3,000 shares of Common Stock. The exercise price of these options is
equal to the fair market value of the Common Stock on the date of grant. Each
initial option grant under the Director Plan vests monthly over three years, and
each subsequent annual option grant is fully vested and exercisable when
granted. No options were granted under the Director Plan in 1995. Employee
directors do not receive any compensation, expense reimbursement or stock option
grants for serving as directors or for attending Board or Committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established its Compensation Committee in November
1995. Prior to establishing the Compensation Committee, the Board of Directors
as a whole performed the functions delegated to the Compensation Committee.
5
<PAGE>
VOTE REQUIRED
The two nominees receiving the highest number of affirmative votes of the
shares of the Company's Common Stock present and entitled to vote at the annual
meeting shall be elected as the Class I directors. Votes withheld from any
nominee will be counted for purposes of determining the presence or absence of a
quorum but are not counted as affirmative votes.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" ELECTION
OF EACH OF MICHAEL J. LEVINTHAL AND MARK B. KNUDSON.
PROPOSAL NO. 2:
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected Ernst & Young LLP, independent auditors,
to audit the financial statements of the Company for the year ending December
31, 1996, and recommends that the stockholders vote for ratification of such
appointment. In the event of a negative vote, the Board of Directors will
reconsider its selection. Ernst & Young LLP has audited the Company's financial
statements since inception. Representatives of Ernst & Young LLP are expected to
be present at the meeting and will have the opportunity to make a statement if
they desire to do so, and are expected to be available to respond to appropriate
questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1996.
MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of the Company as of March 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - -------------------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Alan J. Levy 58 President and Chief Executive Officer
Carlton B. Morgan 48 Vice President of Research and Development
Keith M. Serzen 43 Vice President of Sales and Marketing
James R. Shay 37 Chief Legal Counsel and Secretary
</TABLE>
DR. LEVY joined Heartstream in November 1993 as President, Chief Executive
Officer and a director. From 1989 to 1993, he was President of Heart Technology,
Inc., a company that develops, manufacturers and markets devices for removing
plaque from coronary arteries. Before joining Heart Technology, Dr. Levy was
Vice President of Research and New Technology and a member of the Board of
Directors of Johnson & Johnson's Ethicon division, a manufacturer of medical
devices.
MR. MORGAN, a co-founder of the Company, has served as Vice President of
Research and Development since the Company's inception in December 1992. From
1981 until co-founding the Company, Mr. Morgan held various positions at
Physio-Control Corporation, a manufacturer of emergency cardiac defibrillators
and devices, serving most recently as Research Director.
MR. SERZEN joined the Company in February 1995 as Vice President of Sales
and Marketing. From 1984 until joining the Company, Mr. Serzen held various
positions at Nellcor, Inc., a manufacturer of high-performance electronic
patient monitoring systems, serving most recently as Vice President/ General
Manager of the Sensor and Accessory Division. Before joining Nellcor, Mr. Serzen
held positions with several health care industry companies, including American
Hospital Supply Corporation, a diversified medical supplies manufacturer.
MR. SHAY joined the Company in November 1995 as Chief Legal Counsel and
Secretary. From 1992 until joining the Company, Mr. Shay practiced intellectual
property law with the law firm of Morrison & Foerster in San Francisco,
California, first in an Of Counsel position and then more recently as a
6
<PAGE>
partner. From 1990 to 1992, Mr. Shay served as patent counsel at Nellcor, Inc.
Prior to joining Nellcor, Mr. Shay worked at the intellectual property law firm
of Townsend and Townsend in San Francisco, California.
Each officer is elected and serves at the discretion of the Board of
Directors. Each of the Company's officers devotes substantially full time to the
affairs of the Company. There are no family relationships among any of the
Company's directors or officers.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information for the year ended
December 31, 1995, regarding the compensation of the Company's Chief Executive
Officer and each of the other most highly compensated executive officers of the
Company whose annual salary and bonus for such fiscal year were in excess of
$100,000 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION --------------------
-------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY COMPENSATION OPTIONS (#)
- - --------------------------------------------------------------- ----------- ------------- --------------------
<S> <C> <C> <C>
Alan J. Levy .................................................. $ 180,848 $ 10,369(1) 45,261
President and Chief Executive Officer
Keith M. Serzen (2) ........................................... 126,817 83,353(3) 142,000
Vice President of Sales and Marketing
James R. Shay (4) ............................................. 11,808 -- 100,000
Chief Legal Counsel and Secretary
</TABLE>
- - ------------------------
(1) Consists of a $10,369 automobile allowance.
(2) Keith M. Serzen joined the Company as Vice President of Sales and Marketing
in February 1995. Had he been employed for all of the year ended December
31, 1995, his annual salary would have been $140,000.
(3) Consists of $83,353 in moving expense reimbursements.
(4) James R. Shay joined the Company as Chief Legal Counsel in November 1995.
Had he been employed for all of the year ended December 31, 1995, his annual
salary would have been $130,000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning stock options
granted during the year ended December 31, 1995 to the Named Executive Officers.
In accordance with the rules of the Securities and Exchange Commission, the
following table also sets forth the potential realizable value over the term of
the options (the period from the grant date to the expiration date) based on
assumed
7
<PAGE>
rates of stock appreciation of 5% and 10%, compounded annually. These amounts do
not represent the Company's estimate of future stock price. Actual realizable
values, if any, of stock options will depend on the future performance of the
Common Stock.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES PERCENT OF STOCK PRICE APPRECIATION
UNDERLYING TOTAL OPTIONS EXERCISE FOR OPTION TERM (4)
OPTIONS GRANTED IN PRICE PER EXPIRATION --------------------------
NAME GRANTED (#)(1) FISCAL 1995 (2) SHARE (3) DATE 5% 10%
- - ------------------------------- -------------- --------------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alan J. Levy................... 2,475 0.3% $ 0.40 02/24/05 $ 623 $ 1,578
2,786 0.4 0.70 10/05/05 1,226 3,108
40,000 5.2 9.60 11/30/05 241,496 611,997
Keith M. Serzen................ 120,000 15.5 0.40 02/24/05 30,187 76,500
2,000 0.3 0.70 10/05/05 880 2,231
20,000 2.6 9.60 11/30/05 120,748 305,999
James R. Shay.................. 100,000 12.9 9.60 11/30/05 603,739 1,529,993
</TABLE>
- - ------------------------
(1) Options were granted under the Company's 1993 Employee and Consultant Stock
Plan and generally vest over four years from the date of commencement of
employment.
(2) Based on an aggregate of 772,234 options granted by the Company in the year
ended December 31, 1995 to employees and directors of and consultants to the
Company, including the Named Executive Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board of
Directors.
(4) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the fair
market value of the Company's Common Stock on the date of grant appreciates
at the indicated annual rate compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its term
for the appreciated stock price.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information with respect to the Named
Executive Officers concerning option exercises for the year ended December 31,
1995 and exercisable and unexercisable options held as of December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1995 AT DECEMBER 31, 1995 (2)
ACQUIRED ON VALUE -------------------------- ----------------------------
NAME EXERCISE (#) REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ----------------------------- ----------- ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alan J. Levy,................ 85,000 $ 807,500 82,552 187,709 $ 1,054,593 $ 2,049,360
Keith M. Serzen.............. -- -- 2,417 139,583 26,018 1,578,582
James R. Shay................ -- -- -- 100,000 -- 340,000
</TABLE>
- - ------------------------
(1) Based on a value of $9.60 per share, the fair market value on the date of
exercise as determined by the Board of Directors, minus the per share
exercise price, multiplied by the number of shares issued upon exercise of
the option.
(2) Based on a value of $13.00 per share, the initial price per share of Common
Stock issued in the Company's initial public offering consummated in January
1996, minus the per share exercise price, multiplied by the number of shares
underlying the option.
8
<PAGE>
EMPLOYMENT AGREEMENT
The Company has an employment agreement dated November 8, 1993 with Alan J.
Levy, its President and Chief Executive Officer. The agreement establishes Dr.
Levy's starting base salary, provides for an initial stock option grant to Dr.
Levy under the Company's 1993 Employee and Consultant Stock Plan and provides
Dr. Levy with an automobile at Company expense. The agreement further provides
that if Dr. Levy's employment is terminated without cause, or if Dr. Levy
becomes permanently disabled, he will be entitled to receive severance pay at
his then-current salary and medical benefits until he secures other employment
or for a maximum of six months. If the severance provision was invoked as of
December 31, 1995, the Company would be obligated to pay Dr. Levy up to $97,500
in severance pay. The agreement does not provide for any specified term of
employment.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
THE FOLLOWING REPORT IS PROVIDED TO STOCKHOLDERS BY THE MEMBERS OF THE
COMPANY'S BOARD OF DIRECTORS. THE BOARD ESTABLISHED ITS COMPENSATION COMMITTEE
IN NOVEMBER 1995. PRIOR TO ESTABLISHING THE COMPENSATION COMMITTEE, THE BOARD OF
DIRECTORS AS A WHOLE PERFORMED THE FUNCTIONS DELEGATED TO THE COMPENSATION
COMMITTEE. ALAN J. LEVY, THE COMPANY'S PRESIDENT AND CHIEF EXECUTIVE OFFICER
("CEO"), PARTICIPATED IN ALL MEETINGS AND DISCUSSIONS WITH RESPECT TO
COMPENSATION FOR EXECUTIVE AND OTHER OFFICERS, BUT DID NOT PARTICIPATE IN THE
DELIBERATIONS CONCERNING HIS COMPENSATION AND AWARDS.
COMPENSATION POLICIES. The Company is committed to attracting, hiring and
retaining an experienced management team that can successfully complete
development of the Company's products, obtain required regulatory approvals, and
commercialize such products. With these goals in mind, the Board has closely
aligned its compensation plan for executive management to the milestones planned
and achieved through the product development cycle, the role each individual has
played during product development, and the potential influence that each
executive may have as the Company grows and matures. The Company's compensation
program has three primary components: base salary, short-term incentives and
long-term incentives. The Board believes that executive compensation should be
tied to the long-term success and value of the Company, and therefore has placed
particular emphasis on the long-term portion of its compensation program.
CASH COMPENSATION. The Board believes that executive salaries must be
sufficiently competitive to attract and retain key individuals. In this
connection, executive cash compensation is based on experience level and is
targeted to the median salary paid to comparable executives in similar positions
at similar entities. In June 1995, the Board retained a consultant to perform a
compensation survey for the Company to determine how competitive its base
compensation program was. The compensation consultant surveyed the compensation
practices of a number of comparable companies, and determined that the base
salaries of several key individuals within the Company were below the range of
comparable companies identified in the survey. As a result, the Board of
Directors approved base salary increases for several employees in the Company,
including certain officers who report directly to the CEO. The Board has not
historically granted cash bonuses to executives or employees.
SHORT-TERM INCENTIVES. The Board believes that executive compensation
should be based in part on the achievement of milestones that are important to
the short-term success of the Company. Accordingly, the Board periodically sets
short-term milestones and then compares the Company's progress against these
targets. If some or all of them are met, the executive team, along with all
Company employees, are granted stock options to purchase shares of the Company's
Common Stock using a formula that is based on annual salary. The stock options
are granted at fair market value on the date of grant and are fully exercisable.
During 1995, the milestones set by the Board of Directors included assembly of
certain production prototypes of the Company's product, completion of certain
regulatory assessments and filing of a 510(k) application with the U.S. Food &
Drug Administration. The Board determined that all milestones were substantially
met and granted options to purchase a total of 38,222 shares of Common Stock to
all employees who were employed as of September 15, 1995.
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LONG-TERM INCENTIVES. The Board believes that long-term stockholder
interests and executive compensation should be closely aligned. In order to
align the long-term interests of executives with those of stockholders, the
Company grants all employees, and particularly executives, options to purchase
stock. Options are granted at the fair market value on the date of grant and
will provide value only when the price of the Common Stock increases above the
exercise price. The number of shares granted to each employee is based upon the
job responsibilities, experience and contributions of the individual. Options
are subject to vesting provisions designed to encourage executives to remain
employed by the Company. Additional options are granted from time to time based
on individual performance and the prior level of grants.
COMPENSATION OF CEO. During 1995, the compensation of Dr. Levy was
determined by applying the same criteria discussed above. Dr. Levy's
compensation for 1995 is set forth in the Summary Compensation Table appearing
on page 7. In light of the compensation survey performed in mid 1995, Dr. Levy's
annual base salary was increased during 1995 from $165,000 per annum to $195,000
per annum, bringing his base compensation more in line with comparable
executives at similar companies. Of the options to purchase 45,261 shares of
Common Stock granted to Dr. Levy in 1995, options to purchase 5,261 shares were
granted as short-term incentives upon achievement of certain corporate-wide
milestones, and options to purchase 40,000 shares were granted in recognition of
Dr. Levy's individual contributions and performance as President and CEO.
COMPENSATION LIMITATIONS. Under Section 162(m) of the Internal Revenue
Code, adopted in August 1993, and regulations adopted thereunder by the Internal
Revenue Service, publicly-held companies may be precluded from deducting certain
compensation paid to an executive officer in excess of $1.0 million in a year.
The regulations exclude from this limit performance-based compensation and stock
options provided certain requirements, such as stockholder approval, are
satisfied. The Company believes that its stock option plans qualify for the
exclusions.
<TABLE>
<S> <C> <C>
Submitted by the Board of Ellen M. Feeney Michael J. Levinthal
Directors: Frank M. Fischer Alan J. Levy
Wende S. Hutton Kurt C. Wheeler
Mark B. Knudson
</TABLE>
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PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total stockholder
returns for the Company's Common Stock, the Nasdaq Stock Market index for U.S.
companies, and the Hambrecht & Quist Health Care Excluding Biotechnology Index.
The graph assumes the investment of $100 on January 31, 1996, the date of the
Company's initial public offering. The data regarding the Company assumes an
investment at the initial public offering price of $13.00 per share of the
Company's Common Stock. The performance shown is not necessarily indicative of
future performance.
COMPARISON OF TWO-MONTH CUMULATIVE TOTAL RETURN
AMONG HEARTSTREAM, INC., NASDAQ STOCK MARKET (U.S.) INDEX, AND
HAMBRECHT & QUIST HEALTH CARE EXCLUDING BIOTECHNOLOGY INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
H&Q
HEARTSTREAM, INC. NASDAQ U.S. HEALTHCARE INDEX
(BASED ON $13 OFFERING
PRICE) COMPANIES (EXCL BIOTECH)
<S> <C> <C> <C>
01/31/96 100.00 100.00 100.00
02/29/96 113.46 103.84 100.00
03/31/96 119.23 104.13 100.01
</TABLE>
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CERTAIN TRANSACTIONS
In March 1995, the Company issued and sold shares of Series C Preferred
Stock (which shares were subsequently converted into an equivalent number of
shares of Common Stock in connection with the Company's initial public offering)
at $7.00 per share to the following entities affiliated with directors and 5%
stockholders:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- - ---------------------------------------------------------------------------------- -----------
<S> <C>
ENTITIES AFFILIATED WITH DIRECTORS
Entities affiliated with Mayfield Fund............................................ 285,714
Entities affiliated with Weiss, Peck & Greer...................................... 142,857
OTHER 5% STOCKHOLDERS
Oak Investment Partners IV, Limited Partnership................................... 714,286
</TABLE>
In April 1995, the Company granted an option to Frank M. Fischer, a director
of the Company, to purchase 15,000 shares of Common Stock at $0.70 per share.
This option vests at the rate of 1/4 of the shares one year following the date
of grant and 1/48 of the shares per month thereafter, although all shares become
fully vested and exercisable in the event of a merger of the Company with or
into another corporation, or the sale of all or substantially all of the assets
of the Company, in which the stockholders of the Company before the transaction
own less than 50% of the voting securities of the surviving corporation or its
parent following the transaction.
The Company has agreed to indemnify certain employees, including Carlton B.
Morgan, the Company's Vice President of Research and Development, to the maximum
extent permitted by Delaware law in connection with its on-going litigation with
Physio-Control Corporation.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file certain reports regarding ownership
of, and transactions in, the Company's securities with the Securities and
Exchange Commission (the "SEC"). Such officers, directors and 10% stockholders
are also required by the SEC rules to furnish the Company with copies of all
Section 16(a) forms that they file. Based solely on its review of the copies of
such forms received by it, or written representations from certain reporting
persons, the Company believes that through March 31, 1996 all Section 16(a)
filing requirements applicable to its officers, directors and 10% stockholders
were complied with without exception.
CHANGE IN ACCOUNTANTS
At a meeting on April 12, 1995, the Company's Board of Directors decided to
retain Ernst & Young LLP as the independent accountants for the Company.
Following this meeting, the Company dismissed Coopers & Lybrand L.L.P., its
former independent accountants. There were no disagreements with the former
accountants regarding accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. The former accountants' reports for
all periods since incorporation of the Company through June 30, 1994 did not
contain an adverse opinion or a disclaimer of an opinion or qualifications as to
uncertainty, audit scope or accounting principles. Coopers & Lybrand L.L.P.'s
report dated August 12, 1993 on the period from inception to June 30, 1993
contained a qualification as to the Company's ability to continue as a going
concern unless additional resources were obtained through financing
transactions. In March 1994, the Company raised $7.5 million in a private equity
financing, and the going concern qualification was removed in Coopers & Lybrand
L.L.P.'s subsequent report dated August 19, 1994 on the Company's financial
statements from inception to June 30, 1993 and 1994. Prior to retaining Ernst &
Young LLP, the
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Company had not consulted with Ernst & Young LLP regarding the application of
accounting principles, the type of audit opinion that might be rendered on the
Company's financial statements, or any event that was either a reportable event
or the subject of a disagreement.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company which are intended to be presented
by such stockholders at the Company's 1997 Annual Meeting of Stockholders must
be received by the Company no later than January 13, 1997 in order that they may
be considered for possible inclusion in the proxy statement and form of proxy
relating to that meeting.
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If any
other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of Proxy to vote the shares they represent as
the Board of Directors may recommend.
THE BOARD OF DIRECTORS
Dated: May 13, 1996
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HEARTSTREAM, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE 1996 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 14, 1996
The undersigned hereby appoints Alan J. Levy and James R. Shay, and each of
them, proxies with full power of substitution, and authorizes them to represent
and to vote on behalf of the undersigned all shares which the undersigned would
be entitled to vote if personally present at the 1996 Annual Meeting of
Stockholders of HEARTSTREAM, INC. to be held on June 14, 1996 and any
adjournments thereof, with respect to the following:
1. Proposal to Elect Class I Directors
<TABLE>
<S> <C>
/ / FOR all nominees listed / / WITHHOLD AUTHORITY
(except as marked to the contrary) to vote for all nominees listed
</TABLE>
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name below.)
Michael J. Levinthal, Mark B. Knudson
2. Proposal to ratify selection of Ernst & Young LLP as independent auditors
for 1996.
FOR / / AGAINST / / ABSTAIN / /
Either or both of the proxies (or substitutes) present at the meeting may
exercise all powers granted hereby.
(CONTINUED, AND TO BE DATED AND SIGNED ON THE OTHER SIDE)
<PAGE>
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE
UNDERSIGNED. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE NOMINEES
FOR DIRECTORS AND FOR APPROVAL OF PROPOSAL 2. IN ADDITION, THE PROXIES MAY VOTE
IN THEIR DISCRETION ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE
MEETING.
____________________________
Signature(s)
____________________________
Signature(s)
____________________________
Date
NOTE: Please date and sign
above exactly as your name
or names appear hereon. If
more than one name appears
above, all should sign.
Joint owners should each
sign personally. Corporate
proxies should be signed in
full corporate name by an
authorized officer and
attested. Persons signing in
a fiduciary capacity should
indicate their full title
and authority.
