<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 Section240.14a-11(c) or
Section240.14a-12
HEARTSTREAM, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
HEARTSTREAM, INC.
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 29, 1997
------------------------
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
Heartstream, Inc. ("Heartstream" or the "Company") will be held on Tuesday,
April 29, 1997, at 10:00 a.m., local time, at The Edgewater, 2411 Alaskan Way,
Seattle, Washington 98121, for the following purposes:
1. To elect two Class II directors to serve a three-year term expiring upon
the 2000 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, 1997.
3. To approve amendments to the 1993 Employee and Consultant Stock Plan
(the "Plan") to increase the number of shares reserved for issuance
thereunder by 1,600,000 shares, to a new total of 4,100,000 shares, to
include non-employee directors as persons eligible to receive awards
under the Plan, and to make certain changes to the administration
provisions of the Plan to reflect recent changes made by the Securities
and Exchange Commission to the rules under Section 16 of the Securities
Exchange Act of 1934.
4. 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 March 7, 1997 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
March 19, 1997
<PAGE>
HEARTSTREAM, INC.
----------------
PROXY STATEMENT
The enclosed Proxy is solicited on behalf of Heartstream, Inc., a Delaware
corporation ("Heartstream" or the "Company"), for use at the Annual Meeting of
Stockholders to be held Tuesday, April 29, 1997, at 10:00 a.m., local time, at
The Edgewater, 2411 Alaskan Way, 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 March 19, 1997 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 March 7, 1997 (the
"Record Date") are entitled to notice of and to vote at the annual meeting. At
the Record Date, 11,675,972 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 $3,000 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.
1
<PAGE>
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 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 (the
"Named Executive Officers"), and (iv) all directors and executive officers of
the Company as a group:
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF CLASS
NAME OF BENEFICIAL OWNER SHARES(1) OWNED
- ----------------------------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
Entities affiliated with Mayfield Fund(2)................................................ 810,714 6.9%
2800 Sand Hill Road
Menlo Park, CA 94025
Entities affiliated with Oak Investment Partners(3)...................................... 714,286 6.1%
One Gorham Island
Westport, CT 06880
Entities affiliated with Weiss, Peck & Greer(4).......................................... 647,024 5.5%
555 California Street, #4760
San Francisco, CA 94104
Alan J. Levy(5).......................................................................... 296,358 2.5%
Lori J. Glastetter(6).................................................................... 39,165 *
Curtis R. Hafner......................................................................... -- *
Keith M. Serzen(7)....................................................................... 82,440 *
James R. Shay(8)......................................................................... 39,316 *
Ellen M. Feeney(9)....................................................................... 650,024 5.6%
Frank M. Fischer(10)..................................................................... 14,667 *
Wende S. Hutton(11)...................................................................... 843,126 7.2%
Mark B. Knudson(12)...................................................................... 155,104 1.3%
Michael J. Levinthal(13)................................................................. 853,082 7.3%
Kurt C. Wheeler(14)...................................................................... 27,572 *
All directors and executive officers as a group (13 persons)(15)......................... 2,391,518 19.8%
</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 777,678 shares held by Mayfield VII and 33,036 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 11 and Note 13.
(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
2
<PAGE>
Enterprise Fund, L.P. Also includes an aggregate of 4,167 shares which are
issuable upon exercise of stock options exercisable within 60 days of the
Record Date held by Ellen M. Feeney. Ms. Feeney is a general partner of each
of the listed funds and has an obligation to transfer such shares to such
funds (1,601 shares to Weiss, Peck & Greer Venture Associates II, L.P., 351
shares to Weiss, Peck & Greer Venture Associates II (Overseas), L.P., and
2,215 shares to WPG Enterprise Fund, L.P.) upon exercise of the options.
Excludes an additional 3,000 shares issuable upon exercise of stock options
exercisable within 60 days of the Record Date held by Ms. Feeney. See Note
9.
(5) Includes 135,470 shares issuable upon exercise of stock options exercisable
within 60 days of the Record Date.
(6) Includes 12,306 shares issuable upon exercise of stock options exercisable
within 60 days of the Record Date.
(7) Includes 41,083 shares issuable upon exercise of stock options exercisable
within 60 days of the Record Date.
(8) Includes 39,316 shares issuable upon exercise of stock options exercisable
within 60 days of the Record Date.
(9) 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. Also
includes an aggregate of 4,167 shares which are issuable upon exercise of
stock options exercisable within 60 days of the Record Date held by Ms.
Feeney. Ms. Feeney is a general partner of each of the listed funds and has
an obligation to transfer such shares to such funds (1,601 shares to Weiss,
Peck & Greer Venture Associates II, L.P., 351 shares to Weiss, Peck & Greer
Venture Associates II (Overseas), L.P., and 2,215 shares to WPG Enterprise
Fund, L.P.) upon exercise of the options. Ms. Feeney disclaims beneficial
ownership of all shares held by the listed funds except to the extent of her
proportionate partnership interest therein. Also includes an additional
3,000 shares issuable upon exercise of stock options exercisable within 60
days of the Record Date held by Ms. Feeney which Ms. Feeney does not have an
obligation to transfer to the listed funds.
(10) Includes 14,667 shares issuable upon exercise of stock options exercisable
within 60 days of the Record Date.
(11) Includes 777,678 shares held by Mayfield VII and 33,036 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 interests therein. Also includes
27,167 shares issuable upon exercise of stock options exercisable within 60
days of the Record Date.
(12) Includes 142,857 shares held by Medical Innovation Fund II, L.P. and 469
shares held by MICI Limited Partnership. Mr. Knudson is a general partner of
Medical Innovation Fund II, L.P. and a limited partner of MICI Limited
Partnership, and disclaims beneficial ownership of the shares held by such
entities except to the extent of his proportionate partnership interests
therein. Also includes 7,167 shares issuable upon exercise of stock options
exercisable within 60 days of Record Date
(13) Includes 777,678 shares held by Mayfield VII and 33,036 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 7,167 shares
issuable upon exercise of stock options exercisable within 60 days of the
Record Date.
(14) Includes 13,834 shares issuable upon exercise of stock options exercisable
within 60 days of the Record Date.
(15) Includes 372,145 shares issuable upon exercise of stock options exercisable
within 60 days of the Record Date.
3
<PAGE>
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 be held in
1999; Class II, whose term will expire at the annual meeting of stockholders to
which this proxy statement relates; 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 II 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 2000.
The Board of Directors has nominated Ellen M. Feeney and Kurt C. Wheeler for
election as a Class II 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 Ms. Feeney and Mr. Wheeler. In the event that Ms. Feeney or
Mr. Wheeler 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 Ms. Feeney or Mr. Wheeler will be unable or will
decline to serve as a director.
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 59 President and Chief Executive Officer of the Company 1993
Ellen M. Feeney 37 General Partner of Weiss, Peck & Greer Venture 1994
Partners
Frank M. Fischer 55 President and Chief Executive Officer of Ventritex, 1995
Inc.
Wende S. Hutton 37 General Partner of Mayfield Fund 1993
Mark B. Knudson 48 General Partner of Medical Innovation Fund II 1994
Michael J. Levinthal 42 General Partner of Mayfield Fund 1993
Kurt C. Wheeler 44 President and Chief Executive Officer of InControl, 1993
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 developed, manufactured and marketed 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.
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 is also a
director of Cubist Pharmaceuticals, Inc., and has served as a founder of and
currently serves as a director of several privately held companies.
4
<PAGE>
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 also a director of Heartport, Inc.
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. Ms. Hutton currently serves as a director of several privately held
companies.
DR. KNUDSON has been a special limited partner of Medical Innovation Fund, a
venture capital investment partnership since 1989. He has also been a general
partner of Medical Innovation Fund II since 1993. Dr. Knudson is a director of
Diametrics Medical, Inc., InControl, Inc., Integ Incorporated and several
privately held companies.
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.
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 has the following standing committees:
THE AUDIT COMMITTEE--This committee currently consists of directors Ellen
M. Feeney, Wende S. Hutton and Mark B. Knudson. The Audit Committee did
not meet during 1996 and is currently scheduled to meet during the first
half of 1997. 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--This committee currently consists of
directors Frank M. Fischer, Michael J. Levinthal and Kurt C. Wheeler. The
Compensation Committee held one meeting during 1996. 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.
THE NOMINATING COMMITTEE--This committee currently consists of directors
Ellen M. Feeney and Wende S. Hutton. The Nominating Committee is
responsible for proposing a slate of directors for election by the
stockholders at each annual meeting of stockholders and proposing
candidates to fill any vacancies on the Board. The Nominating Committee
was formed in December 1996 and did not meet during 1996. However, the
Nominating Committee is currently scheduled to meet during the first half
of 1997.
From time to time, the Board of Directors has created various ad hoc
committees for special purposes. No such committees are currently functioning.
The Board of Directors held six meetings during 1996 and acted once by
unanimous written consent. In 1996, all directors attended at least 75% of the
meetings of the Board and all committee meetings of which they were members,
although Kurt C. Wheeler did not attend the meeting of the Compensation
Committee held in 1996.
5
<PAGE>
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 an annual grant of an option to purchase 3,000 shares of Common Stock on the
first business day of each year. 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. If
the stockholders approve the amendments to the Company's 1993 Employee and
Consultant Stock Plan as described in Proposal No. 3 of this proxy statement,
the Director Plan will be discontinued and no further options will be granted
thereunder. However, it is expected that the Company will continue its policy of
granting an initial stock option to new non-employee directors upon joining the
Board and providing annual option grants to all non-employee directors at the
beginning of each new year. Employee directors do not receive any compensation,
expense reimbursement or stock option grants for serving as directors or for
attending Board or Committee meetings.
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 II 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 ELLEN M. FEENEY AND KURT C. WHEELER.
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, 1997, 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, 1997.
PROPOSAL NO. 3:
AMENDMENT TO THE 1993 EMPLOYEE AND CONSULTANT STOCK PLAN
GENERAL
The Company's 1993 Employee and Consultant Stock Plan (the "Plan") provides
for the grant of stock options and stock purchase rights to employees and
consultants of the Company. In March 1997, the Board of Directors of the Company
amended the Plan to increase the number of shares reserved for issuance
thereunder by 1,600,000 shares to a new total of 4,100,000 shares, to include
non-employee directors as persons eligible to receive awards under the Plan, and
to make certain changes to the administration provisions of the Plan to reflect
recent changes made by the Securities and Exchange
6
<PAGE>
Commission to the rules under Section 16 of the Securities Exchange Act of 1934.
The stockholders are being asked to ratify and approve the amendments.
The Board believes that stock options granted under the Plan are vital to
the Company's recruitment and long-term retention of highly skilled employees,
consultants and non-employee directors and its policy of providing such persons
with an investment interest in the future success of the Company. The number of
the Company's employees has increased significantly from 31 as of January 1,
1995 to approximately 110 as of February 28, 1997, and is expected to continue
to increase in the future. Competition for qualified scientific, technical and
managerial personnel is intense and the use of stock options for recruitment,
retention and motivation of such personnel is widespread. The Board believes
that an increase in the number of shares available for grant under the Plan is
critical to enabling the Company to continue its policies of recruiting new
employees, promoting long-term retention of key employees, motivating high
levels of performance and recognizing employee contributions to the success of
the Company.
PLAN ACTIVITY
As of March 14, 1997, a total of 534,018 shares had been issued upon
exercise of granted stock options and 1,642,116 shares were subject to
outstanding options. Approximately 30% of the outstanding options were vested
and exercisable as of such date. Options generally vest and become exercisable
over a four year period. Without taking into account the proposed amendment to
the Plan, a total of 362,616 shares remaine available for future grant as of
March 14, 1997. To date, the Company has not granted any stock purchase rights
under the Plan. The closing market price of the Company's Common Stock on March
14, 1997 was $11.75 per share.
The following table sets forth information with respect to options granted
during 1996 to the Named Executive Officers, to all executive officers as a
group, and to all other employees of the Company as a group:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE NUMBER OF SHARES
EXERCISE PRICE UNDERLYING
NAME OF INDIVIDUAL/GROUP PER SHARE ($) OPTIONS GRANTED (#)
- ---------------------------------------------------------------- ----------------- -------------------
<S> <C> <C>
Alan J. Levy.................................................... $ 13.00 11,250
President and Chief Executive Officer
Lori J. Glastetter.............................................. 13.00 3,180
Vice President, Regulatory Affairs and Quality Assurance
Curtis R. Hafner................................................ 15.25 100,000
Vice President, Engineering
Keith M. Serzen................................................. 13.00 4,500
Vice President, Sales and Marketing
James R. Shay................................................... 13.00 3,900
Chief Legal Counsel and Secretary
All executive officers as a group............................... 14.75 129,100
All other employees as a group.................................. 13.44 435,383
</TABLE>
The Company did not grant any stock options to non-employee directors under
the Plan in 1996, although each non-employee director of the Company (a total of
six persons) received an option to purchase 10,000 shares of Common Stock at an
exercise price of $13.00 per share in January 1996 under the Director Plan. If
the stockholders approve the amendments to the Plan, the Director Plan will be
discontinued and no further options will be granted thereunder. However, it is
expected that the Company
7
<PAGE>
will continue its director option grant policy and will grant each new
non-employee director an option under the Plan to purchase 10,000 shares of
Common Stock at fair market value vesting monthly over three years upon first
joining the Board and an option under the Plan to purchase an additional 3,000
shares of Common Stock at fair market value on the first day of each new year
thereafter which will be fully vested and exercisable upon grant. The Company is
currently evaluating whether these option levels are appropriate and may
increase or decrease these levels at any time in the future. Such an increase or
decrease would not require stockholder approval. The discontinuance of the
Director Plan does not affect options that have already been granted to
non-employee directors under the Director Plan.
The grant of future options under the Plan is subject to the discretion of
the Administrator (as defined below). Accordingly, the amount of future awards
to employees under the Plan is not currently determinable.
SUMMARY OF THE PLAN
GENERAL. The Plan provides for the grant of stock options and stock
purchase rights to employees, consultants and non-employee directors to purchase
Common Stock of the Company. Options granted under the Plan may be either
"incentive stock options," as defined in Section 422 of the Internal Revenue
Code of 1986 (the "Code"), or nonstatutory stock options.
PURPOSE. The purposes of the Plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to employees, consultants and non-employee directors of the
Company and its subsidiaries and to promote the success of the Company's
business.
ADMINISTRATION OF THE PLAN. The Plan may be administered by multiple
administrative bodies. Currently, the Compensation Committee administers the
Plan with respect to awards granted to executive officers of the Company, and
the Board of Directors as a whole administers the Plan with respect to awards
granted to all other participants. The administrators of the Plan are referred
to herein collectively as the "Administrator." The Administrator may, without
stockholder approval, amend the terms of outstanding stock options and stock
purchase rights (subject to the consent of the grantee). Such amendments could
include changes to vesting schedules and reductions in exercise prices.
ELIGIBILITY. Nonstatutory stock options and stock purchase rights may be
granted to employees, consultants and non-employee directors. Incentive stock
options may be granted only to employees. The Administrator selects the
employees, consultants and non-employee directors who will be granted options
and stock purchase rights and determines the number of shares to be subject to
each such award. In making such determination, the Administrator takes into
account the duties and responsibilities of the participant, the value of the
services of the participant, his or her present and potential contributions to
the success of the Company, the anticipated years of future service of the
participant and other relevant factors. As of March 14, 1997, all employees and
consultants were eligible to receive awards under the Plan and approximately 110
employees and consultants held outstanding options under the Plan.
EXERCISE OF OPTIONS. Options and stock purchase rights become exercisable
at such times as are determined by the Administrator and set forth in the
relevant agreement. Stock purchase rights must be exercised within six months
and are generally subject to a repurchase right in favor of the Company. An
award is exercised by giving written notice of exercise to the Company
specifying the number of full shares of Common Stock to be purchased and
tendering payment of the purchase price to the Company. Payment of the exercise
price may be made in cash, check, promissory notes, shares of Common Stock,
cashless exercise or certain other consideration as determined by the
Administrator.
EXERCISE PRICE. The exercise price of options and stock purchase rights
granted under the Plan is determined by the Administrator. In the case of
incentive stock options, the exercise price cannot be less than 100% of the fair
market value of the Common Stock. Incentive stock options granted to
stockholders owning more than 10% of the voting stock of the Company are subject
to the additional restriction that the
8
<PAGE>
exercise price per share of each option must be at least 110% of the fair market
value per share on the date of grant. Fair market value equals the closing price
of the Company's Common Stock as reported on the Nasdaq Stock Market on the date
of grant.
TERMINATION. Upon termination of a participant's continuous status as an
employee, consultant or non-employee director, the awards terminate as provided
in the relevant agreement; provided that an incentive stock option must be
exercised within three months following such termination or such shorter period
as may be indicated in the option agreement, unless such termination resulted
from the death or permanent disability of the optionee, in which case such
option must be exercised within twelve months after termination.
TERM OF OPTION. Options granted under the Plan expire as determined by the
Administrator, but in no event later than ten years after the date of grant. No
option may be exercised by any person after such expiration.
NON-TRANSFERABILITY OF OPTIONS. Unless otherwise determined by the
Administrator, an option is non-transferable by the holder otherwise than by
will or the laws of descent of distribution, and is exercisable during the
holder's lifetime only by the optionee, or in the event of the optionee's death,
by a person who acquires the right to exercise the option by bequest or
inheritance or by reason of the death of the holder.
ADJUSTMENT UPON CHANGES IN CAPITALIZATION; CHANGE IN CONTROL. In the event
any change is made in the Company's capitalization, such as a stock split or
stock dividend, appropriate adjustments shall be made in the exercise price and
in the number of shares subject to the option. In the event of a proposed sale
of all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, each outstanding option that is not
fully exercisable shall be accelerated and become fully exercisable.
AMENDMENT AND TERMINATION OF THE PLAN. The Board may at any time amend or
terminate the Plan without approval of the stockholders except to the extent
required by state and federal law. The Code and the rules and regulations
thereunder governing incentive stock option plans currently require stockholder
approval for any increase in the number of shares issuable under a plan and for
changes in the eligibility standards under a plan. In any event, the Plan shall
terminate in January 2003. The termination of the Plan will not affect options
previously granted under the Plan.
UNITED STATES TAX INFORMATION
STOCK OPTION GRANTS. Options granted under the Option Plan may be either
"incentive stock options," as defined in Section 422 of the Code, or
nonstatutory options.
An optionee who is granted an incentive stock option will not recognize
taxable income at the time the option is granted or upon its exercise, although
the exercise may subject the optionee to the alternative minimum tax. Upon the
sale or exchange of the shares more than two years after grant of the option and
one year after exercising the option, any gain or loss will be treated as
long-term capital gain or loss. If these holding periods are not satisfied, the
optionee will recognize ordinary income at the time of sale or exchange equal to
the difference between the exercise price and the lower of (i) the fair market
value of the shares at the date of the option exercise or (ii) the sale price of
the shares. A different rule for measuring ordinary income upon such a premature
disposition may apply if the optionee is also an officer, director or 10%
stockholder of the Company. The Company will be entitled to a deduction in the
same amount as the ordinary income recognized by the optionee. Any gain or loss
recognized on such a premature disposition of the shares in excess of the amount
treated as ordinary income will be characterized as long-term or short-term
capital gain or loss, depending on the holding period.
All other options that do not qualify as incentive stock options are
referred to as nonstatutory options. An optionee will not recognize any taxable
income at the time he or she is granted a nonstatutory option.
9
<PAGE>
However, upon its exercise, the optionee will recognize taxable income generally
measured as the excess of the then fair market value of the shares exercised
over the exercise price. A different rule may apply if the optionee is a
director, officer or 10% stockholder. Any taxable income recognized in
connection with an option exercise by an optionee who is also an employee of the
Company will be subject to tax withholding by the Company by payment in cash or
out of the current earnings paid to the optionee. Upon resale of such shares by
the optionee, any difference between the sales price and the optionee's exercise
price, to the extent not recognized as taxable income as described above, will
be treated as long-term or short-term capital gain or loss, depending on the
holding period. The Company will be entitled to a tax deduction in the same
amount as the ordinary income recognized by the optionee with respect to shares
acquired upon exercise of a nonstatutory option.
STOCK PURCHASE RIGHTS. Generally, no income will be recognized by a
recipient in connection with the grant of a stock purchase right or the exercise
of the right for unvested stock, unless an election under Section 83(b) of the
Code is filed with the Internal Revenue Service within 30 days of the date of
exercise of the stock purchase right. Otherwise, as the Company's repurchase
right lapses, the recipient will recognize compensation income in an amount
equal to the difference between the fair market value of the stock at the time
the Company's repurchase right lapses and the amount paid for the stock, if any.
Upon disposition of the shares, any gain or loss is treated as capital gain or
loss. In the case of a recipient who is also an employee, any amount treated as
compensation will be subject to tax withholding by the Company, and the Company
will be entitled to a tax deduction in the amount and at the time the recipient
recognizes ordinary income with respect to a stock purchase right.
THE FOREGOING SUMMARY OF THE EFFECT OF UNITED STATES FEDERAL INCOME TAXATION
LAWS UPON THE OPTIONEE AND THE COMPANY IN CONNECTION WITH THE PLAN DOES NOT
PURPORT TO BE COMPLETE, AND REFERENCE SHOULD BE MADE TO THE APPLICABLE
PROVISIONS OF THE CODE. IN ADDITION, THIS SUMMARY DOES NOT DISCUSS THE
PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY
IN WHICH THE PARTICIPANT MAY RESIDE.
VOTE REQUIRED
The approval of the amendment to the Plan requires the affirmative vote of a
majority of the votes cast on this subject matter at the annual meeting. An
abstention is not an affirmative vote and, therefore, will have the same effect
as a vote against the proposal. A broker non-vote will not be treated as a vote
cast on this subject matter at the annual meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
APPROVAL OF THE AMENDMENT OF THE PLAN.
10
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of the Company as of March 14, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Alan J. Levy, Ph.D. 59 President and Chief Executive Officer
Lori J. Glastetter 38 Vice President, Regulatory Affairs and Quality Assurance
Curtis R. Hafner 41 Vice President, Engineering
Kenneth M. Jenkins, Ph.D. 48 Vice President, Manufacturing
Carlton B. Morgan 49 Vice President, Research
Keith M. Serzen 44 Vice President, Sales and Marketing
James R. Shay 38 Chief Legal Counsel and Secretary
</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 developed, manufactured and marketed 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.
MS. GLASTETTER joined the Company in January 1994 as Director of Regulatory
Affairs and Quality Assurance and was promoted to Vice President of Regulatory
Affairs and Quality Assurance in April 1996. From 1993 to 1994, Ms. Glastetter
served as Director of Regulatory Affairs and Quality Assurance for Baxter
Healthcare Corporation's Bentley Division, which manufactures cardiopulmonary
critical care equipment. From 1988 to 1993, Ms. Glastetter served as Director of
Regulatory Affairs and Quality Assurance for Gish Biomedical, Inc., a
cardiovascular device company.
MR. HAFNER joined the Company in September 1996 as Vice President of
Engineering. From 1994 until joining the Company, Mr. Hafner was Director of
Engineering for the Patient Monitoring Division of Marquette Medical Systems, a
company that manufactures and markets medical products. From 1985 to 1994, Mr.
Hafner was a Senior Engineering Manager at Marquette Medical Systems.
DR. JENKINS joined the Company in May 1994 as Director of Manufacturing and
was promoted to Vice President of Manufacturing in April 1996. From 1993 to
1994, Dr. Jenkins served as Vice President of Operations at Virtual Vision,
Inc., a manufacturer of electro-optical head mounted displays. From 1990 to
1993, Dr. Jenkins served as Vice President of Manufacturing at Applied
Microsystems Corporation, a manufacturer of microprocessor emulators.
MR. MORGAN, a co-founder of the Company, has served as Vice President of
Research 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.
11
<PAGE>
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 partner.
From 1990 to 1992, Mr. Shay served as patent counsel at Nellcor, Inc.
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 regarding the
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and each of the other most highly compensated executive
officers of the Company (determined as of December 31, 1996) (the "Named
Executive Officers") for the fiscal years ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION --------------------
---------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) COMPENSATION ($) OPTIONS (#)
- ----------------------------------------------------- --------- ---------- ---------------- --------------------
<S> <C> <C> <C> <C>
Alan J. Levy......................................... 1996 $ 217,956 $ 9,297(1) 11,250
President and Chief Executive Officer 1995 180,848 10,369(1) 45,261
Lori J. Glastetter................................... 1996 104,223 7,402(2) 3,180
Vice President, Regulatory Affairs and Quality 1995 93,526 7,625(2) 17,661
Assurance
Curtis R. Hafner(3).................................. 1996 37,912 16,520(4) 100,000
Vice President, Engineering 1995 -- -- --
Keith M. Serzen...................................... 1996 150,000 -- 4,500
Vice President of Sales and Marketing 1995 126,817 83,353(5) 142,000
James R. Shay........................................ 1996 130,000 17,445(5) 3,900
Chief Legal Counsel and Secretary 1995 11,808 -- 100,000
</TABLE>
- ------------------------
(1) Consists of an automobile allowance.
(2) Consists of principal and interest payments forgiven by the Company pursuant
to a loan agreement between the Company and Ms. Glastetter.
(3) Mr. Hafner joined the Company as Vice President, Engineering, in September
1996. Had he been employed for all of the year ended December 31, 1996, his
annual salary would have been $130,000.
(4) Consists of $7,459 in living expense and $9,061 in moving expense
reimbursements.
(5) Consists of moving expense reimbursements.
12
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning stock options
granted during the year ended December 31, 1996 to the Named Executive Officers.
In accordance with the rules of the Securities and Exchange Commission, the
following table also sets forth the potential realizable value over the term of
the options (the period from the grant date to the expiration date) based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. These
amounts do not represent the Company's estimate of future stock price. Actual
realizable values, if any, of stock options will depend on the future
performance of the Common Stock.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS EXERCISE OPTION TERM(5)
OPTIONS GRANTED IN PRICE(4) EXPIRATION ------------------------
NAME GRANTED (#) FISCAL 1996(3) ($/SHARE) DATE 5% ($) 10% ($)
- ----------------------------------- ----------- ----------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Alan J. Levy....................... 11,250(2) 1.9% $ 13.00 4/16/06 $ 91,976 $ 233,085
Lori J. Glastetter................. 3,180(2) 0.5 13.00 4/16/06 25,999 65,885
Curtis R. Hafner................... 100,000(1) 17.2 15.25 9/16/06 959,064 2,430,457
Keith M. Serzen.................... 4,500(2) 0.8 13.00 4/16/06 36,790 93,234
James R. Shay...................... 3,900(2) 0.7 13.00 4/16/06 31,885 80,803
</TABLE>
- ------------------------
(1) Options were granted under the Company's 1993 Employee and Consultant Stock
Plan and vest over four years from the date of commencement of employment.
(2) Options were granted under the Company's 1993 Employee and Consultant Stock
Plan and vest upon the achievement of certain personal and operating
objectives as determined by the Compensation Committee of the Board of
Directors, or at the end of seven years.
(3) Based on an aggregate of 580,643 options granted by the Company in the year
ended December 31, 1996 to employees of the Company, including the Named
Executive Officers.
(4) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant.
(5) 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.
13
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END 1996 OPTION
VALUES
The following table sets forth information with respect to the Named
Executive Officers concerning option exercises for the year ended December 31,
1996 and exercisable and unexercisable options held as of December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 1996 DECEMBER 31, 1996(2)
ACQUIRED ON VALUE -------------------------- ---------------------------
NAME EXERCISE (#) REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ------------- ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Alan J. Levy................. 75,000 $ 1,023,750 95,053 111,458 $ 1,049,557 $ 940,450
Lori J. Glastetter........... 25,661 264,699 5,126 23,054 26,646 137,568
Curtis R. Hafner............. -- -- -- 100,000 -- --
Keith M. Serzen.............. 15,000 177,750 47,417 84,083 511,455 808,895
James R. Shay................ -- -- 27,083 76,817 71,770 193,230
</TABLE>
- ------------------------
(1) Based on the date of exercise, minus the per share exercise price,
multiplied by the number of shares issued upon exercise of the option.
(2) Based on the difference between the fair market value of Common Stock on
December 31, 1996 and the option exercise price, multiplied by the number of
shares underlying the option.
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, 1996, the Company would be obligated to pay Dr. Levy up to $114,174
in severance pay. The agreement does not provide for any specified term of
employment.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION POLICIES. The Company is committed to attracting, hiring and
retaining an experienced management team that can successfully manufacture the
Company's products in commercial quantities, penetrate target markets, obtain
and maintain required regulatory approvals worldwide, and develop new products.
With these goals in mind, the Compensation Committee (the "Committee") closely
aligns its compensation plan for executive management to the milestones achieved
and the influence that each executive has 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 Committee 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 Committee 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 March 1996, the Committee retained a consultant to
perform a compensation survey for the Company to assess the competitiveness of
its cash compensation levels. The 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 companies
identified in the survey. As
14
<PAGE>
a result, the Committee approved base salary increases for several employees in
the Company, including certain officers who report directly to the CEO. The
Board historically has not granted cash bonuses to executives or employees.
SHORT-TERM INCENTIVES. The Committee 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 Committee periodically
sets short-term milestones and then compares the Company's progress against
these targets. Members of the executive team, along with all Company employees,
are periodically granted stock options to purchase shares of the Company's
common stock with vesting tied to the achievement of specified operating and
personal objectives. The number of shares granted with these vesting provisions
is calculated using a formula based on the individual's annual salary. The
operating objectives set by the Committee for 1996 included attaining a targeted
level of net sales, and required obtaining clearance from the United States Food
and Drug Administration to market the Company's products and securing orders
from major customers. The Committee determined that 1996 operating objectives
had been substantially met. In addition, management evaluated personal
objectives on an individual basis. Based on these results, vesting of
approximately 29,000 and 64,000 options to purchase shares of Common Stock for
officers and other employees, respectively, was accelerated to become
immediately exercisable.
LONG-TERM INCENTIVES. The Compensation Committee 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 1996, the compensation of Dr. Levy was
determined by applying the same criteria discussed above. Dr. Levy's
compensation for 1996 is set forth in the Summary Compensation Table appearing
on page 14. In light of the compensation survey performed in 1996, Dr. Levy's
annual base salary was increased during 1996 from $195,000 per annum to $225,000
per annum, bringing his base compensation more in line with comparable
executives at similar companies. All of the options to purchase shares of Common
Stock granted to Dr. Levy in 1996 were granted as short-term incentives upon
achievement of certain corporate-wide milestones.
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.
Submitted by the Compensation Committee: Frank M. Fischer
Michael J. Levinthal
Kurt C. Wheeler
15
<PAGE>
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 performance shown is not necessarily
indicative of future performance.
COMPARISON OF ELEVEN-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>
HAMBRECHT & QUIST
HEALTH CARE-
NASDAQ EXCLUDING
HEARTSTREAM, INC. STOCK MARKET-US BIOTECHNOLOGY
<S> <C> <C> <C>
1/96 100 100 100
3/96 119 104 100
6/96 106 113 94
9/96 110 117 103
12/96 94 122 104
</TABLE>
16
<PAGE>
CERTAIN TRANSACTIONS
The Company has agreed to indemnify certain employees, including Carlton B.
Morgan, the Company's Vice President of Research, 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 ("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 February 28, 1997 all Section 16(a) filing
requirements applicable to its officers, directors and 10% stockholders were
complied with, except for the following: (i) Alan J. Levy filed a Form 4 in
January 1997 to report the acquisition of 888 shares of Common Stock distributed
to him in November 1996; (ii) Kenneth M. Jenkins filed a Form 3 in May 1996 to
report ownership of 5,000 shares of Common Stock upon becoming an officer of the
Company in April 1996; (iii) Lori J. Glastetter filed a Form 3 in May 1996 to
report ownership of 18,785 shares of Common Stock upon becoming an officer of
the Company in April 1996, and a Form 4 in January 1997 to report the exercise
of an option to purchase 6,876 shares of Common Stock in November 1996; (iv)
Kurt C. Wheeler filed a Form 5 in February 1997 to report the acquisition of 163
shares of Common Stock distributed to him in September 1996 and the acquisition
of 242 shares of Common Stock distributed to him in November 1996; and (v) Mark
B. Knudson filed a Form 5 in February 1997 to report the acquisition of 3,111
shares of Common Stock in November 1996, and filed an amended Form 5 in March
1997 to report the acquisition of 1,500 shares of Common Stock in January 1996
and the acquisition of 469 shares of Common Stock in September 1996 by MICI
Limited Partnership, of which Mr. Knudson is a limited partner.
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 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.
17
<PAGE>
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 1998 Annual Meeting of Stockholders must
be received by the Company no later than November 21, 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: March 19, 1997
18
<PAGE>
REVOCABLE PROXY FOR
HEARTSTREAM, INC.
ANNUAL MEETING OF STOCKHOLDERS
APRIL 29, 1997
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
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 1997
Annual Meeting of Stockholders of HEARTSTREAM, INC. to be held on April 29,
1997 and any adjournments thereof, with respect to the following:
(CONTINUED, AND TO BE MARKED, DATED AND SIGNED ON THE OTHER SIDE)
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
Please mark your votes as indicated in this example /X/
(1) Election of Directors FOR WITHHOLD
all nominees listed AUTHORITY
(except as marked to vote for all
to the contrary) nominees listed
/ / / /
(INSTRUCTION: To withhold authority to vote for any individual, strike a line
through the nominee's name below.)
ELLEN M. FEENEY AND KURT C. WHEELER
(2) Ratify the appointment of Ernst & Young LLP as FOR AGAINST ABSTAIN
independent auditors of the Company for the fiscal / / / / / /
year ending December 31, 1997.
(3) Approve the amendments to the 1993 Employee and / / / / / /
Consultant Stock Plan, including an increase in
the number of shares reserved for issuance by
1,600,000 shares.
(4) OTHER MATTERS. At the discretion of the proxy holders on such other business
as may properly come before the meeting and any adjournments thereof. A
majority of the proxy holders present at the Annual Meeting may exercise
all powers granted hereby.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED ABOVE, BUT IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION OF ALL NOMINEES
AND FOR ALL PROPOSALS LISTED ABOVE. THE PROXY HOLDERS MAY VOTE IN THEIR
DISCRETION AS TO OTHER MATTERS WHICH MAY COME BEFORE THE MEETING.
PLEASE DATE AND SIGN EXACTLY AS NAME IS IMPRINTED HEREOF, INCLUDING DESIGNATION
AS EXECUTOR, TRUSTEE, ETC. IF APPLICABLE, A CORPORATION MUST SIGN ITS NAME BY
THE PRESIDENT OR OTHER AUTHORIZED OFFICER. ALL CO-OWNERS SHOULD SIGN.
Signature(s) Signature(s)
----------------------- --------------------------
Date , 1997
-------------------------
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
HEARTSTREAM, INC.
ANNUAL MEETING OF STOCKHOLDERS
Tuesday, April 29, 1997
10:00 a.m. (PST)
The Edgewater
2411 Alaskan Way
Seattle, Washington
