<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
__X__ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1997
or
_____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ________________.
COMMISSION FILE NUMBER: 0-27330
HEARTSTREAM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1577477
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2401 4TH AVENUE, SUITE 300
Seattle, WA 98121
(Address of principal executive offices, including zip code)
(206) 443-7630
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
At July 23, 1997, there were 11,763,672 shares of the Registrant's Common Stock
outstanding.
<PAGE>
HEARTSTREAM, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
Page
----
<S> <C>
Balance Sheets as of June 30, 1997 (Unaudited) and December 31,
1996........................................................... 3
Statements of Operations (Unaudited) for the three and six months
ended June 30, 1997 and 1996.................................. 4
Statements of Cash Flows (Unaudited) for the six months ended
June 30, 1997 and 1996........................................ 5
Notes to Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 8
</TABLE>
PART II. OTHER INFORMATION
<TABLE>
<S> <C>
Item 4. Submission of Matters to a Vote of Security Holders............ 18
Item 6. Exhibits and Reports on Form 8-K............................... 19
SIGNATURES............................................................... 20
INDEX TO EXHIBITS........................................................ 21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEARTSTREAM, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 20,684,595 $ 24,726,216
Securities available-for-sale.............. 17,921,512 25,353,693
Accounts receivable, net................... 1,139,963 944,579
Inventories................................ 4,008,538 1,548,441
Prepaid expenses and other................. 994,499 114,091
------------ ------------
Total current assets.................... 44,749,107 52,687,020
Property and equipment, net................... 2,486,644 2,492,351
Other assets.................................. -- 111,084
------------ ------------
$ 47,235,751 $ 55,290,455
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Current liabilities:
Accounts payable........................... $ 992,938 $ 1,779,871
Accrued compensation and benefits.......... 855,753 293,312
Other accrued expenses..................... 496,974 127,246
Current portion of long-term obligations... 384,768 409,207
------------ ------------
Total current liabilities............... 2,730,433 2,609,636
Long-term obligations, less current portion.. 77,446 215,753
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value
Authorized shares - 30,000,000
Issued and outstanding shares -
11,758,296 at June 30, 1997 and
11,635,404 at December 31, 1996........ 11,758 11,635
Additional paid-in-capital................. 77,468,264 77,271,965
Accumulated deficit........................ (33,035,377) (24,779,410)
Deferred compensation...................... (16,773) (39,124)
------------ ------------
Total stockholders' equity.............. 44,427,872 52,465,066
------------ ------------
$ 47,235,751 $ 55,290,455
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
HEARTSTREAM, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.................... $ 2,380,899 $ -- $ 3,661,878 $ --
Cost of sales................ (1,698,515) -- (2,504,044) --
----------- ----------- ----------- -----------
Gross margin................ 682,384 -- 1,157,834 --
Operating expenses:
Research and development.... 1,309,289 1,612,801 2,661,003 2,960,667
General and administrative.. 1,636,697 1,270,378 3,181,421 2,187,159
Sales and marketing......... 2,428,407 642,766 4,733,580 982,797
----------- ----------- ----------- -----------
5,374,393 3,525,945 10,576,004 6,130,623
Loss from operations......... (4,692,009) (3,525,945) (9,418,170) (6,130,623)
Interest income, net......... 549,231 746,316 1,150,023 1,260,102
----------- ----------- ----------- -----------
Net loss..................... $(4,142,778) $(2,779,629) $(8,268,147) $(4,870,521)
=========== =========== =========== ===========
Net loss per share,
historical.................. $(0.35) $(0.24) $(0.71) $(0.49)
====== ====== ======= ======
Shares used to calculate
historical net loss per
share....................... 11,743,757 11,427,645 11,709,184 9,976,584
=========== =========== =========== ===========
Net loss per share, pro forma......................................... $ (0.45)
===========
Shares used to calculate
pro forma net loss per
share................................................................ 10,793,360
===========
</TABLE>
See accompanying notes.
4
<PAGE>
HEARTSTREAM, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.............................................. $ (8,268,147) $ (4,870,521)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization....................... 452,406 347,040
Amortization of deferred compensation............... 22,351 111,827
(Accretion) of discounts and amortization of
premiums on securities............................. (26,481) 106,778
Changes in:
Increase in accounts receivable.................... (195,384) --
Increase in inventories............................ (2,460,097) (422,354)
Increase in prepaid expenses and other............. (880,408) (195,986)
Decrease (increase) in other assets................ 111,084 (86,895)
Increase in accounts payable and accrued expenses.. 145,236 504,950
------------ ------------
Net cash used in operating activities................. (11,099,440) (4,505,161)
INVESTING ACTIVITIES:
Purchase of property and equipment.................... (446,699) (508,255)
Purchase of securities................................ (5,758,735) (52,470,841)
Sales of securities................................... 4,200,000 2,700,000
Maturities of securities.............................. 9,029,577 4,010,160
------------ ------------
Net cash provided by (used in) investing activities... 7,024,143 (46,268,936)
FINANCING ACTIVITIES:
Deferred offering costs............................... -- 301,806
Principal payments on capitalized lease obligations... (162,746) (151,072)
Issuance of common stock, net of issuance costs....... 196,422 49,023,529
------------ ------------
Net cash provided by financing activities............. 33,676 49,174,263
------------ ------------
Net decrease in cash and cash equivalents............. (4,041,621) (1,599,834)
Cash and cash equivalents, beginning of period........ 24,726,216 5,970,768
------------ ------------
Cash and cash equivalents, end of period.............. $ 20,684,595 $ 4,370,934
============ ============
NONCASH TRANSACTION AND SUPPLEMENTAL DISCLOSURES:
Cash paid for interest................................ $ 40,557 $ 66,822
============ ============
Conversion of preferred stock to common stock......... $ -- $ 6,190
============ ============
</TABLE>
See accompanying notes.
5
<PAGE>
HEARTSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
Heartstream, Inc. ("Heartstream" or the "Company") according to the rules
and regulations of the Securities and Exchange Commission. Accordingly, they
do not include all of the information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles. In the opinion of management, the financial
statements reflect all adjustments, which include only normal and recurring
items, necessary for fair presentation of the interim periods presented. The
results for the three and six months ended June 30, 1997 may not necessarily
be indicative of the results for the year ending December 31, 1997. These
financial statements and related notes should be read in conjunction with
the Company's audited financial statements for the year ended December 31,
1996, included in its Annual Report to Stockholders incorporated by
reference into the Form 10-K filed with the Securities and Exchange
Commission on March 31, 1997.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
<S> <C> <C>
Raw materials $1,918,887 $1,023,182
Work-in-process 1,533,230 462,919
Finished goods 556,421 62,340
---------- ----------
$4,008,538 $1,548,441
========== ==========
</TABLE>
3. NET LOSS PER SHARE
Historical net loss per share is computed based on the weighted average
number of common shares outstanding and gives effect to the following
adjustments: common equivalent shares are not included in the per-share
calculation where the effect of their inclusion would be antidilutive,
except that, in accordance with Securities and Exchange Commission
requirements, common and common equivalent shares issued during the 12-month
period prior to the filing of an initial public offering have been included
in the calculation as if they were outstanding for all periods using the
treasury stock method and the initial public price of $13 per share even
though their inclusion would be antidilutive.
The pro forma net loss per share is computed based on the historical net
loss per share adjusted for the assumed conversion of all outstanding shares
of convertible preferred stock into common stock at the time of issuance.
6
<PAGE>
HEARTSTREAM, INC.
NOTES TO FINANCIAL STATEMENTS
3. NET LOSS PER SHARE (CONTINUED)
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("Statement 128"), which is effective for financial statements for both
interim and annual periods ending after December 15, 1997. At that time, the
Company will be required to change its method for calculating earnings per
share and restate all prior periods presented. The impact of Statement 128
on the calculation of net loss per share for all current and prior periods
is not expected to be material.
4. LITIGATION
In 1995, Physio-Control International Corporation ("Physio-Control"), a
competitor of the Company, filed a lawsuit in Washington state court
alleging trade secret misappropriation and tortious interference with
business relations against the Company and five of its employees and their
spouses in connection with development of the ForeRunner(R) automatic
external defibrillator. These employees were founders of Heartstream and
former employees of Physio-Control. The complaint includes related
allegations that the five employees breached proprietary information
agreements with Physio-Control. The complaint seeks injunctive relief,
unspecified monetary damages and an order declaring Physio-Control the owner
of certain patent applications filed by the Company and any patents that may
issue from those applications. Heartstream has filed counterclaims against
Physio-Control. The pending litigation has resulted and will continue to
result in substantial expense to the Company and significant diversion of
effort by the Company's technical and management personnel. If the court
finds against the Company, the Company could be enjoined from manufacturing
or selling its ForeRunner product, the Company could be required to seek
licenses from Physio-Control, and the Company could also be held liable for
damages. The litigation is currently in the discovery phase with a trial
date set for March 1998. The Company has conducted a review of its
technology in light of the Physio-Control claims and, after consultation
with its intellectual property and litigation counsel, believes that the
Company should prevail in the litigation based on several defenses
including, among other things, the Company's conclusion that it has
independently developed the technology at issue. However, litigation is
subject to inherent uncertainties, especially cases such as this where
complex technical issues may be decided by a lay jury. Accordingly, no
assurance can be given that the lawsuit will not be decided against the
Company. Adverse determinations in the litigation with Physio-Control could
have a material adverse effect on the Company's business, financial
condition and results of operations.
On January 7, 1997, the Company was awarded a patent relating to the
Company's defibrillator self-test technology. On January 10, 1997, the
Company filed a lawsuit in U.S. Federal District Court in Seattle against
Physio-Control for infringement of this patent. Physio-Control has filed a
counterclaim charging infringement of one of its patents by the Company.
Each party is seeking injunctive relief and unspecified monetary damages.
The litigation is at a very early stage and a trial date has not yet been
determined.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Heartstream, Inc. ("Heartstream" or "Company") was founded in December 1992
and has conducted organizational, research and development, market development
and clinical trial activities of its ForeRunner(R) automatic external
defibrillator ("AED") during the past four years. In 1996 the Company received
the required approvals to market ForeRunner and its accessories in several
countries, including the United States, Canada and the 18 countries of the
European Economic Area. With completion of ForeRunner's development process and
required regulatory approvals, the Company initiated commercial shipments of the
ForeRunner AED and its accessories to Heartstream's direct customers and
international distribution partners in November 1996. During 1997, regulatory
approvals have been awarded to the Company in nine additional countries
including Australia and China.
The Company's ForeRunner is an innovative AED which utilizes a patented low-
energy biphasic waveform for the treatment of sudden cardiac arrest (SCA), the
leading cause of death in the United States. The Company's ForeRunner AED is
the only currently available AED which utilizes a biphasic waveform.
The Company had an accumulated deficit of $33.0 million at June 30, 1997, and
expects to continue to incur operating losses into 1999 as it increases market
development activities, initiates new research and development projects, seeks
regulatory clearance for its products in additional jurisdictions and increases
administrative activities to support growth of the Company. The Company does
not have significant experience manufacturing, marketing or selling its products
in commercial quantities and there can be no assurance that the ForeRunner
defibrillator will ever gain broad commercial acceptance or that the Company
will ever achieve profitability. In addition, the Company and its distributors
are required to comply with regulations regarding product quality and safety in
order to maintain regulatory approvals. Failure to comply with these
requirements could result in warning letters, fines, injunctions, civil
penalties, recall or seizure of products, suspension of production, or delays in
the approval of additional products, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
In 1995, Physio-Control International Corporation ("Physio-Control"), a
competitor of the Company, filed a lawsuit in Washington state court alleging
trade secret misappropriation and tortious interference with business relations
against the Company and five of its employees and their spouses in connection
with development of the ForeRunner automatic external defibrillator. These
employees were founders of Heartstream and former employees of Physio-Control.
The complaint includes related allegations that the five employees breached
proprietary information agreements with Physio-Control. The complaint seeks
injunctive relief, unspecified monetary damages and an order declaring Physio-
Control the owner of certain patent applications filed by the Company and any
patents that may issue from those applications. Heartstream has filed
counterclaims against Physio-Control. The pending litigation has resulted and
will continue to result in substantial expense to the Company and significant
diversion of effort by the Company's technical and management personnel. If the
court finds against the Company, the Company could be enjoined from
manufacturing or selling its ForeRunner product, the Company could be required
to seek licenses from Physio-Control, and the Company could also be held liable
for damages. The litigation is currently in the discovery phase with a trial
date set for March 1998. The Company has conducted a review of its technology
in light of the Physio-Control claims and, after consultation with its
intellectual property and litigation counsel, believes that the Company should
prevail in the litigation based on several defenses
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
including, among other things, the Company's conclusion that it has
independently developed the technology at issue. However, litigation is subject
to inherent uncertainties, especially cases such as this where complex technical
issues may be decided by a lay jury. Accordingly, no assurance can be given that
the lawsuit will not be decided against the Company. Adverse determinations in
the litigation with Physio-Control could have a material adverse effect on the
Company's business, financial condition and results of operations.
On January 7, 1997, the Company was awarded a patent relating to the Company's
defibrillator self-test technology. On January 10, 1997, the Company filed a
lawsuit in U.S. Federal District Court in Seattle against Physio-Control for
infringement of this patent. Physio-Control has filed a counterclaim charging
infringement of one of its patents by the Company. Each party is seeking
injunctive relief and unspecified monetary damages. The litigation is at a very
early stage and a trial date has not yet been determined.
RESULTS OF OPERATIONS
Net sales totaled $2.4 million and $3.7 million for the three and six months
ended June 30, 1997, respectively. The Company had no sales during the first
six months of 1996 as shipment of the Company's products commenced in November
1996. Sales to the Company's international distribution partners accounted for
approximately 45% and 23% of net sales for the three months ended March 31 and
June 30, 1997, respectively. During the second quarter of 1997 the Company
entered into a domestic distribution agreement for certain geographic market
segments in the United States, and expects to enter into agreements with other
distribution partners throughout the remainder of 1997. In addition, the
Company expects domestic sales to further increase as a percent of total sales
as it increases the size of its domestic sales force and adds domestic
distribution partners. Accessories accounted for approximately 15% and 12% of
total sales for the three months ended March 31 and June 30, 1997, respectively.
Gross margin totaled $0.7 million, or 29% of net sales, for the three months
ended June 30, 1997. For the six month period ended June 30, 1997, gross margin
totaled $1.2 million, or 32% of net sales. Margins declined during the second
quarter of 1997 from 37% in the first quarter of 1997 due to a significant
lower-margin order shipped during the quarter. Partially offsetting the impact
of this order was an increase in direct domestic sales which generally have
higher gross margins than sales to international distributors. Future margins
may be impacted by shifts in the sales distribution channel mix and large sales
at volume discounts to certain customers. In addition, the Company has
established production facilities based on forecasted product demand. Actual
utilization of these facilities may affect future margins.
Research and development expenses totaled $1.3 million for the three months
ended June 30, 1997, compared to $1.6 million for the same period in 1996. For
the six months ended June 30, 1997 and 1996, research and development expenses
totaled $2.7 million and $3.0 million, respectively. Higher expenses in the
prior year were due to greater research and development activities focused on
the final validation and qualification of ForeRunner, and activities associated
with obtaining regulatory approval to manufacture, market and sell the Company's
products. The Company expects research and development expenses during the next
several quarters to increase over second quarter 1997 results as the Company
undertakes development of new products and product enhancements and works to
improve existing production processes of the ForeRunner AED.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
General and administrative expenses totaled $1.6 million for the three months
ended June 30, 1997 compared to $1.3 million for the three months ended June 30,
1996. This represents an increase of $0.3 million, or 29% over the same period
in the prior year. For the six months ended June 30, 1997, general and
administrative expenses increased 45% to $3.2 million from $2.2 million for the
same period in 1996. The increase was due to increased costs to operate as a
public company, additional personnel and facilities costs to support growth of
the Company and additional legal costs in connection with the Physio-Control
litigation.
Sales and marketing expenses totaled $2.4 million for the three months ended
June 30, 1997 compared to $0.6 million for the same period in 1996. For the six
months ended June 30, 1997 and 1996, sales and marketing expenses totaled $4.7
million and $1.0 million, respectively. Commercial shipments of the ForeRunner
AED totaled $3.7 million through June 30, 1997 while no commercial shipments
were made during the same periods in the prior year. The increase in expenses
is primarily due to the hiring of direct sales representatives and marketing
personnel, as well as promotional and market development activities. Sales and
marketing expenses for the remainder of 1997 are expected to increase somewhat
compared to current levels due to continued worldwide commercialization of the
ForeRunner AED, including the hiring of additional direct sales representatives,
establishment of additional domestic and international distribution channels,
and increased advertising and promotional activities.
Net interest income was $0.5 million for the three months ended June 30, 1997
compared to $0.7 million for the same period in 1996. This represents a
decrease of $0.2 million, or 26%. The decrease was primarily due to lower cash
and investment balances in 1997 as proceeds from the Company's initial public
offering of common stock were received in February 1996. Net interest income
was $1.2 million for the six months ended June 30, 1997 compared to $1.3 million
for the same period in 1996.
INCOME TAXES
The Company has not generated any net income to date and therefore has not
paid any federal income taxes since inception. At June 30, 1997, the Company
had net operating loss carryforwards of approximately $32.0 million and research
and development credit carryforwards of approximately $0.3 million, net of
carryforwards expected to expire before their complete utilization. The
operating loss carryforwards and research and development carryforwards begin to
expire in the year 2008. Utilization of federal income tax carryforwards is
subject to certain limitations under Section 382 of the Internal Revenue Code of
1986, as amended. The Company's past sales of preferred and common stock have
resulted in "ownership changes" as defined under Section 382, resulting in
limitations on the future use of carryforwards. These limitations are expected
to result in the expiration of approximately $1.0 million of net operating loss
carryforwards and approximately $0.1 million research and development credit
carryforwards before their complete utilization.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company's cash, cash equivalents and securities
available-for-sale totaled $38.6 million, compared to $50.1 million at December
31, 1996. Cash used to fund operating activities was $11.1 million for the six
months ended June 30, 1997 compared to $4.5 million for the six months ended
June 30, 1996, reflecting increased inventory balances and net losses
principally related to increased sales and marketing expenditures. The Company
expects to continue to incur operating losses as it supports the growth of its
sales and marketing organization, undertakes new development activities and
supports its ongoing litigation and administrative activities. Although the
Company believes that its existing liquid assets and cash flows from sales will
be sufficient to fund its operations through 1998, there can be no assurance
that the Company will not require additional financing in the near future or
that additional financing will be available on satisfactory terms, if at all.
RISK FACTORS
This quarterly report on Form 10-Q contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated by such forward-looking statements as a result
of certain factors including those set forth below.
Fluctuations in Operating Results. The Company's results of operations will
depend upon numerous factors, including actions relating to regulatory matters,
the extent to which the Company's products gain market acceptance, increased
competition, and changes in pricing policies by the Company and its competitors.
Results of operations will also be affected by the size and timing of orders
received and the ability of its sales force and distributors to effectively
commercialize the Company's products. In addition, the mix of sales to
distribution partners versus sales by direct sales representatives may affect
operating results since sales to distribution partners generally are made at
lower prices and there timing is more difficult to predict. Based on these
factors, operating results may fluctuate significantly from quarter to quarter
and differ from expectations of public market analysts and investors.
History of Losses and Expectation of Future Losses. The Company was founded
in December 1992 and to date has generated limited revenues. At June 30, 1997,
the Company had an accumulated deficit of approximately $33.0 million. The
Company expects to continue to incur operating losses into 1999 as it increases
market development activities, initiates new research and development projects,
seeks regulatory clearance for its products in additional jurisdictions and
increases administrative activities to support growth of the Company. The
Company has limited experience in manufacturing, marketing and selling its
products in commercial quantities and there can be no assurance that the
ForeRunner will ever gain broad commercial acceptance or that the Company will
ever achieve profitability.
Dependence Upon ForeRunner. The ForeRunner AED and its related accessories
are currently the Company's only products. The Company expects that the
ForeRunner and its related accessories will account for substantially all of the
Company's revenues for the foreseeable future. Accordingly, any problem or
disruption in the manufacturing, acceptance or sale of the ForeRunner AED and
its accessories could have a material adverse effect on the Company's business,
financial condition and results of operations.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Product Liability and Recall Risk; Limited Insurance Coverage. The
manufacture and sale of medical products entail significant risk of product
liability claims and product recalls. There can be no assurance that the
Company's existing insurance coverage limits are adequate to protect the Company
from any liabilities it might incur in connection with the sale of its product.
In addition, the Company may require increased product liability coverage as its
products are further commercialized. Such insurance is expensive and in the
future may not be available on acceptable terms, if at all. A successful
product liability claim or series of claims brought against the Company in
excess of its insurance coverage, or a recall of the Company's products, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Uncertainty of Market Acceptance and Dependence on Market Development. The
Company's success is substantially dependent upon market acceptance of the
ForeRunner AED. Currently, all other commercially available AEDs utilize a
monophasic waveform and utilize 200 to 360 Joules of energy in delivering their
defibrillation therapy. Many of these AEDs have been marketed for several
years, comply with the American Heart Association ("AHA") recommended guideline
for external defibrillation therapy and have been extensively used in the field.
The Company's ForeRunner AED utilizes a biphasic waveform delivered at lower
energy levels. There can be no assurance that the market will broadly accept
the Company's lower energy biphasic waveform protocol. In addition, there can
be no assurance that ForeRunner will demonstrate benefits in ease of use,
maintenance and safety or will achieve wide acceptance in its target markets.
The Company's success is also substantially dependent upon market development
and expansion. AEDs are currently marketed by a number of companies into the
existing professional emergency medical technician ("EMT") market, the Company's
initial target market. The Company's future success depends upon substantially
increasing the number of AEDs sold into the professional EMT market segment, as
well as the emerging first responder market. Development of the first responder
market will depend in large part on the Company's ability to demonstrate to
physicians and potential customers the benefits, safety, efficacy and cost-
effectiveness of widespread use of its AED by first responders who are generally
less trained than EMTs. Doing so may require significant sales and marketing
resources. There can be no assurance that the ForeRunner will gain broad
commercial acceptance or that market demand for the ForeRunner will be
sufficient to allow profitable operations.
Several states and foreign jurisdictions have enacted laws and regulations
which govern the delivery of emergency medical services, including the use of
external defibrillators. These laws and regulations in many cases currently
restrict use of these devices to physicians or other specified categories of
trained personnel, mandate levels of operator training and, in some cases,
require that certain features be incorporated into external defibrillators,
including features such as an ECG strip chart printer which are not currently
incorporated into the ForeRunner. Accordingly, market acceptance of the
ForeRunner will be significantly dependent upon the Company's ability to
convince state, local and foreign government bodies and medical directors of the
safety and efficacy of the ForeRunner and its potential for widespread
deployment. There can be no assurance that restrictions on the use of AEDs will
be eased or removed.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Lengthy Customer Decision Processes. Because of budgetary and bureaucratic
constraints, and because of the ForeRunner's innovative approach to treatment of
sudden cardiac arrest, the Company believes purchasing decisions of some of its
customers, particularly municipal accounts, may be characterized by long
decision processes. The lengthy decision process may be exacerbated through
sales and marketing tactics of the Company's competitors, which may be designed
to create uncertainty and doubt in the minds of customers concerning the
technology and efficacy of the ForeRunner AED. Accordingly, the Company's
products may be subject to long sales cycles.
Competition and Risk of Technological Obsolescence. The domestic and
international markets for external defibrillators are highly competitive, and
several of the Company's competitors have substantial installed bases of
products and significantly greater financial, technical, research and
development, or sales and marketing resources than the Company. Several of the
Company's competitors have been manufacturing defibrillators for many years and
may have greater name recognition than the Company. Accordingly, the Company's
competitors may be able to bring new product offerings to market quickly and may
be able to increase sales of their products by leveraging their installed bases
and established distribution channels. The Company believes that its primary
competitors are companies that currently market AEDs into the professional EMT
segment of the market. This market segment is dominated by Laerdal Medical,
Inc. ("Laerdal") and Physio-Control International Corporation ("Physio-
Control"). Other competitors that sell products into this market segment
include SurVivaLink Corporation ("SurVivaLink"), and Zoll Medical, Inc.
Laerdal, Physio-Control and SurVivaLink have recently introduced new AEDs
targeted at markets similar to those targeted by the ForeRunner defibrillator.
The introduction of these or other similar products may cause pricing pressure
on the Company's existing products in order for the Company to remain
competitive in the market.
The Company believes that the principal competitive factors for AEDs in the
professional EMT and first responder market segments are ease of use, low
maintenance and training requirements, cost-effectiveness, size, safety and
reliability. The ForeRunner AED is designed to address all these factors.
However, there can be no assurance that the Company's products will compete
favorably with the products offered by its competitors, or that superior
defibrillation technologies will not be developed by these competitors or others
which may render the Company's technology or products obsolete or
noncompetitive. In addition, a number of companies may be engaged in the
development of approaches for the treatment of sudden cardiac arrest other than
those utilized by the Company. There can be no assurance that superior
defibrillation technologies will not be developed by these competitors or
others, or that alternative therapies or approaches, including pharmaceutical or
other alternatives, will not render the Company's technology, products, or
products under development obsolete or noncompetitive.
Limited Sales, Marketing and Distribution Experience. The Company has limited
experience selling and marketing its product in domestic or international
markets. In the United States, the Company currently sells its products
primarily through a direct sales force. The Company intends to expand the size
of its direct sales force during the remainder of 1997. However, competition
for sales personnel is fierce and there can be no assurance that the Company
will be able to attract or retain qualified personnel. In addition, the Company
believes that it may be necessary to enter into alliances with additional
domestic partners with significant distribution capabilities to successfully
penetrate various segments of the first responder market. There can be no
assurance that the Company will be able to enter into any such alliances. In
international markets, the Company sells its products primarily through
distributors, and to date has entered into agreements with distributors covering
33 countries worldwide.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
However, there can be no assurance that the Company's distributors will devote
adequate resources to selling the Company's products over other products or will
adequately train their sales force about the Company's products. In addition,
there can be no assurance that the Company's sales and marketing organization
will be cost-effective, or that the Company's sales and marketing efforts will
be successful.
Limited Manufacturing Experience. The Company performs final assembly,
testing, and inspection at its facility in Seattle, Washington. Due to limited
experience in manufacturing its products in commercial quantities, the Company
may encounter difficulties in manufacturing the ForeRunner AED, including
problems involving material requirements planning, production yields, quality
control and assurance, and scaling production capacity and other resources to
meet current and future demand for the product. Fluctuations in any of the
above factors could impact the Company's ability to manufacture its products in
a profitable manner.
Potential Component Shortages; Dependence on Sole Sources of Supply. The
Company manufactures its products based on forecasted product orders, and
purchases subassemblies and components prior to receipt of purchase orders from
customers. Lead times for materials and components ordered by the Company vary
significantly and depend upon factors such as the specific supplier, contract
terms and demand for a component at a given time. In addition, certain
components used in the Company's products have long lead times and have been in
short supply. The Company has acquired an inventory of certain components in
anticipation of possible shortages, and may continue this practice for these or
other components in the future. If orders do not match forecasts, the Company
may have excess or inadequate inventory of certain materials and components.
The Company purchases some key components, such as the main energy storage
capacitor and the LCD display screen used in the ForeRunner, from sole source
suppliers. For certain components, including the ForeRunner's batteries and
microprocessors, there are relatively few sources of supply. In addition,
several of the subassemblies in the ForeRunner require the supplier to perform
extensive testing before the Company accepts the subassembly into its final
manufacturing process. These tests are specific to the design of ForeRunner and
if a supplier is unable to meet the Company's requirements, an alternate
supplier may be required. There can be no assurance that establishment of
additional or replacement suppliers for these components can be accomplished
quickly, or at all. Any significant component supply delay or interruption
could require the Company to qualify new sources of supply, if available.
Dependence Upon Patents and Proprietary Technology; Related Litigation. At
June 30, 1997, the Company had filed a total of 39 patent applications with the
United States Patent and Trademark Office, 18 of which had either been issued or
allowed. The Company's success will depend in part on its ability to obtain
patent protection for its products and processes, to preserve its trade secrets
and to operate without infringing the proprietary rights of third parties. The
Company's strategy is to actively pursue patent protection in the United States
and foreign jurisdictions for technology that it believes to be proprietary and
that offers a potential competitive advantage for its products. However, no
assurance can be given that any patents from pending patent applications or from
any future patent application will be issued, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the Company's patents will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held by the Company. In addition, the laws of
certain foreign countries do not protect the Company's intellectual property
rights to the same extent as do the laws of the United States. Litigation or
regulatory proceedings, which could result in substantial cost and uncertainty
to the Company, may also
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
be necessary to enforce patent or other intellectual
property rights of the Company or to determine the scope and validity of other
parties' proprietary rights. There can be no assurance that third parties will
not assert infringement claims in the future with respect to the Company's
current or future products or that any such claims will not require the Company
to enter into license arrangements or result in litigation, regardless of the
merits of such claims. No assurance can be given that any necessary licenses
can be obtained on commercially reasonable terms, or at all. Should litigation
with respect to any such claims commence, such litigation could be extremely
expensive and time consuming regardless of the outcome of such litigation.
The medical device market has been characterized by extensive litigation
regarding patents, trade secrets and other intellectual property rights. In
1995, Physio-Control, a competitor of the Company, filed a lawsuit in Washington
state court alleging trade secret misappropriation and tortious interference
with business relations against the Company and five of its employees and their
spouses in connection with development of the ForeRunner automatic external
defibrillator. These employees were founders of Heartstream and former
employees of Physio-Control. The complaint includes related allegations that
the five employees breached proprietary information agreements with Physio-
Control. The complaint seeks injunctive relief, unspecified monetary damages
and an order declaring Physio-Control the owner of certain patent applications
filed by the Company and any patents that may issue from those applications.
Heartstream has filed counterclaims against Physio-Control. The pending
litigation has resulted and will continue to result in substantial expense to
the Company and significant diversion of effort by the Company's technical and
management personnel. If the court finds against the Company, the Company could
be enjoined from manufacturing or selling its ForeRunner product, the Company
could be required to seek licenses from Physio-Control, and the Company could
also be held liable for damages. The litigation is currently in the discovery
phase with a trial date set for March 1998. The Company has conducted a review
of its technology in light of the Physio-Control claims and, after consultation
with its intellectual property and litigation counsel, believes that the Company
should prevail in the litigation based on several defenses including, among
other things, the Company's conclusion that it has independently developed the
technology at issue. However, litigation is subject to inherent uncertainties,
especially cases such as this where complex technical issues may be decided by a
lay jury. Accordingly, no assurance can be given that the lawsuit will not be
decided against the Company. Adverse determinations in the litigation with
Physio-Control could have a material adverse effect on the Company's business,
financial condition and results of operations.
On January 7, 1997, the Company was awarded a patent relating to the Company's
defibrillator self-test technology. On January 10, 1997, the Company filed a
lawsuit in U.S. Federal District Court in Seattle against Physio-Control for
infringement of this patent. Physio-Control has filed a counterclaim charging
infringement of one of its patents by the Company. Each party is seeking
injunctive relief and unspecified monetary damages. The litigation is at a very
early stage and a trial date has not yet been determined.
While the Company generally enters into confidentiality agreements with its
employees and consultants, there can be no assurance that the Company's trade
secrets or proprietary technology will not become known or be independently
developed by competitors in such a manner that the Company has no practical
recourse.
Government Regulation. The design, manufacturing, labeling, distribution and
marketing of the Company's products are subject to extensive and rigorous
government regulation in the United States and
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
certain other countries where the process of obtaining and maintaining required
regulatory approvals is lengthy, expensive and uncertain.
In 1996 the Company received the required approvals to market ForeRunner and
its accessories in several countries, including the United States, Canada and
the 18 countries of the European Economic Area. During 1997 regulatory
approvals have been awarded to the Company in nine additional countries,
including Australia and China. In order for the Company to market the
ForeRunner and its related accessories in other foreign jurisdictions, the
Company and its distributors and agents must obtain the required regulatory
approvals and clearances. These regulations vary from country to country. There
can be no assurance that the Company will obtain regulatory approvals in such
countries in a timely manner, if at all, or that the Company will not be
required to incur significant costs in obtaining or maintaining its foreign
regulatory approvals.
Regulatory approvals may include significant limitations on the indicated uses
for which the product may be marketed. In addition, the Company and its
distributors must comply with various regulations regarding product safety and
quality in order to maintain approvals. The Company's manufacturing processes
are required to comply with the GMP regulations of the FDA. These regulations
include design, testing, production, control, documentation and other
requirements. Enforcement of GMP regulations has increased significantly in the
last several years, and the FDA has publicly stated that compliance will be more
strictly scrutinized. The Company's facilities and manufacturing processes, as
well as those of certain of the Company's third party suppliers, are subject to
periodic inspection by the FDA and other agencies. Failure to comply with these
and other applicable regulatory requirements could result in, among other
things, warning letters, fines, injunctions, civil penalties, recall or seizure
of products, total or partial suspension of production, refusal of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of approvals and criminal prosecution.
Dependence Upon Key Personnel. The Company's ability to operate successfully
depends in significant part upon the continued service of certain key
scientific, technical and managerial personnel, and its continuing ability to
attract and retain additional highly qualified scientific, technical and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company can retain such personnel or that it can
attract or retain other highly qualified personnel in the future. In addition,
many employees of the Company, including a number of its key scientific,
technical and managerial personnel, are subject to the terms of confidentiality
agreements with respect to proprietary information of their former employers.
The failure of these employees to comply with the terms of their agreements
with, or other obligations to, such former employers could result in assertion
of claims against the Company and such employees, which, if successful, could
restrict their role with the Company.
Possible Volatility of Stock Price. The stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the market price of the Company's common stock. In
addition, the market price of the Company's common stock is likely to be highly
volatile due to the Company's relatively recent introduction of its products.
Factors such as fluctuations in the Company's sales and operating results,
announcements of technological innovations, new products introduced by the
Company or its competitors, significant orders placed by new or existing
customers of the Company or its competitors, FDA and international regulatory
actions, developments with respect to patents or
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
proprietary rights, public concern as to the safety of products developed by the
Company or others, changes in health care policy in the United States and
internationally, changes in stock market analyst recommendations regarding the
Company, other medical device companies or the medical device industry generally
and general market conditions may have a significant effect on the market price
of the common stock.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1997 Annual Meeting of Stockholders on April 29, 1997
with three matters submitted to stockholders for vote. At the record date,
March 7, 1997, there were 11,675,972 shares of the Company's Common Stock issued
and outstanding. Stockholders representing 9,814,504 shares, or 84.1% of the
total shares issued and outstanding, were present at said meeting either in
person or by proxy.
The first matter submitted for vote was to elect two directors to serve a
three-year term expiring upon the 2000 Annual Meeting of Stockholders, or until
their successors are duly elected and qualified. The nominees were elected with
the following results:
<TABLE>
<CAPTION>
Votes Percent of Votes Percent of
Cast For Votes Cast Withheld Votes Cast
--------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Ellen M. Feeney 9,777,202 99.62% 37,302 0.38%
Kurt C. Wheeler 9,776,028 99.61% 38,476 0.39%
</TABLE>
The Company's Board of Directors is comprised of those elected at the 1997
Annual Meeting as well as the following directors completing their terms: Alan
J. Levy, Frank M. Fischer, Wende S. Hutton, Mark B. Knudson, Michael J.
Levinthal.
The Second matter submitted for vote was to ratify the appointment of Ernst &
Young LLP as independent auditors of the Company for the fiscal year ending
December 31, 1997. The appointment was ratified with the following results:
<TABLE>
<CAPTION>
Votes Votes
Cast For Cast Against Abstentions
---------- ------------- ------------
<S> <C> <C> <C>
Number 9,780,723 17,022 16,759
Percent of Votes Cast 99.66% 0.17% 0.17%
</TABLE>
The third matter submitted for vote was 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. The proposal was approved with the following results:
<TABLE>
<CAPTION>
Votes Votes Broker
Cast For Cast Against Abstentions Non-Votes
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Number 5,771,147 1,669,758 66,870 2,306,729
Percent of Votes Cast 76.87% 22.24% 0.89%
</TABLE>
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<C> <S>
3.1(1) Restated Certificate of Incorporation, as in effect prior to initial public offering
3.2(1) Restated Certificate of Incorporation, as currently in effect
3.3(1) Bylaws
3.4(3) Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock
4.1(1) Specimen Common Stock Certificate
4.2(2) Preferred Share Rights Agreement, dated as of December 6, 1996 between the Registrant and ChaseMellon
Shareholder Services, L.L.C.
10.1(1) Form of Indemnification Agreement between the Registrant and each of its directors and officers
10.2(5) 1993 Employee and Consultant Stock Plan, as amended, and form of Stock Option Agreement thereunder, as amended
10.4(1) 1995 Employee Stock Purchase Plan and forms of agreements thereunder
10.5(1) Lease dated May 25, 1994 between the Registrant and Martin Selig
10.6(1) Restated Investors Rights Agreement dated March 16, 1995 between the Registrant and certain holders of the
Registrant's securities
10.7(1) Agreement dated August 3, 1995 between the Registrant and Oki Semiconductor
10.8(1)(4) International Distributor Agreement (undated) between the Registrant and Schiller AG
10.9(1) Employee Agreement dated November 8, 1993 between the Registrant and Alan J. Levy
10.10(1)(4) International Distributor Agreement dated January 1996 between the Registrant and Nellcor Puritan-Bennett
Europe B.V.
10.11 Form of Change of Control Severance Agreement by and between the Registrant and certain individuals, together
with a schedule identifying such individuals and setting forth the material details, if any, in which the
document to which each such individual is a party differs from the foregoing document
10.12 Lease dated June 10, 1997 between the Registrant and Martin Selig
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
</TABLE>
---------------------------
(1) Incorporated by reference to the same numbered exhibit previously filed
with the Company's Registration Statement on Form S-1 (No. 33-99908)
(2) Incorporated by reference to Exhibit 1 filed with the Registrant's
registration statement on Form 8-A filed with the Commission on
December 10, 1996
(3) Incorporated by reference to the Registrant's 1996 Form 10-K filed with
the Commission on March 31, 1997
(4) Confidential treatment granted with respect to a portion of this exhibit
(5) Incorporated by reference to Exhibit 10.1 filed with the Registrant's
registration statement on Form S-8 filed with the Commission on
June 13, 1997
(b) Reports on Form 8-K
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEARTSTREAM, INC.
(Registrant)
Date August 7, 1997 /s/ Gary Onn
------------------------ ---------------------------------
Gary Onn
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<PAGE>
HEARTSTREAM, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<C> <S>
3.1(1) Restated Certificate of Incorporation, as in effect prior to initial public offering
3.2(1) Restated Certificate of Incorporation, as currently in effect
3.3(1) Bylaws
3.4(3) Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock
4.1(1) Specimen Common Stock Certificate
4.2(2) Preferred Share Rights Agreement, dated as of December 6, 1996 between the Registrant and ChaseMellon Shareholder
Services, L.L.C.
10.1(1) Form of Indemnification Agreement between the Registrant and each of its directors and officers
10.2(5) 1993 Employee and Consultant Stock Plan, as amended, and form of Stock Option Agreement thereunder, as amended
10.4(1) 1995 Employee Stock Purchase Plan and forms of agreements thereunder
10.5(1) Lease dated May 25, 1994 between the Registrant and Martin Selig
10.6(1) Restated Investors Rights Agreement dated March 16, 1995 between the Registrant and certain holders of the
Registrant's securities
10.7(1) Agreement dated August 3, Registrant and Oki Semiconductor
10.8(1)(4) International Distributor Agreement (undated) between the Registrant and Schiller AG
10.9(1) Employee Agreement dated November 8, 1993 between the Registrant and Alan J. Levy
10.10(1)(4) International Distributor Agreement dated January 1996 between the Registrant and Nellcor Puritan-Bennett
Europe B.V.
10.11 Form of Change of Control Severance Agreement by and between the Registrant and certain individuals, together
with a schedule identifying such individuals and setting forth the material details, if any, in which the
document to which each such individual is a party differs from the foregoing document
10.12 Lease dated June 10, 1997 between the Registrant and Martin Selig
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
</TABLE>
- -------------------
(1) Incorporated by reference to the same numbered exhibit previously filed
the Company's Registration Statement on Form S-1 (No. 33-99908)
(2) Incorporated by reference to Exhibit 1 filed with the Registrant's
registration statement on Form 8-A filed with the Commission on
December 10, 1996
(3) Incorporated by reference to the Registrants 1996 Form 10-K filed with
the Commission on March 31, 1997
(4) Confidential treatment granted with respect to a portion of this exhibit
(5) Incorporated by reference to Exhibit 10.1 filed with the Registrant's
registration statement on Form S-8 filed with the Commission on
June 13, 1997
21
<PAGE>
EXHIBIT 10.11
HEARTSTREAM, INC.
CHANGE OF CONTROL SEVERANCE AGREEMENT
This Change of Control Severance Agreement (the "Agreement") is made and
entered into by and between _____________ (the "Executive") and Heartstream,
Inc. (the "Company"), effective as of the latest date set forth by the
signatures of the parties hereto below.
R E C I T A L S
---------------
A. It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Executive and can cause the Executive
to consider alternative employment opportunities. The Board has determined that
it is in the best interests of the Company and its shareholders to assure that
the Company will have the continued dedication and objectivity of the Executive,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
B. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Executive with an incentive to continue his
employment and to motivate the Executive to maximize the value of the Company
upon a Change of Control for the benefit of its shareholders.
C. The Board believes that it is imperative to provide the Executive with
certain severance benefits upon Executive's termination of employment following
a Change of Control which provides the Executive with enhanced financial
security and provides incentive and encouragement to the Executive to remain
with the Company notwithstanding the possibility of a Change of Control.
D. Certain capitalized terms used in the Agreement are defined in Section
6 below.
The parties hereto agree as follows:
1. Term of Agreement. This Agreement shall terminate upon the date that
-----------------
all obligations of the parties hereto with respect to this Agreement have been
satisfied.
2. At-Will Employment. The Company and the Executive acknowledge that
------------------
the Executive's employment is and shall continue to be at-will, as defined under
applicable law. If the Executive's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control, the
Executive shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or pursuant to other agreements with the Company.
<PAGE>
3. Severance Benefits.
------------------
(a) Termination Following A Change of Control. If the Executive's
-----------------------------------------
employment terminates at any time within twenty-four (24) months following a
Change of Control, then, subject to Section 5, the Executive shall be entitled
to receive the following severance benefits:
(i) Termination without Cause. If the Executive is involuntarily
-------------------------
terminated other for Cause, death or Disability, or if Executive voluntarily
terminates his employment with the Company for Good Reason, then Executive shall
receive the following severance benefits from the Company:
(1) Severance Payments. A cash payment in an amount equal to
------------------
two hundred percent (200%) of the Executive's Base Compensation (the "Severance
Payment"). The Severance Payment shall be paid by the Company to the Executive
(or to the Executive's successors in interest, pursuant to Section 7(b)) in cash
and in full, not later than thirty (30) calendar days following the Termination
Date.
(2) Continued Employee Benefits. One hundred percent (100%)
---------------------------
Company-paid health, dental and life insurance coverage at the same level of
coverage as was provided to such Executive immediately prior to the Change of
Control (the "Company-Paid Coverage"). If such coverage included the
Executive's dependents immediately prior to the Change of Control, such
dependents shall also be covered at Company expense. Company-Paid Coverage
shall continue until the earlier of (i) two years from the date of the Change of
Control, or (ii) the date that the Executive and his dependents become covered
under another employer's group health, dental or life insurance plans that
provide Executive and his dependents with comparable benefits and levels of
coverage. For purposes of Title X of the Consolidated Budget Reconciliation Act
of 1985 ("COBRA"), the date of the "qualifying event" for Executive and his
dependents shall be the date upon which the Company-Paid Coverage terminates.
(b) Voluntary Resignation; Termination For Cause. If the Executive
--------------------------------------------
voluntarily terminates his employment with the Company without Good Reason, or
if the Executive is terminated for Cause, then the Executive shall not be
entitled to receive severance or other benefits except for those (if any) as may
then be established under the Company's then existing severance and benefits
plans and practices or pursuant to other agreements with the Company.
(c) Disability; Death. If the Company terminates the Executive's
-----------------
employment as a result of the Executive's Disability, or such Executive's
employment is terminated due to the death of the Executive, then the Executive
shall not be entitled to receive severance or other benefits except for those
(if any) as may then be established under the Company's then existing severance
and benefits plans and practices or pursuant to other agreements with the
Company.
(d) Termination Apart from Change of Control. In the event the
----------------------------------------
Executive's employment is terminated for any reason, either prior to the
occurrence of a Change of Control or after the twenty-four (24) month period
following a Change of Control, then the Executive shall be entitled to
-2-
<PAGE>
receive severance and any other benefits only as may then be established under
the Company's existing severance and benefits plans and practices or pursuant to
other agreements with the Company.
4. Attorney Fees, Costs and Expenses. The Company shall promptly
---------------------------------
reimburse Executive, on a monthly basis, for the reasonable attorney fees, costs
and expenses incurred by the Executive in connection with any action brought by
Executive to enforce his rights hereunder, regardless of the outcome of the
action.
5. Excise Tax Payments. In the event that the severance and other benefits
-------------------
provided for in this Agreement or otherwise payable to the Executive constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and will be subject to the excise tax
imposed by Section 4999 of the Code, then the Executive shall receive (a) a
payment from the Company sufficient to pay such excise tax, and (b) an
additional payment from the Company sufficient to pay the excise tax and federal
and state income taxes arising from the payments made by the Company to
Executive pursuant to this sentence. Unless the Company and the Executive
otherwise agree in writing, the determination of Executive's excise tax
liability and the amount required to be paid under this Section 5 shall be made
in writing by the Accountants. In the event that the excise tax incurred by
Executive is determined by the Internal Revenue Service to be greater or lesser
than the amount so determined by the Accountants, the Company and Executive
agree to promptly make such additional payment, including interest and any tax
penalties, to the other party as the Accountants reasonably determine is
appropriate to ensure that the net economic effect to Executive under this
Section 5, on an after-tax basis, is as if the Code Section 4999 excise tax did
not apply to Executive. For purposes of making the calculations required by this
Section 5, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on interpretations of the Code for
which there is a "substantial authority" tax reporting position. The Company and
the Executive shall furnish to the Accountants such information and documents as
the Accountants may reasonably request in order to make a determination under
this Section. The Company shall bear all costs the Accountants may reasonably
incur in connection with any calculations contemplated by this Section 5.
6. Definition of Terms. The following terms referred to in this Agreement
-------------------
shall have the following meanings:
(a) Base Compensation. "Base Compensation" means an amount equal to
-----------------
Executive's Company salary at the salary rate in effect for and at the date of
Termination, plus the maximum cash bonus which Executive could have been awarded
under a Company bonus plan in effect for and at the date of Termination.
(b) Cause. "Cause" shall mean (i) any act of personal dishonesty
-----
taken by the Executive in connection with his responsibilities as an employee
and intended to result in substantial personal enrichment of the Executive, (ii)
the conviction of a felony, (iii) a willful act by the Executive which
constitutes gross misconduct and which is injurious to the Company, and (iv)
following delivery to the Executive of a written demand for performance from the
Company which describes the basis for
-3-
<PAGE>
the Company's belief that the Executive has not substantially performed his
duties, continued violations by the Executive of the Executive's obligations to
the Company which are demonstrably willful and deliberate on the Executive's
part.
(c) Change of Control. "Change of Control" means the occurrence of any
-----------------
of the following events:
(i) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities;
(ii) A change in the composition of the Board occurring
within a two-year period, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean directors
who either (A) are directors of the Company as of the date hereof, or (B) are
elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual whose election or nomination is
in connection with an actual or threatened proxy contest relating to the
election of directors to the Company);
(iii) The consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation;
(iv) The consummation of the sale or disposition by the
Company of all or substantially all the Company's assets.
(d) Disability. "Disability" shall mean that the Executive has been
----------
unable to perform his Company duties as the result of his incapacity due to
physical or mental illness, and such inability, at least 26 weeks after its
commencement, is determined to be total and permanent by a physician selected by
the Company or its insurers and acceptable to the Executive or the Executive's
legal representative (such Agreement as to acceptability not to be unreasonably
withheld). Termination resulting from Disability may only be effected after at
least 30 days' written notice by the Company of its intention to terminate the
Executive's employment. In the event that the Executive resumes the performance
of substantially all of his duties hereunder before the termination of his
employment becomes effective, the notice of intent to terminate shall
automatically be deemed to have been revoked.
(e) Good Reason. "Good Reason" shall mean (i) without the Executive's
-----------
express written consent, the significant reduction of the Executive's duties,
authority, status (including status
-4-
<PAGE>
as an executive officer of Company) or responsibilities, relative to the
Executive's duties, authority, status or responsibilities as in effect
immediately prior to such reduction, or the assignment to Executive of such
reduced duties, authority, status or responsibilities; (ii) without the
Executive's express written consent, a substantial reduction, without good
business reasons, of the facilities and perquisites (including office space and
location) available to the Executive immediately prior to such reduction; (iii)
a reduction by the Company in the base compensation of the Executive as in
effect immediately prior to such reduction; (iv) a material reduction by the
Company in the kind or level of employee benefits, including bonuses, to which
the Executive was entitled immediately prior to such reduction with the result
that the Executive's overall benefits package is significantly reduced; (v) the
relocation of the Executive to a facility or a location more than fifty (50)
miles from the Executive's then present location, without the Executive's
express written consent; (vi) any purported termination of the Executive by the
Company which is not effected for Disability or for Cause, or any purported
termination for which the grounds relied upon are not valid; (vii) the failure
of the Company to obtain the assumption of this agreement by any successors
contemplated in Section 7(a) below; or (viii) any act or set of facts or
circumstances which would, under Washington case law or statute constitute a
constructive termination of the Executive.
(f) Termination Date. "Termination Date" shall mean (i) if this
----------------
Agreement is terminated by the Company for Disability, thirty (30) days after
notice of termination is given to the Executive (provided that the Executive
shall not have returned to the performance of the Executive's duties on a full-
time basis during such thirty (30)-day period), (ii) if the Executive's
employment is terminated by the Company for any other reason, the date on which
a notice of termination is given, provided that if within thirty (30) days after
the Company gives the Executive notice of termination, the Executive notifies
the Company that a dispute exists concerning the termination or the benefits due
pursuant to this Agreement, then the Termination Date shall be the date on which
such dispute is finally determined, either by mutual written agreement of the
parties, or a by final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal having
been perfected), or (iii) if the Agreement is terminated by the Executive, the
date on which the Executive delivers the notice of termination to the Company.
7. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether
--------------------
direct or indirect and whether by purchase, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligations under this Agreement and agree expressly to
perform the obligations under this Agreement in the same manner and to the same
extent as the Company would be required to perform such obligations in the
absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this Section
7(a) or which becomes bound by the terms of this Agreement by operation of law.
-5-
<PAGE>
(b) Executive's Successors. The terms of this Agreement and all
----------------------
rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
8. Notice. Notices and all other communications contemplated by this
------
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Executive, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
9. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The Executive shall not be required to
-------------------
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Executive may receive from any
other source.
(b) Waiver. No provision of this Agreement shall be modified, waived
------
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Executive and by an authorized officer of the Company
(other than the Executive). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) Whole Agreement. No agreements, representations or understandings
---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof. This Agreement represents the entire
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior arrangements and understandings regarding same
including the Addendum to Employment Offer Letter previously entered into by and
between the Company and Executive.
(d) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
Washington.
(e) Severability. The invalidity or unenforceability of any provision
------------
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(f) Withholding. All payments made pursuant to this Agreement will be
-----------
subject to withholding of applicable income and employment taxes.
-6-
<PAGE>
(g) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year set forth below.
COMPANY HEARTSTREAM, INC.
By:_______________________________
Title:____________________________
Date:_____________________________
EXECUTIVE __________________________________
Date:_____________________________
-7-
<PAGE>
SCHEDULE I TO EXHIBIT 10.11
There are 12 Change of Control Severance Agreements by and between the
Registrant and certain officers/employees of the Registrant. Listed below are
the names of each individual party to such agreement, the date of each such
agreement, and the material details, if any, in which the document to which each
such individual is a party differs from Exhibit 10.11.
<TABLE>
<CAPTION>
Cash Severance Amount
Name Date (percent of base salary plus bonuses)
- ---------------- ------------- -------------------------------------
<S> <C> <C>
Lori Glastetter June 11, 1997 Identical to Exhibit 10.11
Curt Hafner June 18, 1997 Identical to Exhibit 10.11
Ken Jenkins June 16, 1997 Identical to Exhibit 10.11
Alan Levy June 11, 1997 Identical to Exhibit 10.11
Carl Morgan June 13, 1997 Identical to Exhibit 10.11
Gary Onn June 11, 1997 Identical to Exhibit 10.11
Keith Serzen June 11, 1997 Identical to Exhibit 10.11
James Shay June 11, 1997 Identical to Exhibit 10.11
Don Abbey June 16, 1997 100%
John Harris June 11, 1997 100%
Kent Leyde June 12, 1997 100%
Dan Powers June 12, 1997 100%
</TABLE>
<PAGE>
Exhibit 10.12
FOURTH AND VINE
OFFICE LEASE
THIS LEASE, made the 10th day of June, 1997, by and between MARTIN
SELIG, whose address is 1000 Second Avenue, Suite 1800, Seattle, Washington,
98104-1046, hereinafter referred to as "Lessor" and Heartstream Inc., a Delaware
Corporation, whose address is 2401 Fourth Avenue, Suite 300, Seattle,
Washington, 98121, hereinafter referred to as "Lessee".
1. DESCRIPTION. Lessor in consideration of the agreements contained in
-----------
this lease, does hereby lease to Lessee, upon the terms and conditions
hereinafter set forth, that certain space consisting of the agreed upon square
footage of 12,912 (hereinafter referred to as "Premises") comprised of 3,991
square feet on the 2nd floor and 8,921 square feet on the 4th floor levels of
the Fourth & Vine Building, 2601 Fourth Avenue, City of Seattle, State of
Washington 98121, the legal description of which is:
Lots 5, 6, 7 and 8, Block 33 Bell and Denny's Second Addition to City
of Seattle, heretofore laid off by A. A. Denny and William N. Bell
according to plat recorded in Volume 1 of plats, page 137 in King
County Washington.
2. TERM. The term of this lease for the 4th floor Premises shall
----
commence June 1, 1997 and the term of this lease for the 2nd floor shall
commence October 1, 1997. The lease term for both spaces shall expire July 31,
2001.
In the event the Premises are not ready for occupancy on the date set
forth above, whether occasioned by Lessor or Lessee, the lease term shall be
extended in such a manner as to reflect the delay occasioned by the failure of
the Premises to be ready for occupancy. In no event shall Lessor or Lessee be
liable for any further damages.
In the event Lessee exercises its right under paragraph 46, "Lease
Cancellation," in its lease dated May 25, 1994 of premises in Fourth and
Battery, Lessee's lease of premises in Fourth and Vine under the lease contained
herein will also be considered cancelled.
3. RENT. Lessee covenants and agrees to pay Lessor rent each month in
----
advance on the first day of each calendar month. Rent shall be computed at the
annual base rental rate of $16.00 per square foot. Rent for any fractional
calendar month, at the beginning or end of the term shall be the pro rated
portion of the rent computed on an annual basis.
4. USES. Lessee agrees that Lessee will use and occupy said Premises
----
for general offices and related purposes and for no other purposes.
5. RULES AND REGULATIONS. Lessee and their agents, employees, servants
---------------------
or those claiming under Lessee will at all times observe, perform and abide by
all of the Rules and Regulations printed on this instrument, or which may be
hereafter promulgated by Lessor, all of which it is covenanted and agreed by the
parties hereto shall be and are hereby made a part of this lease.
6. CARE AND SURRENDER OF PREMISES. Lessee shall take good care of the
------------------------------
Premises and shall promptly make all necessary repairs except those required
herein to be made by Lessor. At the expiration or sooner termination of this
<PAGE>
lease, Lessee, without notice, will immediately and peacefully quit and
surrender the Premises in good order, condition and repair (damage by reasonable
wear, the elements, or fire excepted). Lessee shall be responsible for removal
of all personal property from the Premises, (excepting fixtures being that which
is attached to the Premises, and property of the Lessor) including, but not
limited to, the removal of Lessee's communication cabling, telephone equipment
and signage. Lessee shall be responsible for repairing any damage to the
Premises caused by such removal. If Lessee fails to remove and restore the
Premises at lease expiration, then Lessor shall have the right to remove said
property and restore the Premises and Lessee shall be responsible for all costs
associated therewith. Lessee shall also be responsible for those costs incurred
by Lessor for removing debris Lessee may discard in the process of preparing to
vacate the Premises and for a final cleaning of the Premises, including, but not
limited to, the cleaning, or replacement of carpets if damage is not caused by
reasonable wear, and removal and disposal of Lessee's personal property
remaining in the Premises.
7. ALTERATIONS. Lessee shall not make any alterations or improvements
-----------
in, or additions to said Premises without first obtaining the written consent of
Lessor, whose consent shall not be unreasonably withheld. All such alterations,
additions and improvements shall be at the sole cost and expense of Lessee and
shall become the property of Lessor and shall remain in and be surrendered with
the Premises as a part thereof at the termination of this lease, without
disturbance, molestation or injury.
8. RESTRICTIONS. Lessee will not use or permit to be used in said
------------
Premises anything that will increase the rate of insurance on said building or
any part thereof, nor anything that may be dangerous to life or limb; nor in any
manner deface or injure said building or any part thereof; nor overload any
floor or part thereof; nor permit any objectionable noise or odor to escape or
to be emitted from said Premises, or do anything or permit anything to be done
upon said Premises in any way tending to create a nuisance or to disturb any
other tenant or occupant of any part of said building. Lessee, at Lessee's
expense, will comply with all health, fire and police regulations respecting
said Premises. The Premises shall not be used for lodging or sleeping, and no
animals or birds will be allowed in the building.
9. WEIGHT RESTRICTIONS. Safes, furniture or bulky articles may be
-------------------
moved in or out of said Premises only at such hours and in such manner as will
least inconvenience other tenants, which hours and manner shall be at the
discretion of Lessor. No safe or other article of over 2,000 pounds shall be
moved into said Premises without the consent of Lessor, whose consent shall not
be unreasonably withheld, and Lessor shall have the right to locate the position
of any article of weight in said Premises if Lessor so desires.
10. SIGN RESTRICTION. No sign, picture, advertisement or notice shall
----------------
be displayed, inscribed, painted or affixed to any of the glass or woodwork of
the building without the prior approval of Lessor.
11. LOCKS. At the termination of the lease, Lessee shall surrender all
-----
keys to the Premises whether paid for or not.
12. KEY. Lessor, his janitor, engineer or other agents may retain a
---
pass key to said Premises to enable him to examine the Premises from time to
time with reference to any emergency or to the general maintenance of said
Premises.
13. TELEPHONE SERVICE. If Lessee desires telephonic or any other
-----------------
electric connection, Lessor will direct the electricians as to where and how the
wires are to be introduced, and without such directions no boring or cutting for
wires in installation thereof will be permitted.
14. SERVICES. Lessor shall maintain Premises and the public and common
--------
areas of building, such as lobbies, stairs, corridor and restrooms, in
-2-
<PAGE>
reasonably good order and condition except for damage occasioned by act of
Lessee.
Lessor shall furnish Premises with electricity for lighting and
operation of low power usage office machines, heat, normal office air-
conditioning, and elevator services, during the ordinary business hours of the
building. Air-conditioning units and electricity therefore for special air-
conditioning requirements, such as for computer centers, shall be at Lessee's
expense. Lessor shall also provide lighting replacement for Lessor furnished
lighting, toilet room supplies, window washing with reasonable frequency, and
customary janitor service.
Lessor shall not be liable to Lessee for any loss or damage caused by
or resulting from any variation, interruption or any failure of said services
due to any cause whatsoever. No temporary interruption or failure of such
services incident to the making of repairs, alterations, or improvements, or due
to accident or strike or conditions or events not under Lessor's control shall
be deemed as an eviction of Lessee or relieve Lessee from any of Lessee's
obligations hereunder.
In the event of any lack of attention on the part of Lessor and any
dissatisfaction with the service of the building, or any unreasonable annoyance
of any kind, Lessee is requested to make complaints at Lessor's building office
and not to Lessor's employees or agents seen within the building. Lessee is
further requested to remember that Lessor is as anxious as Lessee that a high
grade service be maintained, and that the Premises be kept in a state to enable
Lessee to transact business with the greatest possible ease and comfort. The
rules and regulations are not made to unnecessarily restrict Lessee, but to
enable Lessor to operate the building to the best advantage of both parties
hereto. To this end Lessor shall have the right to waive from time to time such
part or parts of these rules and regulations as in his judgment may not be
necessary for the proper maintenance or operation of the building or consistent
with good service, and may from time to time make such further reasonable rules
and regulations as in his judgment may be needed for the safety, care and
cleanliness of the Premises and the building and for the preservation of order
therein.
15. SOLICITORS. Lessor will make an effort to keep solicitors out of
----------
the building, and Lessee will not oppose Lessor in his attempt to accomplish
this end.
16. FLOOR PLAN. The floor plan and specifications for Lessee's
----------
occupancy shall be attached hereto and marked Exhibit "A" which shall be
approved by both Lessor and Lessee, both of whose approval shall not be
unreasonably withheld.
17. ASSIGNMENT. Lessee will not assign this lease, or any interest
----------
hereunder, and this lease, or any interest hereunder, shall not be assigned by
operation of law. Lessee will not sublet said Premises or any part thereof and
will not permit the use of said Premises by others other than Lessee and the
agents of Lessee without first obtaining the written consent of Lessor, whose
consent shall not be unreasonably withheld. In the event such written consent
shall be given, no other or subsequent assignment or subletting shall be made
without the previous written consent of Lessor, whose consent shall not be
unreasonably withheld. In the event Lessee desires to assign or sublet said
Premises or any part thereof, Lessor shall have the first right, but not the
obligation to re-lease the Premises.
18. OPERATING SERVICES AND REAL ESTATE TAXES. The annual base rental
----------------------------------------
rate per rentable square foot in Paragraph 3 includes Lessee's proportionate
share of Operating Services and Real Estate Taxes for the first twelve months of
the lease term, "Base Year Costs". Only actual increases from these Base Year
Costs, if any, will be passed on to Lessee on a proportionate basis.
-3-
<PAGE>
DEFINITIONS
Base Year
- ---------
For computing the Base Year Costs, the base year shall be the calendar year
stated herein or if a specific calendar year is not stated herein then the base
year shall be the calendar year in which the lease term commences. The base year
shall be the calendar year 1997.
Comparison Year
- ---------------
The Comparison Year(s) shall be the calendar year(s) subsequent to the base
year.
Operating Services
- ------------------
"Operating Services" include, but are not limited to, the charges incurred by
Lessor for: building operation salaries, benefits, management fee of five
percent (5%) of gross income for the building, insurance, electricity,
janitorial, supplies, telephone, HVAC, repair and maintenance, window washing,
water and sewer, security, landscaping, disposal, elevator, etc. Operating
Services shall also include the amortization cost of capital investment items
and of the installation thereof, which are primarily for the purpose of safety,
saving energy or reducing operating costs, or which may be required by
governmental authority, (all such costs shall be amortized over the reasonable
life of the capital investment item, with the reasonable life and amortization
schedule being determined in accordance with generally accepted accounting
principles). Notwithstanding anything to the contrary contained herein,
Operating Services shall not include any of the following:
(i) real estate taxes
(ii) legal fees, auditing fees, brokerage commissions, advertising
costs, or other related expenses incurred by Lessor in an effort to generate
rental income;
(iii) repairs, alterations, additions, improvements, or replacements
made to rectify or correct any defect in the original design, materials or
workmanship of the building or common areas (but not including repairs,
alterations, additions, improvements or replacements made as a result of
ordinary wear and tear);
(iv) damage and repairs attributable to fire or other casualty;
(v) damage and repairs necessitated by the negligence or willful
misconduct of Lessor, Lessor's employees, contractors or agents;
(vi) executive salaries to the extent that such services are not in
connection with the management, operation, repair or maintenance of the
building;
(vii) Lessor's general overhead expenses not related to the building;
(viii) legal fees, accountant's fees and other expenses incurred in
connection with disputes with tenants or other occupants of the building or
associated with the enforcement of the terms of any leases with tenants or the
defense of Lessor's title to or interest in the building or any part thereof
unless the outcome is to the financial benefit of all tenants;
(ix) costs (including permit, license and inspection fees) incurred
in renovating or otherwise improving, decorating, painting or altering (1)
vacant space (excluding common areas) in the building or (2) space for tenants
or other occupants in the building and costs incurred in supplying any item or
service to less than all of the tenants in the building;
(x) costs incurred due to a violation by Lessor or any other tenant
of the building of the terms and conditions of a lease;
-4-
<PAGE>
(xi) cost of any specific service provided to Lessee or other
occupants of the building for which Lessor is reimbursed (but not including
Operating Services and Real Estate Tax increases above Base Year Costs to the
extent reimbursed Lessor) or any other expense for which Lessor is or will be
reimbursed by another source (i.e., expenses covered by insurance or
warranties);
(xii) costs and expenses which would be capitalized under generally
accepted accounting principles, with the exception of the capital investment
items specified hereinabove;
(xiii) building management fees in excess of the management fees
specified hereinabove;
(xiv) cost incurred with owning and/or operating the parking lots
serving the building by independent parking operator(s);
(xv) fees paid to Lessor or any affiliate of Lessor for goods or
services in excess of the fees that would typically be charged by unrelated,
independent persons or entities for similar goods and services;
(xvi) rent called for under any ground lease or master lease;
(xvii) principal and/or interest payments called for under any debt
secured by a mortgage or deed of trust on the building; and
Operating Services shall be adjusted for the Base Year and all Comparison
Year(s) to reflect the greater of actual occupancy or 95% occupancy.
Real Estate Taxes
- -----------------
Real Estate Taxes shall be the taxes paid by Lessor in the base year and each
respective Comparison Year. Real Estate Taxes shall be a separate category and
shall be treated as such.
Proportionate Basis
- -------------------
Lessee's share of Base Year and Comparison Year(s) Costs shall be a fraction,
the numerator of which shall be the number of rentable square feet contained in
the leased Premises (see Paragraph 1) and the denominator of which shall be the
number of rentable square feet in the building in which the leased Premises are
located (117,299/RSF).
Computation of Adjustments to Base Year Costs
- ---------------------------------------------
Any adjustment to Base Year Costs will commence to occur in Month 13 of the
lease term with subsequent adjustments commencing every twelve months of the
lease term or in Months 25, 37, 49, etc. as appropriate under the lease term.
Lessee shall be responsible for any increase between Lessee's proportionate
share of Base Year Costs and Lessee's proportionate share of each respective
Comparison Year(s) Costs. The increase shall be the increase to each expense
individually. These costs shall be initially calculated based on estimated
(projected) costs with reconciliation to actual Costs when annual audited
numbers are completed. For the purpose of calculating projected increases to
Base Year Costs, Lessor shall review historical data to predict if any
estimated increases would be anticipated in a Comparison Year(s). If they are,
then commencing in Month 13 and/or every twelve month period thereafter, Lessor
will assess a monthly charge to be paid together with monthly base rent. Once
actual cost data for Comparison Year(s) Real Estate Taxes and Operating Services
for the entire building is formulated in accordance with generally accepted
accounting principles and adjusted to the greater of actual occupancy or 95%
occupancy, then Lessee's estimated pass-through costs shall be corrected with
Lessee or Lessor, as appropriate, reimbursing the other for the difference
between the estimated and actual costs, at that time in a lump sum payment.
-5-
<PAGE>
Upon termination of this lease, the amount of any corrected amount between
estimated and actual costs with respect to the final comparison year shall
survive the termination of the lease and shall be paid to Lessee or Lessor as
appropriate within thirty (30) days after final reconciliation.
Computation of or adjustment to Operating Services and/or Real Estate Taxes
pursuant to this paragraph or to rent pursuant to Paragraph 3 shall be computed
based on a three hundred sixty-five (365) day year.
For an example, see Exhibit B attached hereto.
19. ADDITIONAL TAXES OR ASSESSMENTS. Should there presently be in
-------------------------------
effect or should there be enacted during the term of this lease, any law,
statute or ordinance levying any assessment or any tax upon rents or the income
from real estate or rental property (other than federal or state income taxes),
Lessee shall reimburse Lessor for Lessee's proportionate share of said expenses
at the same time as rental payments.
20. LATE PAYMENTS. Any payment, required to be made pursuant to this
-------------
Lease, not made on the date the same is due shall bear interest at a rate equal
to three percent (3%) above the prime rate of interest charged from time to time
by Seafirst National Bank, or its successor.
In addition to any interest charged herein, a late charge of five
percent (5%) of the payment amount shall be incurred for payments received more
than five (5) days late.
21. RISK. All personal property of any kind or description whatsoever
----
in the demised Premises shall be at Lessee's sole risk. Lessor shall not be
liable for any damage done to or loss of such personal property or damage or
loss suffered by the business or occupation of the Lessee arising from any acts
or neglect of co-tenants or other occupants of the building, or of Lessor or the
employees of Lessor, or of any other persons, or from bursting, overflowing or
leaking of water, sewer or steam pipes, or from the heating or plumbing or
sprinkling fixtures, or from electric wires, or from gas, or odors, or caused in
any other manner whatsoever except in the case of negligence on the part of
Lessor. Lessee shall keep in force throughout the term of this lease such
casualty, general liability and business interruption insurance as a prudent
tenant occupying and using the Premises would keep in force.
22. INDEMNIFICATION. Lessee will defend, indemnify and hold harmless
---------------
Lessor from any claim, liability or suit including attorney's fees on behalf of
any person, persons, corporations and/or firm for any injuries or damages
occurring in or about the said Premises or on or about the sidewalk, stairs, or
thoroughfares adjacent thereto where said damages or injury was caused or
partially caused by the ordinary or gross negligence or intentional act of
Lessee and/or by Lessee's agents, employees, servants, customers or clients.
23. WAIVER OF SUBROGATION. Lessee and Lessor do hereby release and
---------------------
relieve the other, and waive their entire claim of recovery for loss, damage,
injury, and all liability of every kind and nature which may arise out of, or be
incident to, fire and extended coverage perils, in, on, or about the Premises
herein described, whether due to negligence of either of said parties, their
agents, or employees or otherwise.
24. SUBORDINATION. This lease and all interest and estate of Lessee
-------------
hereunder is subject to and is hereby subordinated to all present and future
mortgages and deeds of trust affecting the Premises or the property of which
said Premises are a part. Lessee agrees to execute at no expense to the Lessor,
any instrument which may be deemed necessary or desirable by the Lessor to
further effect the subordination of this lease to any such mortgage or deed of
trust. In the event of a sale or assignment of Lessor's interest in the
Premises, or in the event of any
- 6 -
<PAGE>
proceedings brought for the foreclosure of, or in the event of exercise of the
power of sale under any mortgage or deed of trust made by Lessor covering the
Premises, Lessee shall attorn to the purchaser and recognize such purchaser as
Lessor. Lessee agrees to execute, at no expense to Lessor, any estoppel
certificate deemed necessary or desirable by Lessor to further effect the
provisions of this paragraph
25. CASUALTY. In the event the leased Premises or the said building is
--------
destroyed or injured by fire, earthquake or other casualty to the extent that
they are untenantable in whole or in part, then Lessor may at Lessor's option,
proceed with reasonable diligence to rebuild and restore the said Premises or
such part thereof as may be injured as aforesaid, provided that within sixty
(60) days after such destruction or injury Lessor will notify Lessee of Lessor's
intention to do so, and during the period of such rebuilding and restoration the
rent shall be abated on the portion of the Premises that is unfit for occupancy.
If necessary, Lessor will provide access to any needed alternative space for
Lessee at the fair market rate not to exceed Lessee's rental rate hereunder.
26. INSOLVENCY. If Lessee becomes insolvent, or makes an assignment for
----------
the benefit of creditors, or a receiver is appointed for the business or
property of Lessee, or a petition is filed in a court of competent jurisdiction
to have Lessee adjudged bankrupt, then Lessor may at Lessor's option terminate
this lease. Said termination shall reserve unto Lessor all of the rights and
remedies available under Paragraph 28 ("Default") hereof, and Lessor may accept
rents from such assignee or receiver without waiving or forfeiting said right of
termination. As an alternative to exercising his right to terminate this lease,
Lessor may require Lessee to provide adequate assurances, including the posting
of a cash bond, of Lessee's ability to perform its obligations under this lease.
27. DEFAULT. If this lease is terminated in accordance with any of the
-------
terms herein (with the exception of Paragraph 27), or if Lessee vacates or
abandons the Premises or if Lessee shall fail at any time to keep or perform any
of the covenants or conditions of this lease, i.e. specifically the covenant for
the payment of monthly rent, then, and in any of such events Lessor may with or
without notice or demand, at Lessor's option, and without being deemed guilty of
trespass and/or without prejudicing any remedy or remedies which might otherwise
be used by Lessor for arrearages or preceding breach of covenant or condition of
this lease, enter into and repossess said Premises and expel the Lessee and all
those claiming under Lessee. In such event Lessor may eject and remove from said
Premises all goods and effects (forcibly if necessary). This lease if not
otherwise terminated may immediately be declared by Lessor as terminated. The
termination of this lease pursuant to this Article shall not relieve Lessee of
its obligations to make the payments required herein. In the event this lease is
terminated pursuant to this Article, or if Lessor enters the Premises without
terminating this lease and Lessor relets all or a portion of the Premises,
Lessee shall be liable to Lessor for all the costs of reletting, including
necessary renovation and alteration of the leased Premises. Lessee shall remain
liable for all unpaid rental which has been earned plus late payment charges
pursuant to Paragraph 21 and for the remainder of the term of this lease for any
deficiency between the net amounts received following reletting and the gross
amounts due from Lessee, or if Lessor elects, Lessee shall be immediately
liable for all rent and additional rent (Paragraph 19) that would be owing to
the end of the term, less any rental loss Lessee proves could be reasonably
avoided, which amount shall be discounted by the discount rate of the Federal
Reserve Bank, situated nearest to the Premises, plus one percent (1%).
28. BINDING EFFECT. The parties hereto further agree with each other
--------------
that each of the provisions of this lease shall extend to and shall, as the case
may require, bind and inure to the benefit, not only of Lessor and Lessee, but
also of their respective heirs, legal representatives, successors and assigns,
subject, however, to the provisions of Paragraph 18 of this lease.
It is also understood and agreed that the terms "Lessor" and "Lessee"
and verbs and pronouns in the singular number are uniformly used throughout this
lease regardless of gender, number or fact of incorporation of the parties
hereto. The
-7-
<PAGE>
typewritten riders or supplemental provisions, if any, attached or added hereto
are made a part of this lease by reference. It is further mutually agreed that
no waiver by Lessor of a breach by Lessee of any covenant or condition of this
lease shall be construed to be a waiver of any subsequent breach of the same or
any other covenant or condition.
29. HOLDING OVER. If Lessee holds possession of the Premises after
------------
term of this lease, Lessee shall be deemed to be a month-to-month tenant upon
the same terms and conditions as contained herein, except rent which shall be
revised to reflect the then current market rate. During month-to-month tenancy,
Lessee acknowledges Lessor will be attempting to relet the Premises. Lessee
agrees to cooperate with Lessor and Lessee further acknowledges Lessor's
statutory right to terminate the lease with proper notice.
30. ATTORNEY'S FEES. If any legal action is commenced to enforce any
---------------
provision of this lease, the prevailing party shall be entitled to an award of
reasonable attorney's fees and disbursements. The phrase "prevailing Party"
shall include a party who receives substantially the relief desired, whether by
dismissal, summary judgment, judgment or otherwise.
31. NO REPRESENTATIONS. The Lessor has made no representations or
------------------
promises except as contained herein or in some future writings signed by Lessor.
32. QUIET ENJOYMENT. So long as Lessee pays the rent and performs the
---------------
covenants contained in this lease, Lessee shall hold and enjoy the Premises
peaceably and quietly, subject to the provisions of this lease.
33. RECORDATION. Lessee shall not record this lease without the prior
-----------
written consent of Lessor. However, at the request of Lessor, both parties shall
execute a memorandum or "short form" of this lease for the purpose of
recordation in a form customarily used for such purpose. Said memorandum or
short form of this lease shall describe the parties, the Premises and the
lease term, and shall incorporate this lease by reference.
34. MUTUAL PREPARATION OF LEASE. It is acknowledged and agreed that
---------------------------
this lease was prepared mutually by both parties. In the event of ambiguity, it
is agreed by both parties that it shall not be construed against either party as
the drafter of this lease.
35. GOVERNING LAW. This lease shall be governed by, construed and
-------------
enforced in accordance with the laws of the State of Washington.
36. FINISH WORK. The Premises are leased in their existing, as-is
-----------
condition except that Lessor agrees, at Lessor's sole cost, to repaint the
Premises as needed and to shampoo, patch, and restretch the carpets, and repair
peeling window with laminate as needed. All other improvements or modifications
to the Premises shall be at Lessee's expense and with Lessor's prior approval as
to work and contractor.
Lessor shall be responsible for the costs of complying with ADA, including lever
handled hardware for office doors in the premises
37. EARLY ACCESS. Lessee will be allowed access to the 4th floor space
------------
upon full execution of this Lease Agreement and to the 2nd floor space
September 1, 1997 for the purpose of performing tenant improvement work therein.
38. EARLY TERMINATION. At any time during the lease term for these
-----------------
Fourth and Vine Premises, should space become available for lease in the Fourth
and Battery Building, Heartstream shall have the option to vacate all or a
reasonably leaseable portion of the Premises herein, and relocate to the Fourth
and
-8-
<PAGE>
Battery Building. Upon Lessee's occupancy of the Fourth and Battery space,
Lessee's lease for that portion of the Fourth and Vine Premises shall be
canceled.
39. PARKING. Lessee will be provided parking for fourteen (14) stalls
-------
outside the building. Parking shall be at market rate and paid for by Lessee.
40. RIGHT OF FIRST REFUSAL. Lessee shall have the right to lease
----------------------
additional space on the 1st floor of the Fourth and Vine Building consisting of
3,666 square feet upon the expiration of the existing lease for those premises,
August 31, 1997, under the same terms and conditions as contained herein.
41. HAZARDOUS WASTE. Except as disclosed in the following reports, true
---------------
and correct copies of which have been delivered by Lessor to Lessee, to the best
knowledge of Lessor, (i) no Hazardous Material is present on the Premises or
Building or the soil, surface water or groundwater thereof, (ii) no underground
storage tanks or asbestos containing building materials are present on the
Premises or Building, and (iii) no action, proceeding, or claim is pending or
threatened concerning the Premises or Building concerning any Hazardous Material
or pursuant to any Environmental Law. Lessor has delivered to Lessee all reports
and environmental assessments of the Premises and Building conducted at the
request of or otherwise available to Lessor and Lessor has complied with all
environmental disclosure obligations imposed upon Lessor by applicable law with
respect to this transaction.
Lessor shall indemnify, defend with counsel reasonably acceptable to Lessee,
protect and hold harmless Lessee, its employees, agents, contractors,
stockholders, officers, directors, successors, subtenants, personal
representatives, and assigns from and against all claims, actions, suits,
proceedings, judgments, losses, costs, personal injuries, damages, liabilities,
deficiencies, fines, penalties, damages, attorneys' fees, consultants' fees,
investigations, detoxifications, remediations, removals, and expenses of every
type of nature ("Claims"), directly or indirectly arising out of or in
connection with any Hazardous Material present at any time on or about the
Premises or Building, or the soil, air, improvements, groundwater or surface
water thereof, or the violation of any Environmental Law relating to any such
Hazardous Material, the Premises or Building or the use of the Premises or
Building by any person other than Lessee, its agents or employees, except to the
extent that any of the foregoing actually results from the release, disposal,
discharge, or emissions of Hazardous Material on or about the Premises or
Building during the term of this lease by Lessee or its agents or employees in
violation of applicable Environmental Law.
As used herein "Environmental Law" shall mean all local, state, or federal laws,
statutes, ordinances, rules, regulations, judgments, injunctions, stipulations,
decrees, orders, permits, approvals, treaties, or protocols now or hereafter
enacted, issued or promulgated by any governmental authority which release to
any Hazardous Material or the use, handling, transportation, production,
disposal, discharge, release, emission, sale, or storage of, or the exposure of
any person to a Hazardous Material.
IN WITNESS WHEREOF, the parties hereof have executed this lease the day
and year first above written.
HEARTSTREAM, INC.
/s/ Martin Selig
- -----------------------
Martin Selig By: /s/ Gary Onn
------------------------------
Its: Vice President, Finance
------------------------------
"Lessor" "Lessee"
Attachment
-9-
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 10th day of June, 1997, before me, a Notary Public in and for the State
of Washington, personally appeared MARTIN SELIG, the individual who executed the
within and foregoing instrument and acknowledged said instrument to be his free
and voluntary act and deed for the uses and purposes therein mentioned.
/s/ JILL M. AREND
------------------------------------------------
Notary Public in and for the State of Washington
[NOTARY PUBLIC SEAL] Residing at: Fall City
My commission expires: 6-1-98
(Individual)
STATE OF )
) ss.
COUNTY OF )
On this day of , 19 , before me, a Notary Public in and for the State
---- ---- --
of , personally appeared , the individual(s) who executed
---------- ------------
the within and foregoing instrument, and acknowledged said instrument to be
his/her/their free and voluntary act and deed for the uses and purposes therein
mentioned.
------------------------------------------------
Notary Public in and for the State of
----------
Residing at:
-----------------------------------
My commission expires:
-------------------------
(Partnership)
STATE OF )
) ss.
COUNTY OF )
On this day of , 19 , before me, a Notary Public in and for the State
---- ---- --
of , personally appeared , to me known to be partner(s)
---------- ------------
of , the partnership that executed the foregoing
---------------------------
instrument, and acknowledged said instrument to be the free and voluntary act
and deed of said partnership, for the uses and purposes therein mentioned, and
on oath stated that he/she/they is/are authorized to execute said instrument on
behalf of the partnership.
------------------------------------------------
Notary Public in and for the State of
----------
Residing at:
-----------------------------------
My commission expires:
-------------------------
(Corporation)
STATE OF )
) ss.
COUNTY OF )
On this 10th day of June, 1997, before me, a Notary Public in and for the State
of Washington, personally appeared Gary Onn, to me known to be the Vice
President, Finance, respectively, of Heartstream, Inc., the corporation that
executed the within and foregoing instrument, and acknowledged said instrument
to be the free and voluntary act and deed of said corporation, for the uses and
purposes therein mentioned, and on oath stated that he/she/they is/are
authorized to execute said instrument and that the seal affixed is the corporate
seal of said corporation.
/s/ CHARLENE M. ANDERSON
------------------------------------------------
Notary Public in and for the State of Washington
Residing at: Bellevue, WA
My commission expires: 12-7-98
<PAGE>
EXHIBIT B
---------
EXAMPLE
-------
The intent is to include Lessee's proportionate share of all Base Year Costs in
Lessee's Annual Base Rental Rate. It is further the intent to limit adjustments
to Lessee's Base Year Costs to actual increases in cost. The Operating Services
are adjusted to the greater of actual occupancy or 95% occupancy for the base
year to fairly establish the Base Year Costs at an equitable standard for
comparison purposes. Comparison Years are similarly adjusted for purposes of
fairness and equality. To prevent any confusion regarding computation of Base
Year Costs, Comparison Year Costs and the adjustment of those costs to 95%
occupancy, if necessary, we have set forth the following example. It is
important to note that if adjustment to 95% occupancy is necessary, not all
Operating Services are adjusted.
Expenses requiring adjustment are those which are 100% dependent upon the change
in footage and adjust with the change in occupied footage. This category
includes electricity, water/sewer, superintendent, disposal, management,
janitorial supplies, window washing, repair and maintenance, HVAC maintenance,
and janitorial labor.
Other expenses do not require adjustment nor are they dependent upon occupied
footage change. These categories are the same whether the building is empty or
full. They are, insurance, security, elevator, landscaping and telephone.
Real Estate Taxes are dependent upon independent assessment. Real Estate Taxes
are not adjusted to 95%, but are established for each respective year based on
the actual tax paid whether for the respective Base Year or each subsequent
Comparison Year(s).
Please note the expenses noted below which are and are not adjusted and the
adjustment to each expense to achieve 95% occupancy, if necessary. The method of
adjusting expenses depicted in the example will be followed when adjusting
actual Operating Service Expenses for both the Base Year and Comparison Year(s).
HYPOTHETICAL FACTS
<TABLE>
<S> <C>
Building Occupancy: 80%
Actual Base Year Costs: $375,000
Grossed Base Year Costs to 95%: $440,000
Actual Comparison Year Costs: (see below) $405,440
Grossed Comparison Year Costs to 95%: (see below) $463,080
Tenant Premises: 10,000 RSF
Building RSF: 125,000 RSF
Tenant Proportionate Basis: 10,000 + 125,000 = 8%
</TABLE>
EXAMPLE
-------
<TABLE>
<CAPTION>
Actual Grossed
Description Expenses Expenses
- ----------- -------- --------
<S> <C> <C>
Percent Occupied 80.00% 95.00% Methodology
-----------
Real Estate Taxes $54,854 $54,854 Actual Cost
- -----------------
Operating Expenses
- ------------------
Insurance $26,595 $26,595 Actual Cost
Electricity $69,358 $82,363 Adjusts with occupancy
Water & Sewer $4,945 $5,872 Adjusts with occupancy
Security $5,000 $5,000 Actual Cost
Elevator $7,526 $7,526 Actual Cost
Superintendent $82,869 $98,407 Adjusts with occupancy
Landscaping $2,912 $2,912 Actual Cost
Disposal $15,502 $18,409 Adjusts with occupancy
Management $41,680 $49,495 Adjusts with occupancy
Supplies $4,339 $5,153 Adjusts with occupancy
Window Washing $1,527 $1,813 Adjusts with occupancy
Repairs & Maintenance $24,333 $28,895 Adjusts with occupancy
Telephone $1,144 $1,144 Actual Cost
HVAC Maintenance $6,208 $7,372 Adjusts with occupancy
Janitorial $56,648 $67,270 Adjusts with occupancy
-------- --------
TOTALS: $405,440 $463,080
</TABLE>
<PAGE>
EXHIBIT 11.1
HEARTSTREAM, INC.
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss........................................... $(4,142,778) $(2,779,629) $(8,268,147) $(4,870,521)
----------- ----------- ----------- -----------
Shares used in calculating historical net loss per
share:
Weighted average shares outstanding............... 11,743,757 11,427,645 11,709,184 9,697,880
Net effect of preferred stock issued, after giving
effect to the conversion into common stock, at
less than the offering price during the 12 months
prior to the Company's filing of its initial
public offering, calculated using the treasury
stock method at an offering price of $13 per
share, and treated as outstanding for all periods
prior to the closing date of the Company's
initial public offering.......................... -- -- -- 203,610
Net effect of stock options granted or exercised
at less than the offering price during the 12
months prior to the Company's filing of its
initial public offering, calculated using the
treasury stock method at an offering price of
$13 per share, and treated as outstanding for
all periods prior to the closing date of the
Company's initial public offering................ -- -- -- 75,094
---------- ----------- ----------- -----------
Shares used in computation of historical net loss
per share......................................... 11,743,757 11,427,645 11,709,184 9,976,584
---------- ----------- ----------- -----------
Historical net loss per share...................... $ (0.35) $ (0.24) $ (0.71) $ (0.49)
========== =========== =========== ===========
Net loss........................................... $(4,870,521)
-----------
Shares used in calculating pro forma net loss per
share:
Weighted average shares outstanding............... 9,697,880
Weighted average common shares giving effect to
the conversion of preferred stock into common
for all periods subsequent to issuance........... 1,020,386
Net effect of stock options granted or exercised at
less than the offering price during the 12 months
prior to the Company's filing of its initial
public offering, calculated using the treasury
stock method at an offering price of $13 per
share, and treated as outstanding for all periods
prior to the closing date of the Company's initial
public offering................................... 75,094
-----------
Shares used in computation of pro forma net loss
per share......................................... 10,793,360
-----------
Pro forma net loss per share....................... $ (0.45)
===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT JUNE 30, 1997 (UNAUDITED), THE STATEMENT OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 1997 (UNAUDITED), AND THE STATEMENT OF CASH FLOWS FOR THE
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 20,684,595
<SECURITIES> 17,921,512
<RECEIVABLES> 1,236,094
<ALLOWANCES> 96,131
<INVENTORY> 4,008,538
<CURRENT-ASSETS> 44,749,107
<PP&E> 4,391,095
<DEPRECIATION> 1,904,451
<TOTAL-ASSETS> 47,235,751
<CURRENT-LIABILITIES> 2,730,433
<BONDS> 77,446
0
0
<COMMON> 11,758
<OTHER-SE> 44,416,114
<TOTAL-LIABILITY-AND-EQUITY> 47,235,751
<SALES> 3,661,878
<TOTAL-REVENUES> 3,661,878
<CGS> 2,504,044
<TOTAL-COSTS> 2,504,044
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,557
<INCOME-PRETAX> (8,268,147)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,268,147)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,268,147)
<EPS-PRIMARY> (0.71)
<EPS-DILUTED> 0
</TABLE>
