<PAGE>
As filed with the Securities and Exchange Commission on September 15, 1999
Registration No. 333-78059
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
DATA CRITICAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
--------------
<TABLE>
<S> <C> <C>
Delaware 3663 91-1901482
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
19820 North Creek Parkway, Suite 100, Bothell, Washington 98011
(425) 482-7000
(Address Including Zip Code, and Telephone Number Including Area Code, of
Registrant's Principal Executive Offices)
--------------
Jeffrey S. Brown
President and Chief Executive Officer
Data Critical Corporation
19820 North Creek Parkway, Suite 100, Bothell, Washington 98011
(425) 482-7000
(Name, Address Including Zip Code, and Telephone Number Including Area Code,
of Agent for Service)
--------------
COPIES TO:
<TABLE>
<S> <C>
Craig E. Sherman, Esq. J. Robert Suffoletta, Esq.
Eric L. Dobmeier, Esq. Patrick J. Schultheis, Esq.
Joanna S. Lin Black, Esq. Richard Jay Silverstein, Esq.
VENTURE LAW GROUP Craig N. Lang, Esq.
A Professional Corporation WILSON SONSINI GOODRICH & ROSATI
4750 Carillon Point, Kirkland, Washington 98033 Professional Corporation
(425) 739-8700 650 Page Mill Road, Palo Alto, California 94304
(650) 493-9300
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
--------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]__________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]__________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]__________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Proposed Proposed
Title of each class of Amount maximum maximum Amount of
securities to be to be offering price aggregate registration
registered registered(1) per unit(2) offering price(2) fee(3)
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<S> <C> <C> <C> <C>
Common Stock, par value
$0.001................ 4,025,000 $13.00 $52,325,000.00 $14,546.35
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</TABLE>
(1) Includes 525,000 shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act.
(3) Includes $12,468.30 previously paid by the registrant in connection with
the filing of the registration statement on May 7, 1999.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+We will amend and complete the information in this prospectus. Although we +
+are permitted by US federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION -- September 15, 1999
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PROSPECTUS
, 1999
[DATA CRITICAL LOGO APPEARS HERE]
3,500,000 Shares of Common Stock
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<TABLE>
<S> <C>
Data Critical The Offering:
Corporation:
. We provide wireless . We are offering 3,500,000 shares of our common
access to patient stock.
vital signs and
other medical data . The underwriters have a 30-day option to purchase
from remote a maximum of 525,000 additional shares from us to
locations. cover over-allotments.
. Data Critical . This is our initial public offering, and no
Corporation public market currently exists for our shares.
19820 North Creek The initial public offering price is estimated to
Parkway be between $11.00 and $13.00.
Suite 100
Bothell, Washington . Closing: , 1999.
98011
(425) 482-7000
Trading Symbol & Market:
. DCCA/Nasdaq
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Per Share Total
- ------------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriter fees:
Proceeds to Data Critical Corporation:
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</TABLE>
This investment involves risk. See "Risk Factors" beginning on page 7.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete, nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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Donaldson, Lufkin & Jenrette
U.S. Bancorp Piper Jaffray
Warburg Dillon Read LLC
DLJdirect Inc.
<PAGE>
[Inside front cover of prospectus]
Heading titled "StatView System."
[Photographs of a StatView receiver displaying an electrocardiogram waveform and
a healthcare provider using a StatView receiver]
Beneath the photograph of the StatView receiver is a sentence reading: "The
StatView system notifies caregivers in near real-time of the latest waveforms
and vital signs from patients."
Heading titled "MobileView System."
[Photographs of a MobileView receiving unit displaying waveforms and a
physician using a MobileView receiver]
Immediately above the photograph of the MobileView receiving unit is a sentence
reading: "The MobileView system lets physicians in remote locations view the
latest waveforms, vital signs, and other life-critical information from
patients."
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where such offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock. In this prospectus, "Data
Critical," "we," "us," and "our" refer to Data Critical Corporation, unless the
context otherwise requires.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 30
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Management................................................................. 45
Certain Transactions....................................................... 55
Principal Stockholders..................................................... 56
Description of Capital Stock............................................... 58
Shares Eligible for Future Sale............................................ 61
Underwriting............................................................... 63
Legal Matters.............................................................. 65
Experts.................................................................... 65
Additional Information..................................................... 65
Index to Financial Statements.............................................. F-1
</TABLE>
----------------
MobileView(TM), StatView(TM), AlarmView(TM), Internet ECG(TM), Wireless
Telemedicine(TM), WT(TM) and the Data Critical Corporation name and corporate
logo are all trademarks of Data Critical Corporation. We also have other
trademarks that we use in our business. We license the name PalmVue(TM) from
Hewlett-Packard Company. All other brand names or trademarks appearing in this
prospectus are the property of their respective holders.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read this entire prospectus carefully, especially "Risk Factors."
Unless otherwise indicated, all information contained in this prospectus
assumes:
. no exercise of the underwriters' over-allotment option
. the conversion of all outstanding shares of preferred stock into common
stock
. a 1-for-4 reverse split of our common stock
Data Critical Corporation
We design, manufacture, market, install and support communication and
information systems, using wireless technology and proprietary software to
allow access to health information, including patient vital signs and other
diagnostic data. Our systems provide for information retrieval from remote
sources, both inside and outside the hospital environment, and are integrated
and coordinated through either a wireless network utilizing our interactive
device, a personal computer or the internet. Our focus within health care is on
the hospital, physician and at-home consumer markets.
We have entered into strategic alliances with the following leading
manufacturers of patient-monitoring medical equipment to assist us in the
development, marketing and distribution of our systems:
. GE Marquette Medical Systems, Inc., a subsidiary of General Electric
Company
. Hewlett-Packard Company
. Nellcor Puritan Bennett, a subsidiary of Mallinckrodt Inc.
. Protocol Systems, Inc.
. Siemens Medical Systems, Inc., a subsidiary of Siemens AG
We sell our systems through our direct sales force and jointly with these
strategic partners. Our systems are currently being used in more than 100
hospitals in over 30 states, including:
. Baylor University Medical Center in Dallas, TX
. Duke University Medical Center in Durham, NC
. Heartland Hospital in St. Joseph, MO
. Kaiser Foundation Hospital in San Francisco, CA
. The Mayo Clinic in Scottsdale, AZ
. Montefiore Medical Center - Einstein Division in New York, NY
. Memorial Sloan Kettering Cancer Center in New York, NY
. Mt. Sinai School of Medicine in New York, NY
. Northwest Hospital in Seattle, WA
. St. Mary's Hospital in Pueblo, CO
Below is a brief description of our systems:
Hospital Systems
. StatView is a wireless system that simultaneously sends an alarm and
patient data, such as vital signs and electrocardiogram (ECG) waveforms,
to the StatView receiving unit, which is generally carried by nurses
within a hospital. This system is intended to deliver this patient data
whenever a patient experiences a severe adverse event. The data
transmitted includes patient name, bed number, heart rate and a six to
ten second ECG waveform.
. AlarmView attaches to the back of non-networked patient monitors,
infusion pumps and other medical equipment and transmits near immediate
alarms and critical patient data to wireless receivers, thereby creating
a virtual network for stand-alone medical monitoring equipment at a
relatively low-cost per unit. AlarmView can be integrated with the same
wireless receiver used for StatView. We submitted
4
<PAGE>
our AlarmView system for approval by the U.S. Food and Drug Administration
(FDA) in August 1999, and expect to begin making commercial sales of
AlarmView systems in the first half of 2000.
Physician Systems
. MobileView transmits data that is collected by the StatView system from
individual patient bedside and telemetry monitors to physicians or other
caregivers at remote locations usually outside of the hospital. The
MobileView system uses digital wireless technology on a wide area network
to provide caregivers with immediate remote access to critical patient
information, including multiple ECGs, vital signs parameters and
associated waveforms and nurse notes. Physicians use a portable, wireless
hand-held device to access this information.
. Our DataView system allows physicians to review this same data collected
by StatView through a personal computer.
Consumer System
. Our Internet ECG system is designed to allow consumers to conduct stress
management, physical fitness and educational activities by viewing their
own ECGs through an application downloaded via the internet. Through a
proprietary hand-held device, the consumer would be able to relay heart
rate and ECG waveform information through a personal computer's
microphone to a website running our software. The website would then
relay additional biofeedback, exercise training data and personal
educational information back to the consumer in near real-time.
. We have completed development of the initial release of the Internet ECG
system, but it is not yet commercially available.
We believe that our systems reduce the overall costs of a healthcare
organization by allowing caregivers to monitor the vital signs of patients
remotely while performing other tasks. As a result, hospitals can reassign or
reallocate their staff of medical technicians whose primary responsibility is
to centrally monitor patient critical care data captured by medical equipment.
Moreover, we believe that our systems improve patient care by providing
immediate remote access to critical care information, which allows healthcare
professionals to respond more rapidly to adverse changes in patients'
conditions. Our systems are designed to open standards, use standard components
and interface with equipment manufactured by numerous medical device
manufacturers. We believe our open system architecture will allow us to partner
with additional equipment manufacturers. In addition, data received by our
systems can be encrypted before being transmitted, thereby improving the
security and confidentiality of sensitive patient information.
Our objective is to be the leading developer of wireless health information
communications systems for the hospital, physician and at-home consumer
markets. Our strategy to accomplish this objective includes:
. pursuing additional strategic alliances
. increasing market penetration and generating follow-on sales
opportunities
. expanding internationally
. expanding the use of the internet to link physicians and at-home
consumers
. maintaining and building on our technology leadership
Our company was incorporated in Oklahoma in October 1992 under the name
Intellicomm Corp. We changed our name to Data Critical Corp. in October 1993
and reincorporated in Delaware in March 1998. In May 1999, we changed our name
to Data Critical Corporation. Our principal executive offices are located at
19820 North Creek Parkway, Suite 100, Bothell, WA, 98011. Our telephone number
is (425) 482-7000 and our fax number is (425) 482-7010. Our website is located
at www.datacritical.com. Information contained in our website is not
incorporated by reference into this prospectus, and you should not consider
such information as part of this prospectus.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by Data Critical........ 3,500,000 shares
Common stock to be outstanding after this
offering.................................... 9,824,869 shares
Use of proceeds.............................. For general corporate purposes, including
working capital, capital expenditures and
possible acquisitions.
Proposed Nasdaq National Market symbol....... DCCA
</TABLE>
The common stock to be outstanding after this offering is based on shares
outstanding as of June 30, 1999, and excludes 869,311 shares of common stock
issuable upon the exercise of outstanding stock options at a weighted average
price of $1.62 per share, 488,971 shares of common stock issuable upon the
exercise of warrants at a weighted average exercise price of $2.97 per share.
Generally, unless otherwise indicated, all information in this prospectus
assumes no exercise of the underwriters' overallotment option.
Summary Financial Data
The following table contains summary financial data for Data Critical. You
should read this information along with the Financial Statements and related
Notes included elsewhere in this prospectus.
Pro forma per share amounts in the table below reflect the conversion of
preferred stock of Data Critical into common stock as if the shares had been
converted immediately upon their issuance. The pro forma as adjusted balance
sheet data in the table below reflects the sale of 3,500,000 shares of common
stock offered hereby at the initial public offering price of $12.00 per share,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by Data Critical. The financial data as of June 30,
1999 and for the six months ended June 30, 1998 and June 30, 1999 are
unaudited.
<TABLE>
<CAPTION>
Years Ended December Six Months
31, Ended June 30,
------------------------- ----------------
1996 1997 1998 1998 1999
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue.......................... $ 190 $ 471 $ 4,137 $ 658 $ 3,585
Gross margin..................... 163 123 2,296 335 2,168
Net loss......................... (2,004) (4,002) (5,822) (3,350) (2,521)
Basic and diluted loss per common
share........................... $ (2.44) $ (4.28) $ (5.03) $ (2.82) $ (2.30)
Unaudited pro forma basic and
diluted loss per share.......... (1.01) (0.40)
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1999
---------------------------------
Pro Pro Forma
Actual Forma(1) As Adjusted(2)
-------- -------- --------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................... $ 1,118 $1,118 $39,548
Working capital (deficit)................... (455) (455) 37,975
Total assets................................ 6,015 6,015 44,445
Short-term obligations...................... 1,089 1,089 1,089
Long-term obligations, net of current
portion.................................... 218 218 218
Mandatorily redeemable preferred stock,
$0.01 par value............................ 19,956 -- --
Stockholders' (deficit) equity.............. (18,898) 1,058 39,488
</TABLE>
- --------
(1) Reflects the conversion of all outstanding shares of preferred stock into
shares of common stock.
(2) Reflects the sale of common stock by Data Critical at an assumed initial
public offering price of $12.00 per share and the application of net
proceeds therefrom.
6
<PAGE>
RISK FACTORS
You should consider carefully the risks described below before you decide to
buy our common stock. The risks and uncertainties described below are not the
only ones facing us. The risks below summarize the risks that we currently
believe are material risks of this offering. However, additional risks and
uncertainties that we do not presently know about or that we currently believe
are immaterial may also adversely impact our business. If any of the following
risks actually occur, our business, financial condition and results of
operations would likely suffer. In such case, the trading price of our common
stock could fall, and you may lose all or part of the money you paid to buy our
common stock.
If our potential customers in the healthcare industry are not willing to adopt
our communications systems, our growth and revenues will be limited.
Healthcare industry participants may not accept the transmission of critical
data through networked medical monitoring equipment as readily as we
anticipate. We believe that the complex nature of time-critical data
transmission has and may continue to hinder the development and acceptance of
communications solutions such as ours by the healthcare industry. Conversion
from traditional methods of communication may not occur as rapidly as we
expect. Even if such acceptance or conversion does occur, healthcare industry
participants may use alternative products and services offered by others.
We believe that we must gain significant market share in the healthcare
industry with our systems before competitors introduce alternative products or
systems with features and benefits similar to ours. Our business model is based
on our belief that the value and market appeal of our solution will grow as the
number of participants and scope of data transmitted increase. We may not
achieve the critical mass of users that is necessary to become successful. Any
significant shortfall in the number of users of our systems would adversely
affect our business, financial condition and results of operations.
We cannot assure you that we will achieve profitability.
We have not achieved profitability and, although our revenue has grown in
recent quarters, we cannot be certain that we will realize sufficient revenue
to achieve profitability. Data Critical has incurred net losses of $7.3 million
from inception through December 31, 1997, $5.8 million in 1998 and $2.5 million
in the first six months of 1999. As of June 30, 1999, we had an accumulated
deficit of $20.2 million. We expect to continue to incur net losses for the
foreseeable future. We anticipate continuing to incur significant sales and
marketing, product development and general and administrative expenses and, as
a result, we will need to generate significantly higher revenue to achieve and
sustain profitability.
Our success is highly dependent on sales, marketing and development alliances
with a small number of strategic partners.
We depend on our alliances with strategic partners to generate increased
acceptance of our systems. To date, we have established only a limited number
of strategic alliances and these alliances are in the early stages of
development. We currently maintain co-marketing partnerships with Hewlett-
Packard Company, Protocol Systems, Inc. and Siemens Medical Systems, Inc.,
whose larger sales forces sell our systems on a commission basis. In addition,
we have original equipment manufacturing and distribution partnerships with GE
Marquette Medical Systems, Inc. and Nellcor Puritan Bennett, a subsidiary of
Mallinckrodt Inc.
7
<PAGE>
A substantial portion of our revenue in 1998 and the first six months of
1999 was derived from the sale of systems marketed or distributed through
Hewlett-Packard Company and GE Marquette Medical Systems, Inc. Either of these
companies may decide to discontinue their distribution, marketing or original
equipment manufacturing relationships with us, including as a result of
proposed corporate reorganizations. Our agreements with these companies may be
cancelled on short-term notice. If either company limits or discontinues
marketing or selling our systems, our business, financial condition and results
of operations would fall short of our expectations.
If any of these strategic alliances are terminated or if we fail to
establish additional alliances, we would not be able to execute our business
model and our business, financial condition and results of operations would
suffer significantly. We may not experience increased use of our systems even
if we establish and maintain these strategic alliances.
We expect to commit substantial resources to marketing, development and
operations expenses; if we are unable to generate increasing revenues in excess
of these commitments, our business will suffer.
We anticipate that our expenses will increase substantially for at least the
next 12 months as we increase our sales and marketing activities, further
develop our technology, broaden our system offerings, expand our distribution
channels and potentially pursue acquisitions. If we fail to significantly
increase our revenue as expected as we implement our system development and
distribution strategies, our business, financial condition and results of
operations would materially suffer. In addition, we may not experience any
revenue growth in the future, and our revenue could decline. Our efforts to
expand our sales and marketing activities, system offerings, and direct and
indirect distribution channels and our efforts to pursue strategic alliances
may not succeed or may prove more expensive than we currently anticipate. As a
result, we cannot predict our future operating results with any degree of
certainty.
We may experience fluctuations in our quarterly operating results because our
revenues are heavily dependent on the timing of customer installations of our
systems and our sales mix by distribution channel.
Our revenue in any quarter depends significantly on the timing of systems
shipped and installations completed. The unexpected delay or cancellation of
shipments or installations at the end of a quarter could substantially reduce
revenue in that quarter, adversely affect our operating results and impair our
business in future periods. Because we do not know when, or if, our potential
customers will place orders, finalize contracts and permit installation, we
cannot accurately predict revenue and operating results for future quarters. In
addition, the mix of sales between distribution channels will have a
significant impact on quarterly and annual revenue and profitability because we
receive higher revenue and gross margin on direct sales, including those made
through our alliances with strategic partners, than we do on original equipment
manufacturer sales.
We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of our future performance. It is likely that in future
quarters our operating results may be below the expectations of securities
analysts and investors and, as a result, the price of our common stock may
fall. Our operating results have varied in the past, and we expect that they
will continue to vary significantly from quarter to quarter.
8
<PAGE>
Our success is dependent on sales of one product for a large portion of our
revenue.
In 1998 and the first six months of 1999 substantially all of our revenue
was derived from the sale of our StatView system. Although we expect that our
MobileView and AlarmView systems will account for an increasing portion of
revenue in the future, it is likely that sales of our StatView system will
continue to represent a substantial portion of our revenue for at least the
next 12 months. Any factors adversely affecting the pricing of, demand for or
market acceptance of our StatView system, such as competition or technological
change, could significantly impair our business, financial condition and
results of operations.
If we are unable to keep pace with technological innovation in our industry,
our ability to continue the rapid growth of our business will be impaired.
The medical equipment and wireless communications industries are each
characterized by rapid technological change, changes in end user preferences,
and the emergence of new industry standards and practices that could render our
existing systems and proprietary technology obsolete. Our success depends, in
part, on our ability to continue to enhance our existing systems and to develop
new systems that meet the changing needs of our customers. If we are unable to
develop and introduce in a timely manner new and enhanced systems that
incorporate the latest developments in medical equipment and wireless
communications technologies, our business, financial condition and results of
operations will suffer. The pace of change in information-dependent markets,
such as the healthcare industry, is rapid and there are frequent new product
introductions and evolving industry standards. We may be unsuccessful in
responding to technological developments and changing customer needs. In
addition, our systems may become obsolete due to the adoption of new
technologies or standards by our customers or competitors. We have experienced
development delays in the past and may experience similar or more significant
delays in the future. Difficulties in system development could delay or prevent
the successful introduction or marketing of new or enhanced systems.
Our infrastructure may be unable to keep pace with our growth.
We have rapidly and significantly expanded our operations and expect this
expansion to continue. Our revenue grew from $471,000 in 1997 to $4.1 million
in 1998 and from $658,000 in the first six months of 1998 to $3.6 million in
the first six months of 1999. We have recently moved our Redmond, Washington
headquarters and assembly plant into new facilities in Bothell, Washington. In
addition, we expect to hire a significant number of new employees to implement
and expand our operational, sales, marketing and customer support activities.
In April 1999, we began implementing an integrated management information
system, which includes all sales, accounting, inventory and manufacturing
control functions. This implementation is expected to be completed in the
fourth quarter of 1999. There can be no assurance that this implementation will
be completed on a timely basis. We expect to face increasing daily operational
challenges as our business continues to grow, and we may fail to properly
manage our growth.
If our customers experience system defects, delays in transmission or security
breaches with our products, we could face damage to our business reputation and
potential legal liability.
Our customer satisfaction and our reputation could be harmed if we or our
customers experience any system defects, delays, failures or loss of data. We
depend on the efficient operation of wireless networks and the internet for
communication, and a major catastrophic event or other event beyond our control
including a major security breach in the transmission of data on our systems,
could cause
9
<PAGE>
loss of revenue and market share, damage our reputation and result in liability
to us. In addition, our systems may be vulnerable to computer viruses,
programming errors, attacks by third parties or similar disruptive problems.
Furthermore, patient care could suffer and we could be liable if our systems
fail to deliver correct information in a timely manner. Our contracts attempt
to limit our liability arising from our errors; however, these provisions may
not be enforceable and may not protect us from future liability. While we have
general liability and product liability insurance, including coverage for
errors and omissions, we may not be able to maintain this insurance on
reasonable terms in the future. In addition, our insurance may not be
sufficient to cover large claims and our insurer could disclaim coverage on
claims. If we are liable for an uninsured or underinsured claim or if our
premiums increase significantly, our business, financial condition and results
of operations could suffer.
We may experience substantial delays or difficulties in obtaining required
governmental approvals.
As a manufacturer of wireless telecommunications systems, we are subject to
regulation under the Communications Act of 1934, as amended, the
Telecommunications Act of 1996 and Federal Communications Commission
regulations, as well as the applicable laws and regulations of the various
states administered by the relevant state public service commissions.
Regulatory requirements affecting our operations are subject to change. Such
changes may adversely affect our business by hindering our ability to compete
with other wireless telecommunications product manufacturers, or our ability to
continue providing our existing systems or to introduce future systems or
system enhancements.
Our systems are also considered medical devices and are subject to
regulation by the FDA. Before we can market our systems we must obtain pre-
market notification clearance under Section 510(k) of the Federal Food, Drug,
and Cosmetic Act. In addition, material changes to our systems may also be
subject to FDA review and clearance prior to marketing or sale in the U.S. The
process of obtaining 510(k) clearance can be expensive and time-consuming, and
may require the submission of extensive supporting data. If the 510(k) process
is extended for a considerable length of time for any of our new systems, the
commencement of commercial sales of our new systems will be delayed
substantially or indefinitely. We filed for 510(k) clearance for our AlarmView
system in August 1999.
As a provider of healthcare related systems, we are also subject to
extensive and frequently changing federal regulations that govern the
licensing, conduct of operations, and other aspects of our business. Federal
certification and licensing programs establish standards for day-to-day
operation of our research and manufacturing facilities. Regulatory agencies
verify our compliance with such standards through periodic inspections.
Although we have been found to be in compliance with all such standards to
date, our facilities may not pass future inspections conducted to ensure
compliance with federal or any other applicable licensing or certification
laws.
We also are subject to extensive federal and state regulation relating to
the confidentiality and release of patient medical records. New legislation
governing the distribution of medical records has been proposed at both the
federal and state levels. It may be costly to implement security or other
measures designed to comply with any new legislation. Moreover, we may be
restricted or prevented from delivering patient records electronically. We
cannot assure you that we will not be required to incur significant costs to
comply with current or future laws or that we will not be adversely affected by
the cost of such compliance.
10
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Furthermore, we may expand sales of our systems to international markets.
Such an expansion would require us to comply with a wide variety of foreign
laws and practices, tariffs and other trade barriers. If we fail to obtain the
necessary regulatory approvals in foreign markets on a timely basis, our
business, financial condition and results of operations could be materially
adversely affected.
Our Internet ECG system is not proven and may not be accepted by the at-home
consumer healthcare industry.
Our Internet ECG system has not been commercially released and may never be
adequately developed and marketed by us. Developing and marketing our internet
solutions to the at-home consumer healthcare industry will be costly and time-
consuming. Our internet solutions require that consumers exchange information
in a new and different way. In addition, in order to maximize the benefits of
our internet solutions, at-home healthcare consumers must be willing to allow
sensitive personal information to be stored on our internet databases. We have
not yet determined how to commercialize our Internet ECG system, and we cannot
assure you that the at-home consumer healthcare industry will accept this
system. In addition, although we believe that our Internet ECG system is not
subject to regulatory oversight, the FDA has recently been more active in
reviewing health-related activities on the internet, and any regulatory
overview could delay substantially or indefinitely the release of our system.
If we fail to develop or market our internet solutions, or if the at-home
consumer healthcare industry fails to accept our internet solutions, the future
growth of our business would likely suffer.
We may not be able to effectively compete in the market for wireless data
communications.
We are not aware of any direct competitors that are developing or selling
products enabling wireless data transmission of medical data. However, many
companies selling products using traditional methods of patient monitoring,
such as direct patient oversight and monitoring through wired systems and voice
communications, are well positioned to compete with us. If such companies are
drawn into our market, we may be unable to effectively compete. To maintain and
improve our competitive position, we must continue to successfully:
. demonstrate the benefits of our systems to current and potential
customers
. market to hospitals and healthcare professionals
. maintain stable and constructive alliances with key manufacturers of
complementary medical equipment
. develop new and improved technologies
Many of our potential competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
better name recognition and a larger installed base of customers. Many of our
potential competitors may also have well-established relationships with our
existing and prospective customers. Due to these and other advantages, our
potential competitors may develop products comparable or superior to our
systems or adapt more quickly to new technologies, evolving industry standards,
new product introductions or changing customer requirements.
In addition, there is the possibility that one or more of our strategic
partners or other medical equipment manufacturers may decide to develop
products that directly compete with our systems. We also expect that
competition will increase as a result of medical equipment, wireless and
software industry consolidation. Increased competition is likely to result in
price reductions, reduced gross margins and loss of market share, any one of
which could cause our business, financial condition and results of operations
to suffer.
11
<PAGE>
We may not be able to hire and retain the personnel necessary to support our
expanding business.
Our success will depend significantly on our senior management team,
including: Dr. David Albert, Chief Scientist and Chairman of the Board; Jeffrey
Brown, President and Chief Executive Officer; Michael Singer, Chief Financial
Officer; and Bradley Harlow, Vice President of Business Development and General
Manager, International, as well as other key engineering employees. We face
intense competition for these people and may not be able to attract and retain
them. Although we have recently expanded our direct sales force and plan to
hire additional sales personnel, we need to substantially expand our sales
operations and marketing efforts, both domestically and internationally, in
order to increase market awareness and sales of our systems. Our systems
require a sophisticated sales effort targeted at several people within the
information technology departments of our prospective customers. In addition,
we currently have a small customer service and support organization and will
need to increase our staff to support new customers and the expanding needs of
existing customers. Hiring customer service and support personnel is highly
competitive in our industry due to the limited number of people available with
the necessary technical skills. We cannot assure you that we will be able to
hire and retain sufficient numbers of qualified customer service and support
personnel. We maintain key person life insurance on the life of Jeffrey Brown
in the amount of $1.0 million.
We will incur more deferred compensation expense in the third and fourth
quarters of 1999, which could adversely affect our financial condition and the
results of operations.
During 1998, and for the six month period ended June 30, 1999, we have
recorded $605,000 and $354,000, respectively, of deferred compensation from the
issuance of stock options with exercise prices less than the fair value of
common stock. This deferred compensation is recognized as expense ratably over
the vesting period of the options. In 1998, and for the six month period ended
June 30, 1999 we recognized $53,000 and $142,000, respectively, of expense
related to this deferred compensation.
Since June 30, 1999, we have granted options to certain employees and
consultants to purchase 202,500 shares of common stock at an exercise price of
$6.00. Accordingly, we will record higher deferred compensation expense in the
third and fourth quarters of 1999, which could adversely affect our financial
condition and the results of operations.
Our sales are dependent on third party single-source and limited-source
suppliers.
We use third party manufacturers to purchase necessary components and to
manufacture and test key parts of our systems, including the StatView receiver
and the AlarmView transmitter. Certain components, such as the bitmap display,
are presently only available from a single source. Other parts and components
that we rely on are available from limited sources. Our reliance upon these
single or limited-source suppliers and third party manufacturers involves risks
and uncertainties, including the possibility of a shortage or discontinuation
of key components and reduced control over delivery schedules, manufacturing
capability, quality and cost. Any reduced availability of such components or
key parts, when needed, could cause us to delay the delivery of complete
systems resulting in the delayed payment or cancellation of orders by our
customers, thereby adversely affecting our business, financial condition and
results of operations.
12
<PAGE>
We may fail to protect our proprietary technology and to maintain access to the
proprietary information of third parties that support our competitive position.
Our owned and licensed intellectual property is important to our business.
We could be subject to intellectual property infringement claims as the number
of our competitors grows and the functionality of our systems overlaps with
competitive offerings. These claims, even if not meritorious, could be
expensive and divert our attention from our core business operations. If we
become liable to third parties for infringement of their intellectual property
rights, we could be required to pay substantial damages and to develop
alternative non-infringing technology, obtain a license or cease selling the
systems that contain the infringing intellectual property. We may be unable to
develop non-infringing technology or obtain a license on commercially
reasonable terms, if at all. In addition, we may not be able to protect against
misappropriation or infringement of our intellectual property by third parties.
If misappropriation or infringement occurs, we may not be able to detect it or
to effectively enforce our rights.
Changes in the healthcare industry could force us to make costly modifications
to our business model.
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. These factors affect the
purchasing practices and operation of healthcare organizations. Changes in
current healthcare financing and reimbursement systems could cause us to make
unplanned modifications to our systems, or result in delays or cancellations of
orders. Federal and state legislatures have periodically considered programs to
reform or amend the U.S. healthcare system at both the federal and state level.
These programs may contain proposals to increase governmental involvement in
healthcare, lower reimbursement rates or otherwise change the environment in
which healthcare industry participants operate. Healthcare industry
participants may respond by reducing their investment or postponing investment
decisions, including investments in our systems. We do not know what effect any
such proposals would have on our business. Many healthcare providers are
consolidating to create integrated healthcare delivery systems. These providers
may try to use their market power to negotiate price reductions for our
systems. If we are forced to reduce our prices, our business, financial
condition and results of operations would suffer. As the healthcare industry
consolidates, competition for customers will become more intense.
If our systems are not Year 2000 compliant, we may face unexpected expenses.
Issues with respect to the year 2000 could affect the performance of our
systems. We believe our systems are designed to operate prior to, during and
after the calendar year 2000 without error relating to date data. However, we
have only tested our systems for their intended use on a stand-alone basis in a
test lab. Our business may suffer adverse effects if our systems cause
significant Year 2000 problems in a particular situation or configuration
within the systems of our customers. Our customers use our systems in many
different configurations and in conjunction with many other components and
systems, and we have no way to test whether all those configurations and
systems will properly handle the transition to the year 2000.
We also depend on other vendors and suppliers to be Year 2000 compliant.
Many of these organizations may not be Year 2000 compliant, and we do not know
what effect this may have on our systems. We potentially could be liable for
the failure of our systems even if someone else caused the failure.
Furthermore, the costs to our customers of becoming Year 2000 compliant may
result in reduced funds being available to purchase and implement our systems.
13
<PAGE>
Our system development efforts and marketing plans may require us to seek
additional capital. As a result, your investment may be diluted.
We expect that the proceeds generated from this offering, combined with our
current cash resources and credit facilities, will be sufficient to meet our
capital requirements for at least the next 12 months. However, we may need to
raise additional capital at an earlier time to support expansion, develop new
or enhanced systems, respond to competitive pressures, acquire complementary
businesses or technologies or take advantage of other unanticipated
opportunities. We may need to raise additional funds by selling debt or equity
securities or entering into strategic alliances or other arrangements. We may
be unable to raise any additional capital on reasonable terms and in a timely
fashion. Any additional issuance of equity securities would dilute your
investment.
Trading in our shares could be subject to extreme price fluctuations, and you
could experience difficulties trading your shares.
There was no public trading market for our shares prior to this offering.
The initial public offering price will be established by negotiation between
the underwriters and us. You may not be able to resell your shares at or above
the initial public offering price due to a number of factors, including:
. actual or anticipated quarterly variations in our operating results
. changes in expectations of future financial performance or changes in
estimates of securities analysts
. announcements of technological innovations
. announcements relating to strategic alliances
. customer relationship developments
. conditions affecting the healthcare industry in general
. changes in our executive management team
. the operating or stock price performance of comparable companies
The trading price of our common stock may be volatile. The stock market in
general, and the market for technology companies in particular, has experienced
extreme volatility that often has been unrelated to the operating performance
of particular companies. These broad market and industry fluctuations may
adversely affect the trading price of our common stock, regardless of our
actual operating performance. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been filed. If this were to happen to us, litigation would likely be
expensive and would divert management's attention from running our business.
Delaware law and our certificate of incorporation may inhibit potential
acquisition bids that could be beneficial for stockholders.
Delaware law may inhibit potential acquisition proposals. We are subject to
the anti-takeover provisions of the Delaware General Corporation Law, which
regulates corporate acquisitions. Delaware law prevents us from engaging in a
business combination with any interested stockholder for three years following
the date that such stockholder became an interested stockholder. For purposes
of Delaware law, a business combination includes a merger or consolidation or
the sale of more than 10% of our assets. In general, Delaware law defines an
interested stockholder as any entity or person beneficially owning 15% or more
of the outstanding voting stock of a corporation and any entity or person
affiliated with or controlling or controlled by such entity or person. Under
Delaware law, a Delaware corporation may opt out of the antitakeover
provisions. We do not intend to opt out of these antitakeover provisions of
Delaware law.
14
<PAGE>
In addition, we have adopted provisions in our certificate of incorporation
that may discourage potential acquisition proposals and delay or prevent a
change in control of our company.
These provisions include the following:
. our board of directors may issue up to three million shares of preferred
stock and determine the applicable powers, preferences and rights and the
qualifications, limitations or restrictions of such stock, including
voting rights, without any vote or further action by stockholders
. our directors are elected to staggered three-year terms
. stockholders cannot call special meetings
. the nomination of a director or the taking of certain actions requires
advance notice
. stockholders cannot take action by written consent
Future sales by our existing stockholders could adversely affect the market
price of our common stock.
Sales of our common stock in the public market following this offering could
adversely affect the market price of our common stock. Of the 9,824,869 million
shares that will be outstanding upon the consummation of this offering:
. 3,500,000 million shares will be freely tradeable in the public market
. approximately additional shares may be sold after the
expiration of 180-day lock-up agreements
. approximately additional shares may be sold upon the exercise
of stock options and warrants after the expiration of 180-day lock-up
agreements
The market price for our common stock could fall substantially if our
stockholders sell large amounts of our common stock in the public market
following this offering. These sales, or the possibility that these sales may
occur, could make it more difficult for us to sell equity or equity-related
securities in the future.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about Data Critical and
our industry that involve risks and uncertainties. These forward-looking
statements are usually accompanied by words such as "believe," "anticipate,"
"plan," "seek," "expect," "intend" and similar expressions. Our actual results
may differ materially from the results discussed in the forward-looking
statements because of factors such as the risk factors set forth in this
prospectus. We undertake no obligation to update any forward-looking statements
for any reason, even if new information becomes available or other events occur
in the future.
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of shares in
this offering will be $38.4 million ($44.3 million if the underwriters' over-
allotment option is exercised in full), after deducting the estimated
underwriting discounts and commissions and offering expenses payable by us and
assuming an initial public offering price of $12.00 per share.
We expect to use the net proceeds of this offering for general corporate
purposes, including working capital and capital expenditures. A portion of the
net proceeds may also be used for the acquisition of businesses, products or
technologies that are complementary to those of Data Critical. From time to
time, we may consider and evaluate potential acquisitions; however, we have no
current understandings or agreements regarding any acquisitions. Pending such
uses, we intend to invest the net proceeds from this offering in short-term,
investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have not paid any cash dividends on our common stock. We currently intend
to retain any future earnings for the continued development and expansion of
our business. We are subject to the terms of a credit agreement that restricts
our ability to pay dividends and may in the future become subject to the terms
of other credit agreements or other contractual provisions that impose
restrictions or limitations on the payment of dividends. In the absence of such
restrictions or limitations, the payment of any dividends will be at the
discretion of our board of directors.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
. on an actual basis
. on a pro forma basis to give effect to the conversion of all outstanding
shares of preferred stock into shares of common stock, and the filing of
a restated certificate of incorporation to provide for authorized capital
of 25,000,000 shares of common stock and 3,000,000 shares of undesignated
preferred stock
. on a pro forma as adjusted basis to reflect the sale of common stock by
Data Critical at an assumed initial public offering price of $12.00 per
share and the application of such net proceeds
This table should be read in conjunction with Data Critical's Financial
Statements and the related Notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
At June 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(In thousands, except share
data)
<S> <C> <C> <C>
Long-term obligations, net of current portion.. $ 218 $ 218 $ 218
Mandatorily redeemable preferred stock, $0.01
par value; 19,731,893 shares authorized,
4,904,689 shares issued and outstanding
(actual); no shares authorized, no shares
issued and outstanding (pro forma and pro
forma as adjusted)............................ 19,956 -- --
Stockholders' (deficit) equity:
Preferred stock, $0.001 par value; no shares
authorized, issued or outstanding (actual);
3,000,000 shares authorized, no shares issued
or outstanding (pro forma and pro forma as
adjusted).................................... -- -- --
Common stock $0.001 par value; 30,000,000
shares authorized, 1,420,180 shares issued
and outstanding (actual); 25,000,000 shares
authorized, 6,324,869 shares issued and
outstanding (pro forma); 25,000,000 shares
authorized, 9,824,869 shares issued and
outstanding (pro forma as adjusted).......... 2,082 22,038 60,468
Deferred compensation......................... (764) (764) (764)
Accumulated deficit........................... (20,216) (20,216) (20,216)
-------- -------- --------
Total stockholders' (deficit) equity.......... (18,898) 1,058 39,488
-------- -------- --------
Total capitalization........................... $ 1,276 $ 1,276 $ 39,706
======== ======== ========
</TABLE>
The common stock to be outstanding after this offering is based on shares
outstanding as of June 30, 1999 and excludes:
. 869,311 shares of common stock issuable upon the exercise of outstanding
stock options at a weighted average price of $1.62 per share and 488,971
shares of common stock issuable upon the exercise of warrants at a
weighted average exercise price of $2.97 per share
. 72,505 additional shares of common stock available for issuance under our
1994 Stock Option Plan and 1,188,000 additional shares of common stock
available for issuance under our stock option and employee stock purchase
plans approved in May 1999
17
<PAGE>
DILUTION
As of June 30, 1999, Data Critical had a pro forma net tangible book value
of $515,000, or $0.08 per share of common stock after giving effect to the
conversion of all outstanding shares of preferred stock into common stock. Pro
forma net tangible book value represents the amount of total tangible assets of
Data Critical less its total liabilities. After giving effect to the sale of
the 3,500,000 shares of common stock offered by us at an assumed initial public
offering price of $12.00 per share, and the adjustments set forth above, the
pro forma as adjusted net tangible book value of Data Critical as of June 30,
1999 would have been $38.9 million, or $3.96 per share. The pro forma as
adjusted net tangible book value assumes that the proceeds to us, net of
underwriting discounts and commissions and offering expenses, will be
approximately $38.4 million. Based on the foregoing, there would be at June 30,
1999 an immediate increase in net tangible book value of $3.88 per share to
existing stockholders and an immediate dilution of $8.04 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $12.00
Pro forma net tangible book value per share at June 30,
1999....................................................... $0.08
Increase per share attributable to new investors............ 3.88
-----
Pro forma as adjusted net tangible book value per share after
this offering................................................ 3.96
------
Dilution per share to new investors........................... $ 8.04
======
</TABLE>
The following table summarizes on a pro forma basis, as of June 30, 1999,
the differences between the existing stockholders and new investors with
respect to:
. the number of shares of common stock purchased from us
. the total consideration paid to us and
. the average price paid per share
Underwriting discounts and commissions and offering expenses have not been
deducted.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
----------------- ------------------- Average Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 6,324,869 64.4% $17,800,000 29.8% $ 2.81
New investors............... 3,500,000 35.6 42,000,000 70.2% 12.00
--------- ----- ----------- -----
Total................... 9,824,869 100.0% $59,800,000 100.0%
========= ===== =========== =====
</TABLE>
As of June 30, 1999, there were:
. 869,311 shares of common stock issuable upon the exercise of outstanding
stock options at a weighted average price of $1.62 per share
. 488,971 shares of common stock issuable upon the exercise of stock
warrants at a weighted average exercise price of $2.97 per share
To the extent that any of these options or warrants are exercised, there
will be further dilution to new investors.
18
<PAGE>
SELECTED FINANCIAL DATA
The following historical selected financial and operating data set forth
below should be read along with the Financial Statements, their related Notes
and other information included elsewhere in this prospectus. The selected
statement of operations data for the years ended December 31, 1996, 1997 and
1998 and the selected balance sheet data as of December 31, 1997 and 1998 have
been derived from our audited financial statements included elsewhere in this
prospectus. The selected statement of operations data for the years ended
September 30, 1994, 1995 and 1996 and the selected balance sheet data as of
September 30, 1994, 1995 and 1996 have been derived from our audited financial
statements not included in this prospectus. Effective January 1, 1996 we
changed our fiscal year end from September 30 to December 31. The selected
balance sheet data as of December 31, 1996 has been derived from unaudited
financial statements of Data Critical not included in this prospectus. The
selected statement of operations data for the six months ended June 30, 1998
and June 30, 1999 and the selected balance sheet data as of June 30, 1999 have
been derived from unaudited financial statements of Data Critical appearing
elsewhere in this prospectus and, in the opinion of our management, include all
adjustments, consisting only of normal recurring adjustments, which are
necessary for a fair presentation of the results of operations for this period.
The results for any quarter are not necessarily indicative of results for any
future quarterly or annual results.
<TABLE>
<CAPTION>
Years Ended Years Ended December Six Months
September 30, 31, Ended June 30,
------------------------ ------------------------- ----------------
1994 1995 1996 1996 1997 1998 1998 1999
------ ------- ------- ------- ------- ------- ------- -------
(In thousands, except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue................. $ 60 $ 232 $ 187 $ 190 $ 471 $ 4,137 $ 658 $ 3,585
Cost of revenue......... 38 393 35 27 348 1,841 323 1,417
------ ------- ------- ------- ------- ------- ------- -------
Gross margin............ 22 (161) 152 163 123 2,296 335 2,168
------ ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development.......... 85 270 883 957 1,702 2,194 1,065 1,078
Sales and marketing... -- 282 543 512 1,200 3,512 1,440 1,997
General and
administrative....... 269 720 756 738 1,268 2,564 1,228 1,620
------ ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 354 1,272 2,182 2,207 4,170 8,270 3,733 4,695
------ ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (332) (1,433) (2,030) (2,044) (4,047) (5,974) (3,398) (2,527)
Other income (expense),
net.................... (11) 37 28 40 45 152 48 6
------ ------- ------- ------- ------- ------- ------- -------
Net loss................ $ (343) $(1,396) $(2,002) $(2,004) $(4,002) $(5,822) $(3,350) $(2,521)
====== ======= ======= ======= ======= ======= ======= =======
Basic and diluted loss
per common share....... $(0.32) $ (1.55) $ (2.21) $ (2.44) $ (4.28) $ (5.03) $ (2.82) $ (2.30)
====== ======= ======= ======= ======= ======= ======= =======
Pro forma basic and
diluted loss per common
share.................. $ (1.01) $ (0.40)
======= =======
</TABLE>
<TABLE>
<CAPTION>
At September 30, At December 31, At June 30,
---------------------- ----------------------- -----------
1994 1995 1996 1996 1997 1998 1999
------ ------ ------ ------ ------ ------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 142 $ 398 $ 792 $ 661 $ 865 $ 3,053 $ 1,118
Working capital
(deficit).............. (372) 1,620 628 2,552 717 2,343 (455)
Total assets............ 256 2,057 1,459 3,311 1,788 5,625 6,015
Short-term obligations.. 500 -- -- -- 31 348 1,089
Long-term obligations,
net of current
portion................ -- -- -- -- 1,641 151 218
Mandatorily redeemable
preferred stock........ 134 4,119 5,536 8,282 8,927 19,248 19,956
Stockholders' (deficit)
equity................. (413) (2,189) (4,527) (5,189) (9,226) (16,218) (18,898)
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Data Critical commenced operations in April 1993 to develop communications
solutions for individuals who have a need for notification of data that
requires an immediate response, also known as time-critical data. From 1993
through 1996, we primarily focused on expanding our research and development
efforts, refining our business plan, developing industry and strategic
relationships, building a management team and financing these activities. Since
inception, we have funded our operations primarily through debt and equity
financing from stockholders, cash receipts from sales and commercial credit
facilities.
From inception through 1997, revenue was derived primarily from fees and
royalties paid under product engineering and development contracts, and to a
lesser extent from the sale of wireless communications systems developed for
both medical and non-medical applications. In late 1996, we focused our
development and marketing efforts on specific medical applications.
Accordingly, in 1997 we hired management and other key employees experienced in
sales, manufacturing and regulatory matters in the healthcare industry. As a
result of this new focus, our results of operations since the end of 1997 are
not directly comparable to those of prior periods.
We commercially launched our StatView system late in the third quarter of
1997. The StatView system was our primary source of revenue for 1998 and the
first six months 1999, and will continue to be the primary generator of our
revenue for at least the next 12 months. StatView system revenue includes the
net sales price of the system, installation and training services and software
maintenance. In future periods, we expect to receive additional revenue from
the sale of newly developed systems, such as AlarmView, which we expect to
launch for commercial service in the first half of 2000, and MobileView.
Our revenue recognition policy is as follows:
. revenue from direct sales of systems is generally recognized upon
installation
. revenue from OEM sales of systems is generally recognized upon shipment
. revenue generated from installation and training fees is recognized upon
completion of the related services
. revenue from annual software maintenance fees is deferred and recognized
over the term of the applicable agreement
Deferred revenue was $442,000 at December 31, 1998 and $1.6 million at June
30, 1999. This deferred revenue resulted primarily from the recognition of
systems shipped but not installed and software maintenance fees. We recognize
deferred revenue upon the installation of systems and recognize revenue from
software maintenance agreements generally over one year terms. We expect that
deferred revenue from software maintenance agreements will represent a
decreasing percentage of revenue in future periods. We expect deferred revenue
from these types of contracts to vary as a percentage of revenue from quarter
to quarter.
We sell our systems through a national direct field sales force, alliances
with strategic partners and OEM arrangements. Our direct sales force regularly
works together with the sales teams of our strategic partners, in particular
Hewlett-Packard Company, Siemens Medical Systems, Inc. and Protocol Systems,
Inc. We also sell our systems through OEM relationships with GE Marquette
Medical Systems, Inc. and Nellcor Puritan Bennett, a subsidiary of Mallinckrodt
Inc. Due to revenue
20
<PAGE>
variability between direct and OEM sales channels, future variations in mix of
sales between such channels could have a significant impact on revenue. We
intend to increase the proportion of our revenues generated by direct sales
versus OEM sales.
Although a number of the components used in our systems are readily
available, some of these components are specifically manufactured for us. Due
to the significant investment in capital equipment that would be necessary to
manufacture these items in-house and the relatively low volumes we require, we
have chosen to utilize contract manufacturing firms to manufacture these
components. We generally purchase these components under contracts that provide
for fixed unit costs with incentives for process and design improvements that
result in future manufacturing cost savings.
Due to our history of net operating losses, we currently pay no federal or
state income tax. As of December 31, 1998, we had $12.8 million of net
operating loss carry forwards for federal income tax purposes, which expire
beginning in 2008. Federal and state law restrictions, such as those related to
ownership changes in our voting stock, as defined in the Internal Revenue Code,
will limit our ability to use these net operating losses to offset future
income tax obligations in any one year.
Results of Operations
The following table sets forth for the periods indicated the percentage of
revenue of certain line items included in Data Critical's statement of
operations data:
<TABLE>
<CAPTION>
Six Months
Ended June
30,
Year Ended --------------
December 31, 1998 1998 1999
----------------- ------ -----
<S> <C> <C> <C>
Revenue................................... 100.0% 100.0% 100.0%
Cost of revenue........................... 44.5 49.1 39.5
------ ------ -----
Gross margin.............................. 55.5 50.9 60.5
------ ------ -----
Operating expenses:
Research and development................. 53.0 161.9 30.1
Sales and marketing...................... 84.9 218.8 55.7
General and administrative............... 62.0 186.6 45.2
------ ------ -----
Total operating expenses.................. 199.9 567.3 131.0
------ ------ -----
Loss from operations...................... (144.4) (516.4) (70.5)
Other income (expense), net............... 3.7 7.3 0.2
------ ------ -----
Net loss.................................. (140.7)% (509.1)% (70.3)%
====== ====== =====
</TABLE>
Six Months ended June 30, 1999 compared to Six Months ended June 30, 1998
Revenue. Revenue increased $2.9 million or 444.8% to $3.6 million compared
to $0.7 million for the six months ended June 30, 1999 and 1998, respectively.
This increase was primarily due to increased sales of StatView systems from our
OEM arrangement with GE Marquette Medical Systems, Inc. and sales generated by
our direct sales force and co-marketing activities with our alliances with
strategic partners. Our percentage revenue growth is not expected to continue
at the same rate in future periods.
Gross margin. Gross margin consists of revenue less cost of revenue. Cost of
revenue associated with our systems consists of purchased components, cost of
contract manufacturing, labor
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for assembly and installation, and overhead. Gross margin increased $1.8
million or 547.2%, in the six month period ended June 30, 1999 compared to the
comparable period of 1998. Gross margin as a percentage of revenue increased to
60.5% in the six months of 1999 from 50.9% for the comparable period of 1998.
Gross margin increased in absolute dollars primarily as a result of increased
revenue generated by additional sales of StatView systems. The improvement in
the gross margin percentage resulted primarily from cost reductions on
components for our StatView receivers purchased in the first six months of 1999
and from higher costs per system in the first six months of 1998 due to
inefficiencies related to production start-up costs.
Research and development. Research and development expenses consist
primarily of personnel and related costs, travel and contract engineering
services. Research and development expenses increased $13,000 or 1.2% to $1.1
million in the six month period ended June 30, 1999 compared to the comparable
period of 1998.
Sales and marketing. Sales and marketing expenses consist primarily of
personnel and related expenses, sales commissions, trade show and advertising
expenses, telecommunications costs and consulting fees. Sales and marketing
expenses increased $0.6 million or 38.7% to $2.0 million compared to $1.4
million for the six months ended June 30, 1999 and 1998, respectively. This
increase was primarily due to a doubling of sales personnel and an increase in
associated expenses, including sales commissions.
General and administrative. General and administrative expenses consist
primarily of personnel and related expenses, travel, communication and
professional fees. General and administrative expenses increased $392,000 or
31.9% to $1.6 million compared to $1.2 million for the six months ended June
30, 1999 and 1998, respectively. This increase was primarily due to increases
in salary and bonus for existing personnel and the addition of regulatory and
office support staff.
Operating expenses. Operating expenses increased $962,000 or 25.8% to $4.7
million compared to $3.7 million for the six months ended June 30, 1999 and
1998, respectively. This is primarily due to an increase in the number of
employees performing sales and marketing, general and administrative, and
research and development functions. Operating expenses as a percentage of
revenue decreased to 131.0% in the first six months of 1999 from 567.3% in the
comparable period of 1998.
Other income (expense), net. Other income (expense), net, decreased $42,000
or 87.5% to a net income of $6,000 in the first six months of 1999 from a net
income of $48,000 in the comparable period of 1998. This resulted primarily
from an increase in borrowings in the first six months of 1999.
1998 compared to 1997
Revenue. Revenue increased to $4.1 million in 1998 from $471,000 in 1997, an
increase of 778.3%. This increase resulted primarily from increased sales of
our StatView system, which was launched in the second half of 1997. This
increase in StatView sales was primarily due to:
. the hiring and training of a direct sales force in late 1997
. increased StatView system sales to GE Marquette Medical Systems, Inc.
. direct sales of StatView systems for Hewlett-Packard monitoring devices
beginning in July 1998
Gross margin. Gross margin increased to $2.3 million in 1998 from $123,000
in 1997. Gross margin as a percentage of revenue increased to 55.5% in 1998
from 26.1% in 1997. Gross margin increased in absolute dollars primarily as a
result of increased revenue generated by additional sales
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of StatView systems. The margin percentage increase resulted primarily from our
write off of $197,000 in inventory related to a discontinued product, which
adversely affected our 1997 gross margin. In addition, 1998 gross margins were
reduced by inefficiencies related to production start-up costs, changing
contract manufacturers and minimal production volumes.
Research and development. Research and development expenses increased to
$2.2 million in 1998 from $1.7 million in 1997, an increase of 28.9%. This
increase was primarily due to incurring a full year of salary and benefits for
a Director of Engineering hired in May 1997, additional personnel hired during
1998, an increase in travel expenditures to support an increasing number of
alliances with strategic partners and an increase in contract engineering
services.
Sales and marketing. Sales and marketing expenses increased to $3.5 million
in 1998 from $1.2 million in 1997, an increase of 192.7%. This increase was
primarily due to a full year of costs associated with our direct sales force,
of which hiring began in August 1997, and includes an increase in salaries,
benefits and related costs and increased sales commissions.
General and administrative. General and administrative expenses increased to
$2.6 million in 1998 from $1.3 million in 1997, an increase of 102.2%. This
increase was primarily due to incurring a full year of salary, benefits and
related costs for the addition, from June through November 1997, of several
senior management positions, and their related support staff.
Operating expenses. Operating expenses increased to $8.3 million in 1998
from $4.2 million in 1997, an increase of 98.3%, primarily due to an increase
in the number of employees performing sales and marketing, general and
administrative, and research and development functions.
Other income (expense), net. Other income (expense), net, increased to a net
income of $152,000 in 1998 from a net income of $45,000 in 1997. The increase
in 1998 resulted from an increase in interest income from the investment of net
proceeds received from our Series D preferred stock offering completed in the
first half of 1998. This increase was partially offset by an increase in
interest expense from bridge loans outstanding from November 1997 until March
1998, increases in term loans used for equipment purchases and the use of our
revolving line of credit.
1997 compared to 1996
Revenue. Revenue increased to $471,000 in 1997 from $190,000 in 1996, an
increase of 147.9%. This increase was primarily due to sales of our StatView
system to GE Marquette Medical Systems, Inc. beginning in December 1997 and an
increase in royalties.
Gross margin. Gross margin decreased to $123,000 in 1997 from $163,000 in
1996, a decrease of 24.5%. Gross margin as a percentage of revenue declined to
26.1% in 1997 from 85.8% in 1996. Gross margin decreased as a percentage of
revenue and in absolute dollars primarily as a result of our write off of
$197,000 in inventory related to a discontinued product. This inventory write-
off was partially offset by gross margin from increased revenue generated by
sales of our StatView system. The decrease in the margin percentage resulted
primarily from the relative decrease in the portion of revenue derived from
product development contracts and software products, which have higher margins
than system sales.
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Research and development. Research and development expenses increased to
$1.7 million in 1997 from $957,000 in 1996, an increase of 77.8%. This increase
was primarily due to an increase in the number of employees and contract
engineering services.
Sales and marketing. Sales and marketing expenses increased to $1.2 million
in 1997 from $512,000 in 1996, an increase of 134.4%. This increase was
primarily due to salaries, commissions, benefits and related support costs from
the creation of our direct sales force, which was formed in the second half of
1997.
General and administrative. General and administrative expenses increased to
$1.3 million in 1997 from $738,000 in 1996, an increase of 71.8%. This increase
resulted primarily from salary, benefits and related costs for the addition of
several senior management positions and support staff hired from June through
November 1997. In addition, rent and related facilities costs increased due to
office space additions in 1997.
Operating expenses. Operating expenses increased to $4.2 million in 1997
from $2.2 million in 1996, an increase of 88.9%, primarily due to an increase
in the number of employees performing sales and marketing, general and
administrative, and research and development functions.
Other income (expense), net. Other income (expense), net, increased to a net
income of $45,000 in 1997 from a net income of $40,000 in 1996. This increase
resulted primarily from an increase in interest income from the investment of
higher average cash balances in 1997, which was partially offset by an increase
in interest incurred on bridge loans drawn in November 1997 and an increase in
term loan balances used to purchase equipment.
Selected Quarterly Results of Operations
The following table presents unaudited quarterly statement of operations
data for each of the six quarters ended June 30, 1999, including such amounts
expressed as a percentage of total revenue. In the opinion of management, this
unaudited quarterly data has been prepared on the same basis as Data Critical's
audited financial statements appearing elsewhere in this prospectus, and
reflect all adjustments consisting only of normal recurring adjustments, which
are necessary for a fair presentation of the information for the periods
presented. You should read the quarterly data presented below along with the
Financial Statements and related Notes appearing elsewhere in this prospectus.
24
<PAGE>
The results of operations for any quarter are not necessarily indicative of
future quarterly results of operations. See "Risk Factors."
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1998 1998 1998 1998 1999 1999
--------- -------- --------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 265 $ 393 $ 1,553 $ 1,926 $ 1,758 $ 1,827
Cost of revenue......... 132 191 679 839 660 757
------- ------- ------- ------- ------- -------
Gross margin............ 133 202 874 1,087 1,098 1,070
------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development............ 492 573 536 593 551 527
Sales and marketing..... 628 812 921 1,151 1,073 924
General and
administrative......... 595 633 643 693 726 894
------- ------- ------- ------- ------- -------
Total operating
expenses............... 1,715 2,018 2,100 2,437 2,350 2,345
------- ------- ------- ------- ------- -------
Loss from operations.... (1,582) (1,816) (1,226) (1,350) (1,252) (1,275)
Other income (expense),
net.................... (15) 63 60 44 17 (11)
------- ------- ------- ------- ------- -------
Net loss................ $(1,597) $(1,753) $(1,166) $(1,306) $(1,235) $(1,286)
======= ======= ======= ======= ======= =======
Percentage of Revenue:
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue......... 49.8 48.6 43.7 43.6 37.6 41.4
------- ------- ------- ------- ------- -------
Gross margin............ 50.2 51.4 56.3 56.4 62.4 58.6
------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development............ 185.7% 145.8% 34.5% 30.7% 31.3% 28.9%
Sales and marketing..... 237.0 206.6 59.3 59.8 61.0 50.6
General and
administrative......... 224.5 161.1 41.4 36.0 41.3 48.9
------- ------- ------- ------- ------- -------
Total operating
expenses............... 647.2 513.5 135.2 126.5 133.6 128.4
------- ------- ------- ------- ------- -------
Loss from operations.... (597.0) (462.1) (78.9) (70.1) (71.2) (69.8)
Other income (expense),
net.................... (5.6) 16.0 3.8 2.3 1.0 (0.6)
------- ------- ------- ------- ------- -------
Net loss................ (602.6)% (446.1)% (75.1)% (67.8)% (70.2)% (70.4)%
======= ======= ======= ======= ======= =======
</TABLE>
Liquidity and Capital Resources
Since inception, we have satisfied our liquidity needs primarily from the
net proceeds of approximately $17.8 million generated through private sales of
common and preferred stock and, to a lesser extent, from bank borrowings and
advance deposits received from customers on open orders.
Net cash used in operating activities was $2.2 million in the first six
months of 1999, $5.3 million in 1998, $3.7 million in 1997 and $1.8 million in
1996. Net cash used in operating activities for each of these periods primarily
consisted of net losses as well as increases in accounts receivable, prepaid
expenses and inventories partially offset by increases in accounts payable,
accrued expenses, customer deposits, net deferred revenue and depreciation and
amortization. Working capital decreased to a deficit of $455,000 at June 30,
1999 from $2.3 million at December 31, 1998, primarily due to net losses from
operating activities. Working capital increased to $2.3 million at December 31,
1998 from $717,000 at December 31, 1997, primarily due to the net proceeds of
$9.1 million received from the private sale of our Series D preferred stock.
Investing activities used net cash of $554,000 in the first six months of
1999 and $394,000 in 1998, provided net cash of $1.6 million in 1997 and used
net cash of $1.5 million in 1996. Net cash used in investing activities for the
first six months of 1999 and for 1998 primarily consisted of
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<PAGE>
purchases of equipment and systems, including computer equipment. Net cash
provided by investing activities in 1997 primarily consisted of sales of
marketable securities, which were partially offset by purchases of computer and
office equipment. Net cash used in investing activities in 1996 primarily
consisted of net purchases of marketable securities, investment in an
unconsolidated affiliate, payment of licensing fees and patent acquisition
costs and the purchase of computer and office equipment.
Net cash provided by financing activities was $840,000 for the first six
months of 1999, $7.9 million in 1998, $2.3 million in 1997 and $3.6 million in
1996. Net cash provided by financing activities for the first six months of
1999 consisted of proceeds from the issuance of notes payable partially offset
by debt repayments. Net cash provided by financing activities during 1998
primarily consisted of net proceeds of $7.0 million from the issuance of
preferred stock and proceeds from the issuance of $450,000 of term debt
obligations. Net cash provided by financing activities in 1997 primarily
consisted of net proceeds of $650,000 from the issuance of common stock on the
exercise of warrants and the issuance of bridge notes payable of $1.6 million.
Net cash provided by financing activities during 1996 primarily consisted of
net proceeds of $3.2 million from the issuance of preferred stock and $400,000
from the issuance of convertible notes.
From inception through June 30, 1999, we have invested a total of
approximately $1.6 million in fixed assets, consisting primarily of computer
equipment, related software and office furniture. We expect to spend an
additional $600,000 over the next 12 months for additional fixed assets,
principally leasehold improvements and furnishings for our new offices,
computer systems, demonstration equipment and additional production test
equipment. Approximately $200,000 of this amount will be invested in an
integrated management information system, which comprises all sales,
accounting, inventory and manufacturing control systems, the implementation of
which began in April 1999 and is expected to conclude in the fourth quarter of
1999. We had no material commitments for capital expenditures at June 30, 1999.
As of June 30, 1999, we had $1.1 million of cash and cash equivalents. As of
that date, our principal commitments consisted of obligations outstanding under
operating leases and commercial bank loans.
We have a working capital line of credit that allows us to borrow up to 75%
of eligible accounts receivable to a maximum of $1.5 million. The line is
collateralized by substantially all of our assets and incurs interest at the
bank's prime rate plus 0.75%. This line of credit expires in April 2000 and
requires us to comply with various financial covenants including tangible net
worth and liquidity ratios. As of June 30, 1999, $900,000 in borrowings were
outstanding and $340,000 in letters of credit issued to provide collateral for
our new facility lease were drawn under this line of credit, leaving an
available balance of $260,000.
In April 1999, we established a subordinated debt facility totaling $1.5
million that expires in October 1999. Loans made under this facility will be
secured by substantially all of our assets, subordinated to the commercial bank
loans referenced above. Advances under the subordinated debt agreement are
subject to certain conditions, and these advances are limited to $500,000 or
more per advance and are payable at interest only for the first twelve months
at an 11% rate and in equal monthly principal and interest payments for the
following 24 months. As of June 30, 1999, nothing was outstanding under this
debt facility. In connection with this debt facility, we also granted the
lender an option to purchase up to 105,000 shares of our Series D preferred
stock at a purchase price
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<PAGE>
of $5.00 per share. This option expires upon an initial public offering or
merger, consolidation or sale of substantially all of our assets.
The same lender has also provided a lease line of credit for up to $1.0
million, comprised of $800,000 to finance equipment and $200,000 to finance
equipment, leasehold improvements and software. Advances made under the lease
line are payable over 36 equal monthly installments. As of June 30, 1999,
nothing was outstanding under this lease line. As part of this lease line, the
lender received a warrant to purchase 12,500 shares of Series D preferred stock
at an exercise price of $1.00 per share. This warrant expires upon the earlier
of April 27, 2006 or five years after our initial public offering.
Although it is difficult for us to predict future liquidity requirements
with certainty, we believe that the net proceeds from this offering, together
with our existing liquidity sources and anticipated funds from operations, will
satisfy our cash requirements for at least the next 12 months. Thereafter, we
may require additional funds to support our working capital requirements or for
other purposes and may seek additional funds through public or private equity
or debt financings or from other sources. There can be no assurance that
additional financing will be available to us or that, if available, such
financing will be available on terms favorable to us and our stockholders.
Year 2000 Readiness Disclosure
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies and governmental agencies may need
to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
State of Readiness
We have made a preliminary assessment of the Year 2000 readiness of our
information technology systems, including the hardware and software that enable
us to provide and deliver our systems. Our assessment plan consisted of:
. quality assurance testing of our systems, including internally developed
proprietary software incorporated in our systems, which has been
completed for our StatView systems and is ongoing for our other systems
. contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to
the delivery of our systems, which is scheduled for completion in October
of 1999
. an assessment of repair or replacement requirements, which has identified
no material issues to date
. implementation, which is ongoing
. creation of contingency plans in the event of Year 2000 failures, which
will be a continuous assessment
In accordance with our Year 2000 compliance plan we have begun to identify
measures that will help to avoid Year 2000 disruptions to our business
operations. As part of our move to larger facilities in June 1999, we replaced
all data connectivity and telephone equipment with updated hardware. In
addition, our new facility is located in a newly constructed office park. We
are currently
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implementing a new integrated management information system primarily in order
to manage our growth. We will test this new system for Year 2000 compliance
during the third and fourth quarters of 1999, with an expected completion date
in the fourth quarter of 1999.
We believe our hardware and software component vendors provide products that
are currently Year 2000 compliant. We will require our material hardware and
software component vendors to provide assurance of their Year 2000 compliance.
We will complete this process during the fourth quarter of 1999. We are
currently assessing our non-information technology systems and will seek
assurance of Year 2000 compliance from providers of material non-information
technology systems. Until such testing is complete and such vendors and
providers are contacted, we will not be able to completely evaluate whether our
information technology systems or non-information technology systems will need
to be revised or replaced.
We have not specifically contacted our existing customers regarding the Year
2000 compliance of our systems. However, we have posted our Year 2000 policy on
our website since November 1998, and we reference our Year 2000 policy on each
customer quote and purchase order.
Costs
To date, we have not incurred significant costs in connection with
identifying or evaluating Year 2000 compliance issues including costs
associated with time spent by employees in the evaluation process and Year 2000
compliance matters generally. If these costs are substantially higher than
anticipated in future periods, it could have a material adverse effect on our
business, financial condition and results of operations. The cost of Year 2000
compliance will be accounted for as an operating expense and funded from
working capital.
Risks
We are not currently aware of any Year 2000 compliance problems relating to
our technology or our internal systems that would have a material adverse
effect on our business, financial condition and results of operations. Third-
party software or hardware incorporated in our systems for sale to customers or
in our internal systems may need to be revised or replaced, all of which could
be time consuming and expensive. In addition, we may discover Year 2000
compliance problems in our technology that will require substantial revisions.
If we fail to fix or replace third-party software or hardware or upgrade our
technology on a timely basis, the result could be lost revenue, increased
operating costs, the loss of customers and other business interruptions, any
one of which could have a material adverse effect on our business, financial
condition and results of operations. Moreover, the failure to adequately
address Year 2000 compliance issues in our technology and our internal systems
could result in claims of mismanagement, misrepresentation or breach of
contract and related litigation, which could be costly and time-consuming to
defend. In addition, there can no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. The failure by these types of
entities to be Year 2000 compliant could result in a systemic failure beyond
our control, such as a prolonged internet, telecommunications or electrical
failure, which could also prevent us from delivering our systems to our
customers, and therefore have a material adverse effect on our business,
financial condition and results of operations.
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Contingency Plan
As discussed above, we are engaged in an ongoing Year 2000 assessment and
the development of contingency plans. The responses received from third-party
vendors and service providers will be taken into account in determining the
nature and extent of any contingency plans. We have identified our worst-case
scenario as the interruption of our business resulting from the inability of
our vendors to deliver components or the failure of public utilities to provide
services. We have not yet completed our worst-case scenario contingency plan.
Without a worst-case scenario contingency plan we may not have enough time to
complete remedial measures and implement contingency planning for the worst-
case scenario. We plan to complete our worst-case scenario contingency plan in
accordance with our compliance plan in the fourth quarter of 1999.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The implementation of SOP 98-1 is not expected to
have a material impact on our financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The implementation of SOP 98-5
is not expected to have a material impact on our financial position or results
of operations.
29
<PAGE>
BUSINESS
We design, manufacture, market, install and support communication and
information systems to allow access to health information, including patient
vital signs and other diagnostic data, using wireless technology and
proprietary software. Our systems provide for information retrieval from remote
sources, both inside and outside the hospital environment, and are integrated
and coordinated through either a wireless network utilizing our interactive
device, a personal computer or the internet. Our focus within health care is on
the hospital, physician and at-home consumer markets. The following are
examples of data that can be transmitted using our technology:
. ECG waveforms . heart rate
. blood pressure . temperature
. oxygen levels in the blood . patient name and location
. ventilator data . physician and nurse notes
We have entered into strategic alliances with the following leading
manufacturers of patient-monitoring medical equipment to assist us in the
development, marketing and distribution of our systems:
. GE Marquette Medical Systems, Inc., a subsidiary of General Electric
Company
. Hewlett-Packard Company
. Nellcor Puritan Bennett, a subsidiary of Mallinckrodt Inc.
. Protocol Systems, Inc.
. Siemens Medical Systems, Inc., a subsidiary of Siemens AG
We sell our systems through our direct sales force and jointly with these
strategic partners. Our systems are currently being used in more than 100
hospitals is over 30 states, including:
. Baylor University Medical Center . Montefiore Medical Center -
in Dallas, TX Einstein Division in New York, NY
. Duke University Medical Center in . Memorial Sloan Kettering Cancer
Durham, NC Center in New York, NY
. Heartland Hospital in St. Joseph, . Mt. Sinai School of Medicine in
MO New York, NY
. Kaiser Foundation Hospital in San . Northwest Hospital in Seattle, WA
Francisco, CA
. St. Mary's Hospital in Pueblo, CO
. The Mayo Clinic in Scottsdale, AZ
Industry Background
Recent technological advances in digital wireless communications and the
demands of an increasingly mobile workforce have resulted in the proliferation
of wireless hand-held information communication devices. The capabilities of
these sophisticated devices, which include personal digital assistants,
wireless receivers and smart phones, are fostering the development of
information-intensive applications than can result in greater workforce
productivity and efficiency.
At the same time, healthcare facilities, such as hospitals and extended care
facilities, are focused on reducing costs and enhancing workforce productivity.
These facilities are seeking to improve the response time, decision-making
quality and overall efficiency of caregivers, including physicians and nurses,
who treat patients in life-critical situations.
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Dynamics of Healthcare Industry
Large Market with Need for Reduced Costs
According to the Health Care Financing Administration (HCFA), healthcare is
estimated to be the largest single sector of the U.S. economy in 1999,
representing approximately $1.2 trillion, or 14% of the U.S. gross domestic
product. According to data from the American Hospital Association, in 1997
there were 6,097 hospitals and 1,035,890 hospital beds in the United States.
Inefficiencies within the healthcare system consume significant time, resources
and capital. During 1998, an estimated $250 billion, or 25 percent of every
healthcare dollar, was spent on excessive administrative costs, the delivery of
unnecessary care and performance of redundant tests and procedures. One
responsive measure taken by the government and managed care companies has been
to impose restrictions on hospital admittance and reimbursement. This has
resulted in higher levels of acuity and a lower number of patients being
treated in an inpatient environment, each requiring closer monitoring in order
to maintain an appropriate level of care.
Aging of the Population
Rapid growth in the aged population is expected as the baby boomers move
into the elderly population group. According to the U.S. Census Bureau, the 75+
age group is expected to grow from 13.2 million in 1990 to over 16.6 million by
the year 2000. The population of seniors age 85+ is expected to increase from
3.1 million in 1990 to 4.3 million by the year 2000. As the proportion of
population who are elderly increases, the average age of hospital patients
increases as well. Since the elderly are more susceptible to complications
while hospitalized, monitoring of their vital signs is critical to ensure
against unforeseeable adverse events.
Migration of Patients to Less Costly Care Environments
In response to escalating healthcare costs, government and private pay
sources have implemented cost-containment measures designed, when appropriate,
to migrate post-acute patients more quickly from higher intensity care, high
cost units such as intensive care units to lower intensity care, lower cost
units such as step-down units. These patients continue to require monitoring
even though they have been moved to a lower cost setting which has a much lower
nurse-to-patient ratio. Hospitals spend significant capital to upgrade their
monitoring equipment to accommodate the level of care required by these
patients. Because of this trend of moving more ill patients out of critical
areas of the hospital sooner, hospitals are converting more of their general
medical/surgical beds to step-down units or telemetry units.
Underdeveloped Communications Technology in Hospitals
Underdeveloped information systems and communications procedures within
hospitals, specifically relating to critical care patient information,
contribute to inefficiencies and high cost in the healthcare industry.
Caregivers must attend to several patients in various locations while
simultaneously accessing time-critical patient medical information that is
monitored and collected by medical equipment. Within hospitals, patients are
monitored by medical equipment that either is centrally connected or operates
on a stand-alone basis. According to Frost and Sullivan, the worldwide hospital
monitoring equipment market, which includes cardiac, respiratory, blood gas,
and neurological monitoring equipment, is estimated to be approximately $6.4
billion in 1999. The large number of medical monitoring devices in each
hospital and the fact that these devices are manufactured by numerous medical
equipment suppliers has hampered the ability of many hospitals
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to create integrated critical care patient communications networks. While most
hospitals operate in a decentralized nurse mode, the information from medical
equipment is available only at a central location. Consequently, most hospitals
employ monitoring technicians to centrally monitor critical care patient data
captured by medical equipment and inform caregivers when problems arise. This
method of communicating critical care information is time-consuming, costly and
can adversely impact the care of patients requiring immediate attention. Due to
these conditions, neither monitoring technicians nor caregivers within
hospitals are able to attend to other vital stand-alone medical equipment on a
regular basis.
Growth of Wireless Communications
In recent years, the proliferation of wireless communications solutions has
extended the reach and connectivity of mobile professionals. For example, in
voice communications, cellular telephones have enabled mobile users to place
phone calls from virtually any location. Similarly, advances in wireless data
communications, including wireless local area networks (LANs) and radio modems,
have enabled the extension of enterprise networks to the notebook computers and
handheld information communication devices of mobile users. The projected
growth of wireless data communications systems, driven by increasing
connectivity options for mobile users, will result in increased accuracy,
timeliness and convenience of information access, thereby reducing costs and
improving productivity. Frost & Sullivan expects revenue from wireless data
services to triple to more than $9 billion in 2000 from an estimated $3 billion
in 1997.
The Internet as a Critical Healthcare Information Tool
Consumers are seeking more information in order to actively manage their
personal health and wellness. As a result, many consumers are turning to the
Internet to obtain health information. According to Cyber Dialogue, an industry
research firm, during 1998, approximately 22 million adults in the United
States searched online for health and medical information. In addition, Cyber
Dialogue estimates that in the year 2000, the number of adults in the United
States searching for online health and medical information will grow to
approximately 33 million, and they will spend approximately $150 billion for
all types of health-related products and services. Cyber Dialogue also
estimates that approximately 70% of the persons searching for health and
medical information online believe the Internet empowers them by providing them
with resourceful information to make better informed health decisions. Over the
past decade, the healthcare industry has changed radically as employers seeking
to reduce their healthcare costs have turned from indemnity insurance to
managed health plans. Approximately 180 million people, or 90% of the insured
U.S. population, are now subject to some form of managed care. We believe that
consumers increasingly question the motivations of their caregivers and are
more inclined to take an active role in the decisions that affect their health
and wellness as well as that of their families.
The Data Critical Solution
Data Critical's systems extend the power of wireless technology to the
healthcare industry by employing a suite of hardware and software systems that
transmit complex time-critical data over wireless networks and through the
internet. Our systems improve communications and decision-making both in the
hospital and in remote locations, thereby improving the delivery of patient
care and reducing healthcare costs.
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Our solution provides the following key benefits:
Increased Work Efficiency. Our systems extend a hospital's existing patient-
monitoring capability by allowing physicians and nurses to remotely monitor
critically-ill patients and communicate on a near-immediate basis. By gathering
data from a broad array of patient-monitoring and other medical equipment and
distributing that data to a wireless communications device, caregivers can
monitor patient conditions while continuing to perform tasks elsewhere. When
there are adverse changes in a particular patient's condition, caregivers are
immediately alerted. Alarms can then be automatically and simultaneously
transmitted to individual nurses, physicians or other caregivers.
Reduced Costs. Most hospitals employ technicians with the responsibility to
monitor patient data from central locations. Those hospitals that use
monitoring technicians generally employ one to two full time equivalents per
nursing station. Our systems reduce the need for hospitals to maintain large
staffs of monitoring technicians. We believe that in many situations hospitals
can realize full return on their investment within 12 months of purchasing our
systems simply through the redeployment of these hospital personnel.
Improved Quality of Care. Our systems are designed to provide critical
patient information on a near-immediate basis directly to caregivers in and out
of the hospital. This near immediate delivery of information allows for more
rapid response times with better information. Our products allow hospitals to
maintain or improve quality of care, especially in light of the current trend
of declining caregiver-to-patient ratios.
Ease of Use. We have designed our receivers based on feedback from
healthcare professionals that dictated operational simplicity and hand-held
form factors. Device operation is rapidly learned. We believe that our design
features allow our customers to quickly and easily deploy our systems without
requiring extensive or technical training.
Open Architecture. Our systems are designed to interface with medical
equipment manufactured by numerous medical equipment suppliers. By providing a
standard, scaleable system we can interface with the medical equipment that is
already deployed in hospitals. In addition, the ability of our systems to
operate with other similar medical equipment allows us to partner with various
manufacturers.
Security and Confidentiality. Certain of our systems include strict
authentication methods and data encryption technology. These security features
allow for the exchange of confidential patient information without that
information being compromised. In addition, our Wireless Telemedicine (WT)
Server software provides access to the proprietary network software of our
strategic partners' patient monitoring systems.
Our Strategy
Our objective is to be the leader in providing wireless health information
communications systems to industries that depend upon the interactive
transmission of complex and time-critical data to mobile individuals. The
principal elements of our strategy include the following:
Pursue Additional Strategic Alliances. We are continuing to pursue
additional strategic alliances that will augment or expand our distribution
channels and system offerings. In the immediate term, we are pursuing
additional partners for our AlarmView system. In addition to our
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<PAGE>
direct sales force, we distribute our systems through leading vendors of
complementary medical equipment. We expect to build upon the expertise we gain
though these strategic alliances to facilitate additional alliances and move
into new markets. We will continue to review mutually beneficial opportunities
to share new technologies, such as cross-licensing opportunities. We also
intend to enter into strategic relationships with one or more internet portals
and other web-based healthcare companies to promote the use of our Internet ECG
system and DataView system.
Increase Market Penetration and Generate Follow-On Sales Opportunities. The
initial target market for our systems includes approximately 5,000 hospitals
and 50,000 cardiology-related physicians in the U.S. Each of these hospitals
has multiple placement opportunities for our systems in various areas
throughout the hospital, including critical care units, step-down units,
emergency rooms, telemetry units and obstetrics. Since commencing distribution
of our systems in late 1997, we have installed our systems in over 100 U.S.
hospitals. We intend to increase our market penetration in major U.S. hospitals
by building upon the existing installed base of products manufactured by our
strategic alliance partners. In addition, once we have introduced our systems
to a hospital and have demonstrated the benefits of these systems to healthcare
professionals, we plan to sell our systems to other areas of practice within
that hospital.
International Expansion. We intend to expand sales of our systems into
international markets, including Europe and Japan. The international healthcare
market makes use of similar networked and stand-alone monitoring devices and
has similar scope to that of the U.S. healthcare market. We believe that there
may be significant demand for our systems in international markets because
hospitals outside the U.S. are even less equipped with remote monitoring and
interconnectivity systems than U.S. hospitals. We intend to build upon our
existing strategic alliances through their dealer and distributor organizations
to further our international expansion strategy.
Expand Use of the Internet to Link Physicians and At-home Consumers. Through
our Internet ECG system and the DataView system, we expect to expand our
ability to rapidly provide complex data to these users. We believe that many of
our existing technologies for the efficient transmission of data may have broad
applications for hospitals, physicians and patients seeking to access and
deliver information from and to remote locations, through either wireless or
wired devices linked to the internet. We have developed core technology to
address the need to transmit medical information from homes through the
internet.
Maintain and Build on Technology Leadership. We are a technology leader in
providing for the communication of complex healthcare data through wireless
systems and networks. To strengthen and extend our communications solutions, we
plan to continue investing in research and development to expand the features
and functionality of our systems. For example, future systems may extend the
remote communications network to other types of medical equipment, such as
infusion pumps, ventilators, incubators, medical information systems, smart
beds, nurse call devices and home care devices. In addition, we may apply our
technology to other industries where the rapid communication of detailed
information is critical, and where the mobility of end users is key, such as
law enforcement or other government services.
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Our Systems
We design our systems to address the needs of the healthcare industry.
Caregivers are highly dependent on access to complex and time-critical data and
benefit greatly from the rapid transmission of such data.
The following table provides a summary of the features and benefits of our
systems:
<TABLE>
<CAPTION>
Market Focus Systems Features and Benefits
- -------------------------------------------------------------------------------
<C> <C> <S>
Hospitals StatView . Hand-held unit that alerts caregivers within ten
seconds when alarms from patient monitors or
other medical equipment are triggered
. Provides reminder messages and periodic patient
updates
. Enables immediate responses to patient alarms
. Allows caregivers to monitor graphic
representations of data, known as waveforms, and
vital signs while performing tasks elsewhere in
the hospital
------------------------------------------------------------------
AlarmView . Uses wireless technology to deliver alarms and
other information collected by stand-alone
medical equipment to a patient-monitoring
system, creating a virtual network
. Designed to allow rapid response to non-
networked medical equipment
. Designed to increase caregiver efficiency and
flexibility at a low cost per unit
- -------------------------------------------------------------------------------
Physicians MobileView . Uses digital wireless technology on a wide area
network to provide critical patient information
to caregivers in remote locations usually outside
of the hospital
. Allows caregivers to remotely review ECGs, vital
signs parameters, associated waveforms, and nurse
notes
. Permits faster and more informed clinical
consultation and decision-making from remote
locations
. Delivers quality waveforms without faxes or phone
lines
------------------------------------------------------------------
DataView . Allows caregivers to access data collected by
StatView through a personal computer
- -------------------------------------------------------------------------------
Consumers Internet ECG . Enables consumers to view their ECGs through an
application downloaded via the internet
. Permits at-home use for stress management, self-
monitoring of physical fitness and educational
activities
</TABLE>
Hospital Systems
StatView
The StatView system is a local wireless system that alerts nurses when
alarms from patient-monitoring systems are triggered. The StatView system
connects to an existing patient-monitoring network, collects alarm data from
these monitors and transmits vital signs and waveforms through a dedicated
wireless transmitter to a StatView receiver unit worn by the nurse. Alarm
events can be transmitted automatically to individuals or groups and periodic
updates can be transmitted to the appropriate caregivers. Nurses using the
StatView system carry a compact graphic
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<PAGE>
wireless receiver that sounds alarm tones or vibrates whenever a patient
monitor generates an alarm. The receiver then displays bed number, patient
name, diagnosis (such as ventricular tachycardia), heart rate, and, with one
button click, a six second ECG waveform. By looking at the waveform, nurses
can determine the urgency of the alarm and be informed prior to reaching a
patient's bedside.
The following diagram illustrates a typical StatView installation:
[CHART APPEARS HERE]
"StatView System"
[Beneath the heading is a diagram containing four icons. Starting from the
left, there are two icons, one showing three telemetry units labeled "Portable
Monitors" and one below this showing two monitors labeled "Bedside Monitors."
These icons are both linked to an icon of a monitor labeled "Central Station,"
which is linked to a third icon to the right labeled "WT Server." The "WT
Server" icon is linked to an icon labeled "Wireless Transmitter" that is
depicted as transmitting signals to two icons of a StatView receiving unit
labeled "StatView Receiver."]
The StatView system has the following key features and benefits:
. transmits alarm data to lightweight, hand-held StatView receivers within
ten seconds
. enables alarm information to be sent to all nurses or to the patient's
assigned caregiver
. sends reminder pages for any alarms that have not been acknowledged
within a specific time period
. allows caregivers to configure the transmission of periodic updates
AlarmView
AlarmView is a wireless system that is designed to connect to stand-alone
devices to create a virtual monitoring network. AlarmView attaches to the back
of non-networked patient monitors, infusion pumps and other intelligent
devices and can deliver near immediate alarms and other information to
wireless receivers in less than ten seconds. The information from AlarmView
transmitters can be sent to the same StatView receivers already worn by
caregivers. As the volume of patient admissions changes, the AlarmView
transmitter can be easily transferred to devices manufactured by multiple
vendors without requiring costly and time-consuming setup since AlarmView is
designed to automatically interface upon connection. We submitted our
AlarmView system for approval by the FDA in August 1999, and expect to begin
commercial sales of AlarmView systems in the first half of 2000.
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<PAGE>
AlarmView has the following key features and benefits:
. increases efficiency and flexibility within hospital wards
. low cost per unit
. can store information not recorded by stand-alone devices
. can integrate with StatView
Physician Systems
MobileView
MobileView transmits data that is collected by the StatView system from
individual patient bedside and telemetry monitors to physicians or other
caregivers at remote locations usually outside of the hospital. The MobileView
System uses digital wireless technology on a wide area network to provide
caregivers with immediate remote access to critical patient information,
including multiple ECGs, vital signs parameters and associated waveforms and
nurse notes. Physicians can access this information through a portable,
wireless hand-held device or through a website that uses our DataView system.
MobileView is designed to be easily integrated into a wide variety of
monitoring equipment and is compatible with our StatView system.
DataView
Our DataView system allows physicians to review data collected by StatView
systems through a website.
The following diagram illustrates a typical MobileView and DataView
installation:
[CHART APPEARS HERE]
"MobileView and DataView Systems"
[Beneath the heading is a diagram containing eight icons. Starting from the
left, there are two icons, one showing three telemetry units labeled "Portable
Monitors" and one below this showing two monitors labeled "Bedside Monitors."
These icons are both linked to an icon of a monitor to labeled "Central
Station," which is linked to a third icon to the right labeled "WT Server."
The "WT Server" icon is linked to an icon labeled "Wireless Carrier." The
"Wireless Carrier" icon is connected to an icon of a communications tower that
is depicted as transmitting signals to an icon of two MobileView receiving
units labeled "MobileView" on the far right of the page.
The "Wireless Carrier" icon is also connected to an icon of a personal
computer labeled "DataView" to the far right beneath the MobileView receiving
unit icons.]
The MobileView system has the following key features and benefits:
. delivers quality waveforms and other patient data to remote locations
. enables faster clinical consultation and decision making
. transmits data securely
. integrates with StatView
. provides a dial-up, wireless connection to the patient-monitoring network
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<PAGE>
Consumer System
Internet ECG
We have completed development of the initial release of our Internet ECG
system, which is designed for consumers to view their own ECGs and review them
through an application downloaded via the internet. Through a proprietary hand-
held device, the consumer would be able to relay heart rate and ECG waveform
information via a personal computer's microphone to a website running our
software. The website would then relay additional biofeedback, exercise
training data and personal educational information back to the consumer almost
simultaneously. The Internet ECG system is not yet commercially available. We
intend to pursue agreements with internet portals and other web-based
healthcare companies for distribution of this system.
The Wireless Telemedicine (WT) Server
Our StatView and MobileView systems depend on our WT Server, which is
designed to collect, compress and encrypt critical patient data for
transmission to individual handheld devices through wireless networks. The WT
Server combines an Intel server running Microsoft NT with our proprietary
technology, which is designed to ensure secure and rapid transmission of
confidential patient information.
The WT Server has the following key features and benefits:
. compatible with the leading patient monitoring systems
. internet browser-based system administration
. allows multiple concurrent wireless connections
. radio frequency transmitter provides unit coverage area
. modem interface with digital wireless networks
Strategic Alliances
We have entered into strategic alliances with manufacturers of medical
equipment to:
. increase our revenue
. gain access to proprietary technology
. increase our market penetration
. provide important specialized industry experience
. enhance our system portfolio
We have entered into direct sales and co-marketing arrangements with the
following companies:
Hewlett-Packard Company. Hewlett-Packard Company's Medical Product Group is
a worldwide manufacturer and supplier of clinical measurement and diagnostic
equipment for the healthcare industry. In September 1997, we obtained a
nonexclusive license to a patent from Hewlett-Packard for the transmission of
data over an alphanumeric paging network. This patent is used in our MobileView
system. The Hewlett-Packard license agreement has an indefinite duration,
subject to termination if either party breaches its material obligations
thereunder. We also have an arrangement with Hewlett-Packard to engage in joint
sales and marketing programs and trade show presentations for StatView and
MobileView systems.
Siemens Medical Systems, Inc. Siemens Medical Systems, a division of Siemens
AG, manufactures and sells a wide variety of medical equipment, including life
support, anesthesia, and
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<PAGE>
electrocardiography products. In July 1998, we entered into an agreement with
Siemens under which Siemens has enabled us to integrate our MobileView and
StatView systems with Siemens' Infinity Patient Monitoring System. The Siemens
agreement is effective through January 2000, with successive automatic 12 month
renewal periods. Either party may terminate the Siemens agreement upon 60 days
notice or if the other party breaches its material obligations thereunder. We
have also engaged in joint sales and marketing programs and trade show
presentations with Siemens for our MobileView and StatView systems.
Protocol Systems, Inc. Protocol designs, manufactures and markets patient
monitoring instruments and systems in more than 80 countries worldwide. In
March 1998, we entered into an agreement with Protocol under which Protocol has
paid us to integrate our MobileView and StatView systems with Protocol's
Flexible Monitoring System. We have also agreed to provide Protocol with an OEM
system under jointly agreed upon labeling. The Protocol agreement is effective
through April 2001, subject to early termination if either party breaches its
material obligations thereunder. Protocol may elect to extend the agreement for
an additional three year term.
We have entered into original equipment manufacturing arrangements with the
following companies:
GE Marquette Medical Systems, Inc. GE Marquette Medical Systems, a
subsidiary of General Electric Company, manufactures and supplies patient-
monitoring products in more than 65 countries worldwide. In January 1997, we
entered into an agreement with GE Marquette under which we granted GE Marquette
nonexclusive worldwide distribution rights to the StatView system under the
trade name IMPACT. We also granted GE Marquette the exclusive right to
distribute StatView systems with certain custom features, subject to minimum
purchase requirements. The GE Marquette agreement is effective through January
2000, subject to early termination if either party breaches its material
obligations thereunder.
Mallinckrodt Inc. Nellcor Puritan Bennett, a subsidiary of Mallinckrodt
Inc., manufactures and sells a wide range of healthcare products, including
pulse oximetry monitoring devices, in more than 100 countries worldwide. In
February 1999, we entered into an agreement with Nellcor Puritan Bennett under
which Nellcor Puritan Bennett paid us to integrate our AlarmView systems with
Nellcor Puritan Bennett's products. Nellcor Puritan Bennett has also agreed to
serve as a nonexclusive distributor of AlarmView. The Nellcor Puritan Bennett
agreement is effective through February 2004, subject to early termination if
either party breaches its material obligations thereunder.
Customers and Markets
Data Critical currently focuses on the healthcare industry because of the
critical need of healthcare professionals to have immediate access to time-
critical patient data. Our target customers include hospitals and physicians
primarily across the U.S., and to a lesser extent in Canada and Europe. We
believe that such groups would benefit from using the StatView and AlarmView
systems, by reducing costs and increasing productivity. Our target markets also
include aggregators of individual physicians such as large medical groups,
independent practice associations, physician practice management companies and
other large organized physician entities. We also target physicians who
practice outreach telemedicine. Additionally, we believe that specialist
physicians with patients who require immediate medical attention upon sudden
change in medical status, such as cardiologists, nephrologists, obstetricians
and gynecologists, would benefit from using our
39
<PAGE>
MobileView systems. Although our products are only being used by hospitals and
physicians, we are targeting the at-home consumer market.
Below is a summary of our target domestic markets and end users:
<TABLE>
<CAPTION>
Market Category System Market Size
- ---------------------------------------------------------------------------
<C> <C> <S>
Hospitals StatView More than 5,000 hospitals
AlarmView in the U.S.
- ---------------------------------------------------------------------------
Physicians MobileView Approximately 50,000
cardiology-related physicians
DataView in
the U.S.
- ---------------------------------------------------------------------------
At-home Consumers Internet ECG More than 58 million
people with cardiovascular
disease in the U.S.
</TABLE>
Our systems are being used in more than 100 hospitals in over 30 states. Our
current customers include:
. Baylor University Medical . Montefiore Medical Center -
Center in Dallas, TX Einstein Division in New York, NY
. Duke University Medical Center . Memorial Sloan Kettering Cancer
in Durham, NC Center in New York, NY
. Heartland Hospital in St. . Mt. Sinai School of Medicine in New
Joseph, MO York, NY
. Kaiser Foundation Hospital in . Northwest Hospital in Seattle, WA
San Francisco, CA
. St. Mary's Hospital in Pueblo, CO
. The Mayo Clinic in Scottsdale,
AZ
Sales, Marketing and Customer Support
We market and sell our systems both through direct marketing and sales
programs and through OEM relationships with our strategic partners. We
currently have 15 sales territories in two regions supported by four telephone
direct sales account managers. In addition, our strategic partners provide
field sales people who actively sell and market our StatView and/or MobileView
systems to their respective accounts. We carefully select our strategic
partners and work closely with them throughout their sales process to increase
our revenue potential. We maintain direct co-marketing relationships with
several of our partners, which allow us more control and flexibility over the
sales and marketing process of our systems.
We also directly target physicians and large medical groups for MobileView
and nurses and nursing professional associations for StatView. We maintain an
extensive, online database of all U.S. hospitals that is updated quarterly.
This database is a key source of sales information covering capital equipment
purchase cycles, key decision makers and the status of all contacts made at the
account. We attend and showcase our systems at major trade shows, including
those sponsored by the American Heart Association, the Association of Nurse
Executives and the Society of Critical Care Medicine. At many of these trade
shows, we co-promote our products in our strategic partners'
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<PAGE>
booths. We also send direct mailings to potential customers promoting our
systems, and support the external research efforts of institutions that are
reviewing technology uses within the healthcare industry.
We believe that a high level of customer support is necessary to achieve
wide acceptance of our systems. We provide customer support services twenty-
four hours a day, seven days a week. We employ technical support personnel who
work directly with our direct sales force, strategic partners and customers. We
also provide training programs for our customers.
Manufacturing
Our manufacturing operations consist primarily of final assembly and
testing, quality assurance, packaging and shipping. Our current manufacturing
facility is located in Bothell, Washington. Our facilities are regulated by the
FDA and are subject to periodic audits for compliance with the FDA's quality
system regulations.
We currently rely on outside contract manufacturers for certain components
of our systems. We purchase standard server hardware directly from third party
manufacturers and install our proprietary software on these servers. We have
developed a supplier selection procedure and approved vendor list to maintain
quality. In addition, we monitor our suppliers' performance to ensure
consistent quality, reliability and yield.
Research and Development
The emerging market for the use of wireless communications in the healthcare
industry is characterized by rapid technological developments, frequent new
product introductions and evolving industry standards. Advances in operating
systems, radio frequency systems and hardware are enabling the rapid
proliferation of new solutions.
Through our research and development efforts, we strive to use the most
current technology to ensure that we provide systems that meet the needs of an
ever-changing marketplace. We believe that our future success will depend in
large part on our ability to continue to maintain and enhance our software
applications, wireless technologies and other proprietary technology while
simultaneously improving the performance, features and reliability of our
systems. The success of our new system introductions will be dependent on
several factors, including:
. identification of a realizable market opportunity
. definition of new systems
. timely completion and introduction of new systems
. market acceptance of our systems
To enable us to develop new systems more rapidly, we intend to leverage the
modular nature of our system architecture. In addition, we intend to rely on
our alliances with strategic partners for additional research and development
resources to create solutions that interface with their products.
In the first six months of 1999 and the years 1998, 1997 and 1996, expenses
attributable to research and development totaled $1.1 million, $2.2 million,
$1.7 million and $957,000, respectively. We believe that the timely development
of new and enhanced systems and technologies is necessary to remain competitive
in the marketplace. Accordingly, we intend to continue recruiting and hiring
experienced development personnel, as well as making other investments in
research and development.
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Competition
Currently, we are not aware of any product offerings directly competitive to
our systems. Our systems compete primarily with traditional methods of patient
monitoring, such as direct patient oversight, monitoring through wired systems
and voice communications. If we are successful in establishing a need for our
systems, we expect that additional entrants will be drawn into our market. In
addition, there is the possibility that one or more of our strategic partners
or other medical equipment manufacturers may decide to develop products that
directly compete with our systems. We may have difficulty competing with these
potential competitors because many of them may have longer operating histories,
significantly greater resources, better name recognition and a larger installed
base of products and technologies.
Our systems compete on the basis of cost-efficiency, enhanced mobility,
features, functionality and price. We believe we compete favorably with regard
to each of these factors. To maintain and improve our competitive position, we
must:
. continue to prove the benefits of our systems
. develop new and improved technologies
. market to hospitals, healthcare professionals and consumers
. maintain and continue to create alliances with key manufacturers of
complementary medical equipment
Patents and Intellectual Property Rights
We rely on a combination of patent, copyright, trademark and trade secret
laws and other agreements with employees and third parties to establish and
protect our proprietary rights. Currently, we own three patents, two of which
were filed with the U.S. Patent and Trademark Office (PTO) in 1993 and one in
1996, have one pending patent application that was filed with the PTO in 1996,
and license two patents, filed with the PTO in 1991 and 1995, and certain trade
secrets and other intellectual property rights from third parties. The duration
of patents filed with the PTO is 20 years from the date of filing. Our patents
cover specific technology related to the wireless transmission of waveforms.
Our strategic partners have also disclosed and/or licensed to us source code or
output protocols, which are proprietary to their medical equipment and
monitoring systems. We believe that no other company in our industry currently
has the access to the breadth of medical monitoring equipment and source/output
code that we do.
We require each of our employees and consultants, including our executive
officers, to enter into standard agreements containing provisions requiring
confidentiality of proprietary information and assignment to us of all
inventions made during the course of their employment. We also enter into
nondisclosure agreements and limit access to and distribution of our software,
documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our systems or may independently develop
technologies that are substantially equivalent to ours. We cannot be certain
that our patent application will be allowed or that our existing patents will
be held valid and enforceable by a court if we desire to enforce them. In
addition, employees or other parties may breach confidentiality agreements or
other contracts we have entered, and we may not be able to effectively enforce
our rights in the event of such breaches.
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<PAGE>
Government Regulation
Federal Communications Commission
In the U.S., we are subject to various FCC rules and regulations. The FCC
requires that wireless access devices meet various standards, including safety
standards with respect to human exposure to electromagnetic radiation and basic
signal leakage. The FCC has approved our radio frequency system components. In
addition, we currently hold an FCC license on 26 frequencies in the UHF
spectrum.
We are also subject to regulation under the Telecommunications Act of 1996
and other federal, state and international laws and regulations. Additional
laws and regulations may also be adopted with respect to wireless
communications networks covering issues such as user privacy and quality of
products and services. The adoption of any additional laws or regulations, or
our failure to comply with existing laws and regulations, may impede the growth
of wireless communications networks, decrease the demand for our systems and
have a material adverse effect on our business, financial condition and results
of operations.
Food and Drug Administration
The FDA is responsible for assuring the safety and effectiveness of medical
devices under the Federal Food, Drug and Cosmetic Act. Our StatView, MobileView
and AlarmView systems are subject to regulation by the FDA because they have
been defined as medical devices used in the diagnosis and treatment of disease.
Under FDA regulations, medical devices are classified into one of three
classes on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness: Class I, Class II and Class
III. Class I requires only general controls such as labeling, pre-market
notification and adherence to good manufacturing practices. Class II requires
general and specific controls such as performance standards and post-market
surveillance. Class III requires pre-market approval by the FDA. The FDA has
classified our StatView system as a Class III product. MobileView is currently
classified as a Class II product, grandfathered under the Hewlett-Packard
PalmVue classification. We submitted our AlarmView system for FDA approval as a
Class III product during August 1999.
Before we can market systems that are classified as Class III products, we
must obtain pre-market notification clearance under Section 510(k) of the
Federal Food, Drug, and Cosmetic Act. In addition, material changes to our
systems may also be subject to FDA review and clearance prior to marketing or
sale in the U.S. The FDA will typically grant 510(k) clearance if we can
establish that our device is "substantially equivalent" to a legally marketed
Class I or II medical device or to a Class III device for which the FDA has not
yet required the submission of a pre-market approval application.
The process of obtaining 510(k) clearance can be expensive and time-
consuming, and may require the submission of extensive supporting data. If we
fail to obtain 510(k) clearance for any of our new or modified systems, or if
the 510(k) process is extended for a considerable length of time, the
commencement of commercial sales of our such systems will be delayed
substantially or indefinitely.
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<PAGE>
Healthcare Regulations
As a provider of healthcare related systems, we are also subject to
extensive and frequently changing federal regulations that govern the
licensing, conduct of operations and other aspects of our business. Federal
certification and licensing programs establish standards for day-to-day
operation of our research and manufacturing facilities. Regulatory agencies
verify our compliance with such standards through periodic inspections and
required participation in proficiency testing programs. Although we have been
found to be in compliance with all such standards to date, our facilities may
not pass future inspections conducted to ensure compliance with federal or any
other applicable licenses or certification laws.
Patient Medical Record Confidentiality Laws
The confidentiality of patient records and the circumstances under which
records may be released for transmission through our systems are subject to
substantial regulation by state governments. These state laws and regulations
govern both the disclosure and the use of confidential patient medical record
information. Although compliance with these laws and regulations is at present
principally the responsibility of the hospital, physician or other healthcare
provider, regulations governing patient confidentiality rights are evolving
rapidly. Additional legislation governing the dissemination of medical record
information has been proposed at both the state and federal level. This
legislation may require holders of confidential patient information to
implement security measures that could require substantial expenditures.
Changes to state or federal laws could materially restrict the ability of
healthcare providers to transmit information from patient records using our
systems.
Employees
As of August 31, 1999, we had 69 employees, including 6 in manufacturing, 21
in sales and marketing, 5 in services and support, 17 in research and
development, 4 in regulatory affairs and 16 in general and administrative
functions. We believe that our employee relations are good.
Facilities
Our principal executive offices and final assembly and testing facilities
are located in Bothell, Washington where we lease approximately 17,000 square
feet under a lease that expires in June 2004. We also maintain a facility used
primarily as an advanced development laboratory in approximately 4,700 square
feet of space in Oklahoma City, Oklahoma under a lease that expires on December
31, 2000.
Legal Proceedings
We are not a party to any material legal proceedings.
44
<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of Data Critical as of August 31, 1999
are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
David E. Albert, M.D........ 44 Chief Scientist and Chairman of the Board
Jeffrey S. Brown............ 39 President, Chief Executive Officer and Director
Bradley R. Harlow........... 42 Vice President of Business Development and
General Manager, International
Craig S. Kairis............. 41 Vice President of Sales
Michael E. Singer........... 37 Vice President and Chief Financial Officer
Robert W. Benson............ 43 Vice President and Chief Information Officer
Richard L. Earnest (1)(2)... 57 Director
Ronald H. Kase (2).......... 40 Director
George M. Middlemas (1)(2).. 53 Director
David B. Swedlow (1)........ 53 Director
</TABLE>
- --------
(1) Member of the audit committee
(2) Member of the compensation committee
David E. Albert, M.D. founded Data Critical in October 1992 and serves as
Chief Scientist and Chairman of the Board of Data Critical. Prior to founding
Data Critical, Dr. Albert served as a consultant to Hewlett-Packard's
Cardiology Business Unit from 1990 to 1992. Dr. Albert was president and
founder of Corazonix Corp. from 1984 to 1989, and from 1984 to 1987 served as a
consultant to Quinton Instrument Co. in Seattle. Dr. Albert holds an A.B.
degree from Harvard University and an M.D. from Duke University.
Jeffrey S. Brown has served as President and Chief Executive Officer of Data
Critical since September 1994. Mr. Brown has also served as a director of Data
Critical since September 1994. Prior to joining Data Critical, he served as
Vice President of Sales and Marketing/Business Development for McCaw Wireless
Data where he was responsible for the general management of this start-up
business unit from January 1993 to September 1994. From June 1992 to January
1993, Mr. Brown was Director of Product Development at McCaw Cellular
Engineering where he was responsible for developing key wireless products,
including packet and circuit switched data and advanced voice service products.
From 1990 to June 1992, Mr. Brown was Director of Marketing Operations and
National Accounts at PacTel Cellular, a subsidiary of Pacific Telesys. Mr.
Brown has also held sales and marketing positions at Pacific Bell, a subsidiary
of Pacific Telesys, from 1984 to 1990, and at AT&T from 1982 to 1984. Mr. Brown
earned a B.A. in political science from the University of California at
Berkeley and an M.B.A. from Golden Gate University.
Bradley R. Harlow joined Data Critical as Vice President and General Manager
of Data Critical in August 1997 and became Vice President of Business
Development and General Manager, International in July 1999. Prior to joining
Data Critical, he served as Vice President of Worldwide Sales and Marketing at
Instromedix, Inc., a producer of ambulatory products that transmit data over
phone lines, from 1991 until 1997. From 1989 to 1991, he served as General
Manager of the Avionics/Marine department at Icom America Communications
Company. Mr. Harlow also held management positions at Spacelabs/ATL Ultrasound
from 1982 to 1989 and at Kaiser Industries from 1979 to 1982. In addition,
Mr. Harlow is a faculty advisor and instructor at the Marshall School of
Business at the University of Southern California, Los Angeles. Mr. Harlow
earned both a B.S. in
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accounting from Oregon State University and an M.B.A. from Albers School of
Business at Seattle University. Mr. Harlow also serves as a director of
Prevention Concepts Incorporated, a private ultrasound cardiac risk analysis
company.
Craig S. Kairis joined Data Critical as Vice President of Business
Development in February 1995 and became Vice President of Sales in July 1999.
Prior to joining Data Critical, he served as director of sales at McCaw
Wireless Data, from January 1994 until February 1995. Prior to his role at
McCaw, Mr. Kairis served in sales, marketing, channel development and systems
integration positions at IBM from July 1980 until December 1993. Mr. Kairis
holds a B.A. degree in business from the University of Washington.
Michael E. Singer has served as Vice President and Chief Financial Officer
of Data Critical since June 1999. Prior to joining Data Critical, from 1992 to
1999 Mr. Singer was an investment banker focusing on mergers & acquisitions and
corporate financings for health care companies. During that period of time, Mr.
Singer served as a principal at Banc of America/NationsBanc Montgomery
Sercuities from 1998 to 1999, vice president at Alex, Brown & Sons from 1997 to
1998 and vice president at Wolfensohn & Co., Incorporated from 1992 to 1997.
From 1990 to 1992, Mr. Singer worked at Union Bank of Switzerland in Zurich,
Switzerland in global corporate and institutional banking, and in 1986 at the
Commission of the European Communities in Brussels, Belgium. Mr. Singer holds a
Ph.D. degree from the London School of Economics, a M.A. degree from the
Maxwell School of Public Affairs, Syracuse University and a B.A. degree from
Washington and Lee University.
Robert W. Benson joined Data Critical as Chief Financial Officer in July
1997 and became Vice President and Chief Information Officer in June 1999.
Prior to joining Data Critical, he served as executive vice president and chief
financial officer of Stellar One Corp., a digital telecommunications equipment
and software developer, from 1994 until 1997. Prior to his role at Stellar One
Corp., Mr. Benson was chief financial officer at Special Devices, Inc., a
manufacturer of pyrotechnic devices for the automotive and aerospace
industries, from 1991 until 1994. Mr. Benson holds a B.S. degree in accounting
from California State University.
Richard L. Earnest has served as a director of Data Critical since May 1997.
Since December 1998, Mr. Earnest has been the mayor of the city of Del Mar,
California. From 1995 to 1997, Mr. Earnest served as chief executive officer of
Tudor Publishing Company, a private educational software company. From 1993 to
1995, Mr. Earnest was chief executive officer at Demax Software, Inc., a VAX
and UNIX security products company. From 1991 to 1993, Mr. Earnest was the
chief executive officer at AdvantEDGE Systems Group, a software re-engineering
company. From 1989 to 1991, Mr. Earnest was chief executive officer at
Peregrine Systems. From 1983 to 1989, he was the president at VM Software, Inc.
Mr. Earnest is a director of Security Dynamics Technologies Inc., a computer
network security products company, and also serves as a director on the board
of various private companies.
Ronald H. Kase has served as a director of Data Critical since March 1998.
Since January 1991, Mr. Kase has been employed by New Enterprise Associates, a
venture capital investment firm, and became a general partner in May 1995. Mr.
Kase also serves as a director of Endocardial Solutions and several privately-
held healthcare companies.
George M. Middlemas has served as a director of Data Critical since February
1995. Since 1991, Mr. Middlemas has been a managing general partner of Apex
Investment Partners, a Chicago-based
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<PAGE>
venture capital firm that focuses on telecommunications, information technology
and software investments. Mr. Middlemas earned an M.B.A. from Harvard
University and is a certified public accountant. Mr. Middlemas is a director of
Security Dynamics Technologies Inc., a computer network security products
company, and Tut Systems, Inc., a telecommunications products company, and also
serves as a director on the board of various private companies.
David B. Swedlow has served as a director of Data Critical since July 1998.
Dr. Swedlow founded and has been a principal of The Swedlow Group, a medical
technologies consulting firm, since April 1998. From 1987 to April 1998, Dr.
Swedlow was Senior Vice President of Medical Affairs and Technology Development
at Nellcor Puritan Bennett. Dr. Swedlow earned a B.S. from the Massachusetts
Institute of Technology and an M.D. from Harvard Medical School.
Board of Directors
We currently have authorized seven directors. Our board of directors
currently has one vacancy. The executive officers serve at the discretion of
the board of directors. There are no family relationships among any of our
directors or executive officers.
Our board of directors will be divided into three classes effective upon the
closing of this offering. The class I directors, Jeffrey S. Brown, Richard L.
Earnest and one director to be named to fill an existing vacancy, will serve an
initial term until the 2000 annual meeting of stockholders, the class II
directors, David B. Swedlow and George M. Middlemas, will serve an initial term
until the 2001 annual meeting of stockholders, and the class III directors,
David E. Albert and Ronald H. Kase, will serve an initial term until the 2002
annual meeting of stockholders. Each class will be elected for three-year terms
following its respective initial term.
Director Compensation
Directors are not compensated for their services. We reimburse directors for
reasonable travel expenses relating to their attendance at each meeting. Non-
employee directors are eligible to participate in the 1999 Directors' Stock
Option Plan. Directors who are employees are eligible to participate in our
1999 Stock Option Plan and our 1999 Employee Stock Purchase Plan. Under our
1994 Stock Option Plan, Mr. Brown was granted an option to purchase 208,832
shares of common stock at an exercise price of $0.80 per share in September
1994, an option to purchase 41,167 shares of common stock at an exercise price
of $1.60 per share in November 1997 and an option to purchase 75,000 shares of
common stock at an exercise price of $2.40 per share in May 1998. Mr. Earnest
was granted an option to purchase 12,500 shares of common stock under our 1994
Stock Option Plan at $0.80 per share in May 1997. Mr. Middlemas was granted an
option to purchase 12,500 shares of common stock under our 1994 Stock Option
Plan at an exercise price of $1.60 per share in February 1998. Mr. Kase was
granted an option to purchase 12,500 shares of common stock under our 1994
Stock Option Plan at an exercise price of $1.60 per share in March 1998.
Mr. Swedlow was granted an option to purchase 3,125 shares of common stock
under our 1994 Stock Option Plan at an exercise price of $2.40 per share in
July 1998. These options vest over a four-year period.
Committees of the Board of Directors
In April 1995, the board of directors established the audit committee and in
December 1994, the board of directors established the compensation committee.
The audit committee reviews our annual
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<PAGE>
audit and meets with our independent auditors to review our internal controls
and financial management practices. The board of directors' audit committee
currently consists of Messrs. Earnest, Middlemas and Swedlow. The compensation
committee recommends to the board of directors compensation for our executive
officers and administers our stock purchase and stock option plans. The
compensation committee currently consists of Messrs. Earnest, Kase and
Middlemas.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between the board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past.
Executive Compensation
The following table lists the compensation received for services rendered to
Data Critical for the fiscal year ending December 31, 1998 by our chief
executive officer and each of the other four most highly compensated executive
officers, each of whose aggregate compensation during our last fiscal year
exceeded $100,000. Throughout the rest of the prospectus, we will refer to the
following officers as our named executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual
Compensation Securities
---------------- Underlying
Name and Principal Position(s) Salary Bonus Options
------------------------------ -------- ------- ------------
<S> <C> <C> <C>
David E. Albert, M.D. ........................... $121,042 $25,000 --
Chief Scientist and Chairman of the Board
Jeffrey S. Brown................................. 180,000 40,000 75,000
President and Chief Executive Officer
Bradley R. Harlow................................ 141,875 12,731 75,000
Vice President of Business Development and
General Manager, International
Craig S. Kairis.................................. 111,458 5,000 32,500
Vice President of Sales
Robert W. Benson................................. 119,583 23,000 --
Vice President and Chief Information Officer
</TABLE>
- --------
This table excludes perquisites and other personal benefits which did not
exceed the lesser of $50,000 or 10% of the total annual compensation of such
officers.
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<PAGE>
Stock Option Grants
The following table provides summary information regarding stock options
granted to the named executive officers during the year ended December 31,
1998, and consists of options granted under our 1994 Stock Option Plan. The
option term for each option listed below is seven years. The 5% and 10% assumed
annual rates of compounded stock price appreciation are mandated by SEC rules.
There can be no assurance that the actual stock price appreciation over the
seven year option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the common stock appreciates over the
option term, no value will be realized from the option grants made to the named
officers.
Option Grants in 1998
<TABLE>
<CAPTION>
Potential
Realizable Value
Individual Grants at Assumed
----------------------------------------------- Annual Rates of
Number of Percent of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise or Option Term
Options Employees in Base Price Expiration ----------------
Name Granted Fiscal Year per Share Date 5% 10%
- ---- ---------- ------------- ----------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
David E. Albert, M.D.... -- -- -- -- -- --
Jeffrey S. Brown........ 75,000 23.6% $2.40 9/28/05 $73,278 $170,769
Bradley R. Harlow....... 75,000 23.6% 2.40 9/28/05 73,278 170,769
Craig S. Kairis......... 32,500 10.2% 2.40 9/28/05 31,754 74,000
Robert W. Benson........ -- -- -- -- -- --
</TABLE>
Option Exercises and Holdings
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by each of the named
executive officers as of December 31, 1998. No options were exercised by the
named executive officers during the year ended December 31, 1998.
1998 Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
December 31, 1998 December 31, 1998
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David E. Albert, M.D....... -- -- -- --
Jeffrey S. Brown........... 219,123 105,876 $2,445,955 $1,041,110
Bradley R. Harlow.......... 18,750 131,250 210,000 1,350,000
Craig S. Kairis............ 21,250 41,250 238,000 410,000
Robert W. Benson........... 15,625 46,875 175,000 525,000
</TABLE>
Value is determined by subtracting the exercise price from the proposed
initial public offering price of the common stock, multiplied by the number of
shares underlying the options.
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<PAGE>
Employment Agreements
None of our named executive officers has an employment agreement with Data
Critical.
In June 1999, we entered into an employment agreement with Michael Singer,
our Chief Financial Officer, for a period of five years. Until June 2000, we
may terminate the agreement only for cause. Thereafter, we may terminate the
agreement without cause upon 30 days' prior written notice. Mr. Singer may
terminate the agreement at any time without cause upon 30 days' prior written
notice. The agreement provides for an annual base salary of $160,000, with
increases and/or bonuses in the discretion of our board of directors, and
provides that Mr. Singer shall be entitled to one year's severance if he is
terminated without cause. In connection with his employment, we have agreed to
grant Mr. Singer 7,500 shares of common stock and options to purchase a total
of 175,000 shares of common stock. We have also agreed to reimburse Mr. Singer
for any federal excise "parachute" taxes imposed upon him as a result of
compensation he may receive in connection with a merger, acquisition or other
change of control of Data Critical. The agreement also contains a non-
competition agreement, which provides that for a period of one year after
termination of Mr. Singer's employment, he will not compete with Data Critical
or solicit its customers or employees.
Stock Plans
1999 Stock Option Plan.
Our 1999 Stock Option Plan was adopted by the board of directors and
approved by our stockholders in May 1999. 1,000,000 shares plus an annual
increase in each of the next five years equal to the lesser of 250,000 shares
or two percent of the outstanding shares of common stock on the last day of the
preceding fiscal year of common stock have been reserved for issuance under the
1999 Stock Plan. As of June 30, 1999, no options to purchase common stock had
been exercised, options to purchase a total of 12,000 shares at a weighted
average exercise price of $6.00 per share were outstanding and 988,000 shares
remained available for future option grants.
The purposes of the 1999 Stock Plan are to attract and retain the best
available personnel at Data Critical, to provide additional incentives to our
employees and consultants and to promote the success of our business. The 1999
Stock Plan provides for the grant of incentive stock options to employees and
directors who are employees, and nonstatutory stock options to employees, non-
employee directors and consultants. To the extent an option holder would have
the right in any calendar year to exercise for the first time one or more
incentive stock options for shares having an aggregate fair market value (under
all plans of Data Critical and determined for each share as of the date the
option to purchase the shares was granted) in excess of $100,000, any such
excess options shall be treated as nonstatutory stock options. If not
terminated earlier, the 1999 Stock Plan will terminate in May 2009.
The 1999 Stock Plan is administered by the compensation committee of the
board of directors. The administrator determines the terms of options granted
under the 1999 Stock Plan, including the number of shares subject to the
option, exercise price, term and exercisability of the options. The exercise
price of all incentive stock options granted under the 1999 Stock Plan must be
at least equal to the fair market value of the common stock of Data Critical on
the date of grant. The exercise price of any incentive stock option or
nonstatutory stock option granted to an option holder who owns shares
representing more than 10% of the total combined voting power of all classes of
outstanding capital stock of Data Critical must equal at least 110% of the fair
market value of the common stock on the date of grant. The exercise price of
all nonstatutory stock options must equal at least 85% of the fair market value
of the common stock on the date of grant if required by applicable law. Payment
of the exercise price may be made in cash or other consideration as determined
by the administrator.
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<PAGE>
Options granted under the 1999 Stock Plan generally become exercisable at
the rate of 25% of the total number of shares subject to the options 12 months
after the date of grant, and 25% of the total number of shares subject to the
options every 12 months thereafter.
In the event of the sale of all or substantially all of the assets of Data
Critical, or the merger of Data Critical with another corporation, each option
will be accelerated so that 50% of the unvested shares covered by each option,
up to a maximum of 50% of all unvested shares covered by all options held by
the option holder, shall become fully vested. The administrator has the
authority to amend or terminate the 1999 Stock Plan as long as such action does
not adversely affect any outstanding option and provided that stockholder
approval shall be required for an amendment to increase the number of shares
subject to the 1999 Stock Plan, to change the designation of the class of
persons eligible to be granted options, or to change the limitation on grants
to individual employees.
1994 Stock Option Plan.
Our 1994 Stock Option Plan was adopted by the board of directors and
approved by the stockholders in December 1994. 950,000 shares of common stock
have been reserved for issuance under the 1994 Stock Plan. As of June 30, 1999,
options to purchase 20,184 shares of common stock had been exercised, options
to purchase a total of 857,311 shares at a weighted average exercise price of
$1.56 per share were outstanding and 72,505 shares remained available for
future option grants. After the completion of this offering, no further options
will be granted under the 1994 Plan.
The 1994 Stock Plan provides for the grant of incentive stock options to
employees and directors who are employees, and nonstatutory stock options to
employees, non-employee directors and consultants. If not terminated earlier,
the 1994 Stock Plan will terminate in December 2001.
The 1994 Stock Plan may be administered by the board of directors or a
committee of the board of directors. The 1994 Stock Plan is currently
administered by the compensation committee of the board of directors. The
administrator determines the terms of options granted under the 1994 Stock
Plan, including the number of shares subject to the option, exercise price,
term and exercisability. The term of options may not exceed seven years, or
five years in the case of an incentive stock option granted to a 10%
stockholder. Options granted under the 1994 Stock Plan generally become
exercisable at the rate of 25% of the total number of shares subject to the
options 12 months after the vesting commencement date, and 25% of the total
number of shares subject to the options every 12 months thereafter.
In the event of the sale of all or substantially all of our assets, or the
merger of Data Critical with another corporation, then each option may be
assumed or an equivalent option substituted by the successor corporation. The
administrator may instead elect to accelerate the exercisability of each option
in its discretion. The administrator has the authority to amend or terminate
the 1994 Stock Plan as long as such action does not adversely affect any
outstanding option. Stockholder approval is required for an amendment to
increase the number of shares subject to the 1994 Stock Plan, to change the
designation of the class of persons eligible to be granted options, or to
change the limitation on grants to individual employees.
1999 Directors' Stock Option Plan.
1999 Directors' Stock Option Plan was adopted by the board of directors and
approved by the stockholders in May 1999. 100,000 shares of common stock have
been reserved for issuance under
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<PAGE>
the Directors' Plan. As of June 30, 1999, no options to purchase shares of
common stock had been granted by Data Critical. The Directors' Plan provides
for the grant of nonstatutory stock options to non-employee directors of Data
Critical. The Directors' Plan is designed to work automatically without
administration; however, to the extent administration is necessary, it will be
performed by the board of directors. To the extent that conflicts of interest
arise, it is expected that such conflicts will be addressed by having any
interested director abstain from both deliberations and voting regarding
matters in which such director has a personal interest.
The Directors' Plan provides that each person who is or becomes a non-
employee director of Data Critical will be granted a nonstatutory stock option
to purchase 15,000 shares of common stock on the later of the date on which the
option holder first becomes a non-employee director of Data Critical or the
date of the closing of this offering. Thereafter, on the date of our annual
stockholders' meeting each year, each non-employee director of Data Critical
will be granted an additional option to purchase 5,000 shares of common stock
if, on such date, he or she has served on our board of directors for at least
six months.
The Directors' Plan sets neither a maximum nor a minimum number of shares
for which options may be granted to any one non-employee director, but does
specify the number of shares that may be included in any grant and the method
of making a grant. No option granted under the Directors' Plan is transferable
by the option holder other than by will or the laws of descent or distribution
or pursuant to a qualified domestic relations order, and each option is
exercisable, during the lifetime of the option holder, only by such option
holder. The Directors' Plan provides that each option shall be fully vested and
exercisable on the date of grant. If a non-employee director ceases to serve as
a director for any reason other than death or disability, he or she may, but
only within 90 days after the date he or she ceases to be a director of Data
Critical, exercise options granted under the Directors' Plan. If he or she does
not exercise such option within such 90 day period, such option shall
terminate. The exercise price of all stock options granted under the Directors'
Plan shall be equal to the fair market value of a share of our common stock on
the date of grant of the option. Options granted under the Directors' Plan have
a term of ten years.
Upon a change in control of Data Critical, each non-employee director shall
have either a reasonable time within which to exercise their options prior to
the effectiveness of such change in control, at the end of which time the
option shall terminate, or the right to exercise the option, or receive a
substitute option with comparable terms, as to an equivalent number of shares
of stock of the corporation succeeding Data Critical in the change in control.
The board of directors may amend or terminate the Directors' Plan but must
obtain stockholder consent if required by any applicable law. If not terminated
earlier, the Directors' Plan will have a term of ten years.
1999 Employee Stock Purchase Plan.
Data Critical's 1999 Employee Stock Purchase Plan was adopted by the board
of directors and approved by the stockholders in May 1999. 100,000 shares plus
an annual increase in each of the next five years equal to the lesser of
150,000 shares or one percent of the outstanding shares of common stock on the
last day of the preceding fiscal year of common stock have been reserved for
issuance under the Purchase Plan. As of June 30, 1999, no rights to purchase
stock under this plan had been granted by Data Critical.
The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, will be implemented by a series of overlapping offering
periods of 24 months in duration, with new offering periods (other than the
first offering period) commencing on February 1 and August 1 of each year. Each
offering period will consist of four consecutive purchase periods of six months
in
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<PAGE>
duration. The initial offering period is expected to commence on the date of
this offering and end on July 31, 2001; the initial purchase period is expected
to end on January 31, 2000. The Purchase Plan will be administered by the
compensation committee. Employees, including officers and employee directors,
of Data Critical, or of any majority-owned subsidiary designated by the board
of directors, are eligible to participate in the Purchase Plan if they are
employed by Data Critical or any such subsidiary for at least 20 hours per week
and more than five months per year. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions, which may not be
less than 1% and not more than 20% of an employee's compensation, at a price
equal to the lower of 85% of the fair market value of Data Critical's common
stock at the beginning of each offering period or at the end of each purchase
period. Employees may end their participation in the offering at any time
during the offering period, and participation ends automatically on termination
of employment with Data Critical. If not terminated earlier, the Purchase Plan
will have a term of 20 years.
The Purchase Plan provides that in the event of a merger of Data Critical
with or into another corporation or a sale of all or substantially all of Data
Critical's assets, each right to purchase stock under the Purchase Plan will be
assumed or an equivalent right substituted by the successor corporation unless
the board of directors shortens the offering period so that employees' rights
to purchase stock under the Purchase Plan are exercised prior to the merger or
sale of assets. The board of directors has the power to amend or terminate the
Purchase Plan as long as that action does not adversely affect any outstanding
rights to purchase stock under the Purchase Plan.
401(k) Plan
Data Critical provides a tax-qualified employee savings and retirement plan,
commonly known as a 401(k) plan, which covers our eligible employees. Pursuant
to the 401(k) plan, employees may elect to reduce their current annual
compensation up to the lesser of 15% or the statutorily prescribed limit, which
is $10,000 in calendar year 1999, and have the amount of the reduction
contributed to the 401(k) plan. The 401(k) plan is intended to qualify under
Sections 401(a) and 401(k) of the Internal Revenue Code, so that contributions
by our employees to the 401(k) plan, and income earned on plan contributions,
are not taxable to employees until withdrawn from the 401(k) plan, and so that
contributions will be deductible by Data Critical when made. The trustee of the
401(k) plan invests the assets of the 401(k) plan in the various investment
options as directed by the participants.
Limitation of Liability and Indemnification Matters
As permitted by the Delaware General Corporation Law, our restated
certificate of incorporation limits the personal liability of its officers and
directors to the maximum extent permitted by Delaware law for breach or alleged
breach of their fiduciary duties. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except for liability for
. any breach of the director's duty of loyalty to Data Critical or its
stockholders
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law
. unlawful payments of dividends or unlawful stock repurchases or
redemptions or other distributions
. any transaction from which a director derives an improper personal
benefit
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<PAGE>
In addition, our bylaws provide that Data Critical is required to indemnify
its officers and directors to the fullest extent permitted by law, including in
those circumstances in which indemnification would otherwise be discretionary.
Data Critical is required to advance expenses to its officers and directors as
incurred in connection with proceedings against them for which they may be
indemnified. Data Critical has entered into indemnification agreements with its
officers and directors containing provisions that are in some respects broader
than the specific indemnification provisions contained in Delaware law. The
indemnification agreements require Data Critical to indemnify such officers and
directors against liabilities that may arise by reason of their status or
service as officers and directors, other than liabilities arising from willful
misconduct of a culpable nature, to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance if available on reasonable terms.
Data Critical has also obtained directors' and officers' liability insurance.
At present, Data Critical is not aware of any pending or threatened
litigation or proceeding involving a director, officer, employee or agent of
Data Critical in which indemnification would be required or permitted. Data
Critical is not aware of any threatened litigation or proceeding that might
result in a claim for such indemnification. Data Critical believes that its
charter provisions and indemnification agreements are necessary to attract and
retain qualified persons as directors and officers.
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CERTAIN TRANSACTIONS
On July 10, 1996, Data Critical entered into a Product Development Agreement
with Nomadics, Inc. and Colin Cumming, the President of Nomadics, under which
Nomadics has agreed to perform engineering services, and we agreed to provide
operating capital pursuant to a note in the principal amount of $50,000 with an
interest rate of 8.0% per annum, due July 10, 2000. The outstanding principal
due under this note is convertible at our election into up to a 3.6% equity
interest in Nomadics at any time prior to July 10, 2000. The largest aggregate
amount outstanding under the loan during fiscal year 1998 was $59,878, and the
amount outstanding as of June 30, 1999 was $62,211. As of the date of this
prospectus, Data Critical owns 130,208 shares of common stock of Nomadics
representing a 10.8% ownership share. David E. Albert, M.D., our Chief
Scientist and Chairman of the Board, formerly served on the board of directors
of Nomadics.
From September to November of 1996, Data Critical sold an aggregate of
1,187,809 shares of Series C preferred stock for $3.20 per share. Apex
Investment Fund II, L.P. whose general partner is George M. Middlemas, a
director of Data Critical, purchased 181,885 shares, and ML Oklahoma and
Kimberlin Family Partners, L.P., each of which beneficially owns more than five
percent of our common stock, purchased 31,250 shares and 317,485 shares,
respectively in the Series C financing. Also, Mr. Middlemas, individually,
purchased 15,625 shares.
On November 4, 1997, Data Critical and 15 lenders entered into a bridge loan
agreement under which Data Critical issued bridge notes in the principal amount
of $2,120,482 with an interest rate of 9.0% per annum, due upon November 1,
1999 or upon the close of a private or public offering sale of equity
securities by Data Critical resulting in cash proceeds of at least $4,000,000.
Pursuant to the bridge loan agreement, common stock purchase warrants were
granted to the lenders which permit the lenders to purchase an aggregate of
198,792 shares of common stock at an exercise price of $1.60 per share at any
time on or before November 1, 2002. In March 1998, all lenders holding bridge
notes issued by Data Critical under the bridge loan agreement tendered them as
payment for the purchase of 530,119 shares of Series D preferred stock at a
price of $4.00 per share. Apex Investment Fund II, L.P. loaned us $302,208,
which converted into 75,552 shares of Series D preferred stock, and received a
warrant to purchase 28,332 shares of common stock. Kimberlin Family Partners,
L.P. loaned us $1,000,000, which converted into 250,000 shares of Series D
preferred stock, and received a warrant to purchase 93,750 shares of common
stock.
From March to June of 1998, Data Critical sold an aggregate of 2,296,734
shares of its Series D preferred stock for $4.00 per share. Apex Investment
Fund II, L.P., purchased 75,552 shares, New Enterprises Associates VII, L.P.,
NEA Presidents Fund, L.P. and NEA Ventures 1998, L.P. purchased 1,075,000,
18,750 and 1,250 shares, respectively and Ronald L. Kase, one of our directors
is a general partner of each. Kimberlin Family Partners, L.P. purchased 250,000
shares. Acacia Ventures Partners, L.P. and South Pointe Venture Partners, L.P.
purchased 451,250 and 48,750 shares, respectively, and together beneficially
own more than five percent of our common stock. Mr. Middlemas, individually,
purchased 6,250 shares. Michael Singer, our Chief Financial Officer, purchased
12,500 shares.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table summarizes information regarding the beneficial
ownership of our common stock as of August 31, 1999 and as adjusted to reflect
the sale of the common stock in this offering and the conversion of all
outstanding shares of preferred stock into shares of common stock by:
. each person known by us to own beneficially more than five percent of
our common stock
. each of our directors and named executive officers and
. all of our directors and executive officers as a group.
Except pursuant to applicable community property laws or as otherwise noted
below this table, we believe each stockholder identified in the table possesses
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by such stockholder. The number of shares
beneficially owned by a person includes all shares the individual has the right
to acquire within 60 days of August 31, 1999. Unless otherwise indicated, the
address of each stockholder identified below is: c/o Data Critical Corporation,
19820 North Creek Parkway, Suite 100, Bothell, Washington 98011.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Number of Shares ------------------------------
Name of Beneficial Owner Beneficially Owned Before Offering After Offering
<S> <C> <C> <C>
Ronald H. Kase
New Enterprise Associates
VII LP(1).................. 1,098,125 17.4% 11.2%
2490 Sand Hill Road
Menlo Park, CA 94025
Kimberlin Family Partners,
L.P.
Oshkim Limited Partners
Oshkim Family Partners
Spencer Trask Holdings,
Inc.(2).................... 994,096 15.4 10.0
535 Madison Ave., 18th
Floor
New York, NY 10022
George M. Middlemas
Apex Investment Fund II,
L.P.(3).................... 726,099 11.4 7.4
233 South Wacker Dr., Suite
9500
Chicago, IL 60606
ML Oklahoma Venture
Partners, Limited
Partnership................ 553,125 8.7 5.6
10830 E. 45th St., Suite
307
Tulsa, OK 74146
Acacia Venture Partners,
L.P........................ 500,000 7.9 5.1
South Pointe Venture
Partners, L.P.(4)
101 California Street,
Suite 3160
San Francisco, CA 94111
David E. Albert, M.D........ 525,937 8.3 5.4
100 North Broadway, Suite
2200
Oklahoma City, OK 73102
Jeffrey S. Brown(5)......... 237,873 3.6 2.4
Bradley R. Harlow(6)........ 93,750 1.5 *
Robert W. Benson(7)......... 31,250 * *
Craig S. Kairis(8).......... 36,875 * *
David Swedlow(9)............ 3,125 * *
Richard L. Earnest(10)...... 6,250 * *
2194 San Dieguito Drive
Del Mar, CA 32014
All directors and executive
officers as a group
(10 persons)(11)........... 2,808,972 41.3% 27.3%
</TABLE>
56
<PAGE>
- --------
* Less than one percent of the outstanding shares of common stock.
(1) Includes 1,075,000 shares held by New Enterprise Associates VII, Limited
Partnership; 18,750 shares held by NEA Presidents Fund, L.P.; 1,250 shares
held by NEA Ventures 1998, L.P. Ronald H. Kase, one of our directors, is
general partner of each of these entities, and as such may be deemed to
share voting and investment power with respect to such shares. Mr. Kase
disclaims beneficial ownership of such shares, except to the extent of his
pecuniary interest. Also includes 3,125 shares issuable upon exercise of
options held by Mr. Kase.
(2) Includes 582,906 shares and immediately exercisable warrants to purchase
93,750 shares held by Kimberlin Family Partners, L.P.; 218,875 shares and
immediately exercisable warrants to purchase 45,326 shares held by Oshkim
Limited Partners, L.P.; 39,062 shares held by Oshkim Family Partners; and
immediately exercisable warrants to purchase 14,177 shares held by Spencer
Trask Holdings, Inc.
(3) Includes 663,392 shares and immediately exercisable warrants to purchase
28,332 shares held by Apex Investment Fund II, L.P. George Middlemas, one
of our directors, is general partner of Apex Management Partnership, the
sole general partner of Apex Investment Fund II, L.P., and as such may be
deemed to share voting and investment power with respect to such shares.
Mr. Middlemas disclaims beneficial ownership of such shares, except to the
extent of his pecuniary interest. Also includes 21,875 shares and 12,500
shares issuable upon exercise of options held by Mr. Middlemas.
(4) Includes 451,250 shares held by Acacia Venture Partners, L.P. and 48,750
shares held by South Pointe Venture Partners, L.P.
(5) Includes 237,873 shares issuable upon exercise of options.
(6) Includes 93,750 shares issuable upon exercise of options, of which 37,500
shares vest in full only upon the completion of this offering.
(7) Includes 31,250 shares issuable upon exercise of options.
(8) Includes 36,875 shares issuable upon exercise of options.
(9) Includes 3,125 shares issuable upon exercise of options.
(10) Includes 6,250 shares issuable upon exercise of options.
(11) Includes 454,436 shares issuable upon exercise of options. Includes
1,758,392 shares and immediately exercisable warrants to purchase 28,332
shares held by entities affiliated with certain directors as described in
footnotes (1) and (3).
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, Data Critical will be authorized to
issue 25,000,000 shares of common stock, $0.001 par value per share, and
3,000,000 shares of undesignated preferred stock, $0.001 par value per share.
All currently outstanding shares of preferred stock will be converted into
common stock upon the closing of this offering. The following description is
intended to be a summary of all material terms of our capital stock, but it
does not describe all provisions of our certificate of incorporation or bylaws
or Delaware law applicable to Data Critical. For a more thorough understanding
of the terms of our capital stock, you should refer to our certificate of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus is a part.
Common Stock
As of June 30, 1999, there were 6,324,869 shares of common stock outstanding
held of record by 113 stockholders after giving effect to the conversion of all
outstanding shares of our preferred stock into common stock. After giving
effect to the sale of the shares offered hereby, there will be 9,824,869 shares
of common stock outstanding, assuming no exercise of the underwriter's over-
allotment option.
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders. Subject to preferences that
may be applicable to any outstanding preferred stock, holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared by
the board of directors out of funds legally available for that purpose. In the
event of a liquidation, dissolution or winding up of Data Critical, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to the prior distribution rights of any
outstanding preferred stock. The common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions available to the common stock. The outstanding shares of common
stock are, and the shares of common stock to be issued upon completion of this
offering will be, fully paid and non-assessable.
Preferred Stock
Upon the closing of this offering, all outstanding shares of preferred stock
will be converted into 4,904,689 shares of common stock and automatically
retired. Thereafter, the board of directors has the authority, without further
action by the stockholders, to issue up to 3,000,000 shares of preferred stock,
$0.001 par value, in one or more series, to fix the number of shares
constituting any series and to designate the rights, preferences and privileges
of each series. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of Data Critical without
further action by the stockholders and may also adversely affect the voting
power of the holders of common stock. The issuance of preferred stock could
have the effect of decreasing the market price of the common stock. Data
Critical currently has no plans to issue any shares of preferred stock.
Warrants
As of June 30, 1999, there were 42 warrants outstanding to purchase an
aggregate of 371,471 shares of common stock, with a weighted average exercise
price of $2.34, expiring between April 14, 2000 and November 1, 2002. In
addition, on April 27, 1999, we issued a warrant to purchase 12,500 shares of
Series D preferred stock to a commercial lender in connection with an equipment
lease line.
58
<PAGE>
This warrant expires upon the earlier of April 27, 2006 or five years after our
initial public offering. Generally, each outstanding warrant contains
provisions for the adjustment of the exercise price and the aggregate number of
shares issuable upon the exercise of the warrant in the case of stock
dividends, stock splits, reorganizations, reclassifications, consolidations and
dilutive issuances of securities at prices below the then existing warrant
exercise price.
Purchase Option
There is a purchase option outstanding to purchase 105,000 shares of Series
D preferred stock at an exercise price of $5.00 per share issued to a
commercial lender in connection with a debt facility. This option expires upon
the earlier of our initial public offering or the merger, consolidation or sale
of substantially all of our assets.
Registration Rights
Following the closing of this offering, the holders of 5,293,752 shares of
common stock and warrants to purchase 371,471 shares of common stock will have
rights to register those shares under the Securities Act. These rights are
provided under the terms of an agreement between Data Critical and the holders
of the registrable securities. Subject to limitations specified in the
agreement, the holders of at least 40% of the registrable securities then
outstanding may require, on two occasions beginning 120 days after the date of
this offering, that Data Critical use its best efforts to register the
registrable securities for public resale if Form S-3 is not available. If Data
Critical registers any of its common stock either for its own account or for
the account of other security holders, the holders of registrable securities
are entitled to include their shares of common stock in such registration,
subject to the ability of the underwriters to limit the number of shares
included in the offering. The holders of registrable securities then
outstanding may also require Data Critical to register all or a portion of
their registrable securities on Form S-3 when use of such form becomes
available to us, provided that the proposed aggregate selling price net of any
underwriters' discounts or commissions is at least $250,000. We will be
responsible for paying all registration expenses, and the holders of
registrable securities selling their shares will be responsible for paying all
selling expenses.
Delaware Law and Data Critical Charter and Bylaw Provisions
Provisions of Delaware law and our charter documents could make the
acquisition of Data Critical or the removal of incumbent officers and directors
more difficult. These provisions may discourage certain types of takeover
practices and encourage persons seeking to acquire control of Data Critical to
negotiate first. Data Critical believes that the benefits of protecting our
ability to negotiate with a proponent of an unsolicited business combination
proposal outweigh the disadvantages of potentially discouraging such proposals
because negotiation of such proposals could result in terms more favorable to
our stockholders.
Data Critical is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, the statute prohibits a publicly-held
Delaware corporation from engaging in a business combination with an interested
stockholder for a period of three years after the date that the person became
an interested stockholder unless the business combination or the transaction in
which the person became an interested stockholder is approved in a prescribed
manner. Generally, a business combination includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the stockholder.
Generally, an interested stockholder is a person who, together with affiliates
and associates, owns, or within three years prior, did own, 15% or more of the
59
<PAGE>
corporation's voting stock. These provisions may have the effect of delaying,
deferring or preventing a change in control of Data Critical without further
action by the stockholders.
Our board of directors, without stockholder approval, has the authority
under our certificate of incorporation to issue preferred stock with rights
superior to the rights of the holders of common stock. As a result, preferred
stock could be issued quickly and easily, could adversely affect the rights of
holders of common stock and could be issued with terms calculated to delay or
prevent a change of control or make removal of management more difficult. Our
certificate of incorporation provides that stockholder action can be taken only
at an annual or special meeting of stockholders and may not be taken by written
consent. Our certificate of incorporation also requires that business
combinations--including a merger, share exchange or other disposition of a
substantial part of our assets--be approved by either the holders of two-thirds
of the outstanding shares or by a majority of disinterested directors, in which
case the affirmative vote required shall be the holders of a majority of the
outstanding shares. In addition, our board of directors will be staggered in
three classes effective upon the closing of this offering. See "Management--
Board of Directors". As a result, only one class of directors will be elected
at each annual stockholder meeting, with the other classes continuing for the
remainder of their terms. The bylaws provide that special meetings of
stockholders can be called only by the board of directors, the Chairman of the
Board or the President. Moreover, the business permitted to be conducted at any
special meeting of stockholders is limited to the business stated in the
special meeting notice. The bylaws set forth an advance notice procedure for
the nomination of candidates for election as directors and for business to be
brought before a meeting of stockholders. These provisions in our certificate
of incorporation and bylaws may have the effect of delaying or preventing
changes in control of Data Critical.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Service LLC. The transfer agent's address is 520 Pike Street, Suite
1220, Seattle, WA 98101, and telephone number is (206) 674-3030.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 9,824,869 shares of common
stock issued and outstanding, or 10,349,869 shares if the underwriters' over-
allotment option is exercised in full, and 1,358,282 shares issuable upon the
exercise of outstanding warrants and options, in each case as of June 30, 1999
and as adjusted for the issuance of shares in this offering. The 3,500,000
shares sold in the offering, plus any shares issued or sold upon exercise of
the underwriters' over-allotment option, will be freely tradable without
restriction or further registration under the Securities Act, except that any
shares purchased by "affiliates" as the term is defined in Rule 144 under the
Securities Act, may generally only be resold in compliance with applicable
provisions of Rule 144.
We issued the remaining 6,324,869 shares in private transactions. These
shares may be publicly sold only if registered under the Securities Act or sold
in accordance with an applicable exemption from registration, such as Rule 144.
In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares for at least one year, including an "affiliate," is
entitled to sell, within any three-month period, a number of "restricted"
shares that does not exceed the greater of one percent (1%) of the then
outstanding shares of common stock, or 98,248 shares based on the number of
shares expected to be outstanding after the offering, or the average weekly
trading volume during the four calendar weeks preceding such sale. Sales under
Rule 144 are subject to manner of sale limitations, notice requirements and the
availability of current public information about the issuer. Rule 144(k)
provides that a person who is not deemed an "affiliate" and who has
beneficially owned shares for at least two years is entitled to sell such
shares at any time under Rule 144 without regard to the limitations described
above. We estimate that [ ] outstanding shares fall in this category. Of the
6,324,869 shares outstanding before the offering, affiliates beneficially own
over % of such shares.
Any employee, officer, director, advisor or consultant who purchased his or
her shares pursuant to a written compensatory plan or contract is entitled to
rely on the resale provision of Rule 701, which permits non-affiliates to sell
their Rule 701 shares without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this prospectus.
As of June 30, 1999, there were outstanding stock options to purchase an
aggregate of 869,311 shares of common stock, of which 443,947 are presently
exercisable or exercisable within 60 days. These outstanding stock options are
held by our executive officers, directors or employees. Following the offering,
we intend to file a registration statement on Form S-8 covering the 2,129,816
shares of common stock issuable under our stock plans, including shares subject
to outstanding options, thus permitting the resale of such shares in the public
market without restriction under the Securities Act, other than restrictions
applicable to affiliates.
As of June 30, 1999, there were also outstanding warrants to purchase an
aggregate of 488,971 shares of common stock, which are all presently
exercisable. The warrants have a weighted-average exercise price of $2.97 per
share.
We have granted registration rights to many of our stockholders. As of the
date of this prospectus, 5,293,752 of the outstanding shares of common stock
are entitled to these registration rights. These registration rights also
extend to another 371,471 shares not yet issued, for example, shares issuable
upon the exercise of warrants.
61
<PAGE>
We, our executive officers and directors, and many of our stockholders have
agreed that, subject to limited exceptions in which the transferee agrees to
the same restriction, for a period 180 days from the date of this prospectus,
neither we nor they will, without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock, regardless of whether any of these transactions are to be settled
by the delivery of common stock, or such other securities, in cash or
otherwise.
In addition, during the same period, we have agreed not to file any
registration statement with respect to, and each of our executive officers,
directors and stockholders entitled to registration rights has agreed not to
make any demand for, or exercise any right with respect to, the registration of
any shares of our common stock or any securities convertible into or
exercisable or exchangeable for common stock without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation. The lock-up agreements
by persons other than us cover an aggregate of [ ] shares, and an additional
[ ] shares issuable upon exercise of outstanding options and warrants. Of
the [ ] outstanding shares and shares issuable upon exercise of outstanding
options and warrants not subject to lock-up agreements, only [ ] of such
shares will be freely tradable immediately following the offering under Rule
144 as discussed above. Under Rule 144, the remaining [ ] shares will be
available for resale subject to the limitations of Rule 144 beginning 90 days
following the offering.
Donaldson, Lufkin & Jenrette Securities Corporation has advised us that they
have no intention to waive any of the agreements described in the immediately
preceding paragraph. Donaldson, Lufkin & Jenrette Securities Corporation has
further advised us that in determining whether to grant any requested waiver,
they would consider the market prices and trading volumes for our common stock
at that time, market conditions generally, the size and timing of the requested
waiver and any special circumstances of the requesting person.
Prior to the offering, there has been no public market for our common stock.
We are unable to estimate the number of shares that may be sold in the future
by our existing stockholders or the effect, if any, that sales of shares by
such stockholders, or the availability of shares for sale, will have on the
market price of the common stock prevailing from time to time. Sales of
substantial amounts of common stock by existing stockholders could adversely
affect prevailing market prices.
62
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated the
date of this prospectus, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, U.S. Bancorp Piper
Jaffray, Warburg Dillon Read LLC and DLJdirect Inc., have severally agreed to
purchase from us the number of shares of common stock set forth opposite their
names below.
<TABLE>
<CAPTION>
Number
Underwriters of Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation..............
U.S. Bancorp Piper Jaffray.......................................
Warburg Dillon Read LLC..........................................
DLJdirect Inc. ..................................................
---------
Total.......................................................... 3,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
included in the offering are subject to approval of certain legal matters by
their counsel and to certain other conditions. The underwriters are obligated
to purchase and accept delivery of all the shares, other than those covered by
the over-allotment option described below, if they purchase any of the shares.
The underwriters propose to initially offer some of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and some of the shares to certain dealers at the
public offering price less a concession not in excess of $ per share. The
underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share on sales to certain other dealers. After the initial
offering of the shares to the public, the representatives may change the public
offering price and such concessions. The underwriters do not intend to confirm
sales to any accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with the offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of common stock.
<TABLE>
<CAPTION>
Paid by Data Critical
-------------------------
No Exercise Full Exercise
<S> <C> <C>
Per share.......................................... $ $
Total.............................................. $ $
</TABLE>
We will pay the offering expenses, estimated to be [$ ]
We have granted to the underwriters an option, exercisable for 30 days from
the date of the underwriting agreement, to purchase up to 525,000 additional
shares at the public offering price less the underwriting fees. The
underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with the offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to
certain conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
63
<PAGE>
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments that the underwriters may be required to make in respect
of any of those liabilities.
Our common stock has been approved for quotation on the NASDAQ National
Market under the symbol DCCA.
Prior to the offering, there has been no established trading market for our
common stock. The initial public offering price for our shares of common stock
offered hereby will be determined by negotiation among us and the
representatives of the underwriters. The factors to be considered in
determining the initial public offering price include the history of and the
prospects for the industry in which we compete, our past and present
operations, our historical results of operations, the prospects for future
earnings, the recent market prices of securities of generally comparable
companies and the general condition of the securities markets at the time of
the offering.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of our common
stock included in the offering in any jurisdiction where action for that
purpose is required. The shares included in the offering may not be offered or
sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisement in connection with the offer and sale of any such
shares be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons who receive this prospectus are
advised to inform themselves about and to observe any restrictions relating to
the offering of the common stock and the distribution of this prospectus. This
prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of common stock included in the offering in any jurisdiction where that
would not be permitted or legal.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 5% of the shares included in the offering, to be
sold to certain of our directors, officers, employees, distributors, dealers,
business associates and related persons. The number of shares available for
sale to the general public will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares that are not orally confirmed for
purchased within one day of the pricing of the offering will be offered by the
underwriters to the general public on the same terms as the other shares
offered hereby.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of our common stock.
Specifically, the underwriters may overallot the offering, creating a syndicate
short position. The underwriters may bid for and purchase shares of our common
stock in the open market to cover such syndicate short position or to stabilize
the price of the common stock. In addition, the underwriting syndicate may
reclaim selling concessions from syndicate members if Donaldson, Lufkin &
Jenrette Securities Corporation repurchases previously distributed common stock
in syndicate covering transactions, in stabilizing transactions or otherwise or
if Donaldson, Lufkin & Jenrette Securities Corporation receives a report that
indicates that the clients of such syndicate members have "flipped" the common
stock. These activities may stabilize or maintain the market price of our
common stock above independent market levels. The underwriters are not required
to engage in these activities, and may end any of these activities at any time.
64
<PAGE>
LEGAL MATTERS
The validity of the common stock in this offering will be passed upon for
Data Critical by Venture Law Group, A Professional Corporation, Kirkland,
Washington. Craig E. Sherman, a director of Venture Law Group, is the Secretary
of Data Critical. Legal matters in connection with this offering will be passed
upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. As of the date of this prospectus, certain
directors of Venture Law Group and an investment partnership affiliated with
Venture Law Group own an aggregate of 2,500 shares of Data Critical's Series D
preferred stock, which shares will convert into 2,500 shares of Data Critical's
common stock upon the completion of this offering.
EXPERTS
The audited financial statements included in this prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission for the common stock in this offering. This prospectus does
not contain all of the information set forth in the registration statement and
its exhibits and schedules. For further information on Data Critical and the
common stock offered hereby, you should refer to the registration statement and
to its exhibits and schedules. Statements made in this prospectus concerning
the contents of any document referred to herein are not necessarily complete.
For each such document filed as an exhibit to the registration statement, you
should refer to the exhibit for a more complete description of the matter
involved. The registration statement and the attached exhibits and schedules
may be inspected without charge at the public reference facilities maintained
by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the SEC located at Seven World Trade Center, 13th Floor,
New York, NY 10048, and the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of the
registration statement may be obtained from the SEC's offices upon payment of
certain fees prescribed by the SEC. The SEC maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of
this website is http://www.sec.gov.
65
<PAGE>
DATA CRITICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Balance Sheets at December 31, 1997 and 1998, and June 30, 1999
(unaudited)............................................................. F-3
Statements of Operations for the Years Ended December 31, 1996, 1997 and
1998, and for the Six Months Ended June 30, 1998 and June 30, 1999
(unaudited)............................................................. F-4
Statements of Stockholders' Deficit for the Years Ended December 31,
1996, 1997 and 1998, and for the Six Months Ended June 30, 1999
(unaudited)............................................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and
1998, and for the Six Months Ended June 30, 1998 and June 30, 1999
(unaudited)............................................................. F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Data Critical Corporation:
We have audited the accompanying balance sheets of Data Critical Corporation
(a Delaware corporation) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' deficit and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Data Critical Corporation
as of December 31, 1997 and 1998, and the results of its operations and cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
May 7, 1999
F-2
<PAGE>
DATA CRITICAL CORPORATION
BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Pro Forma
Shareholders'
At December 31, Equity
----------------- June 30, (Note 1) at
1997 1998 1999 June 30, 1999
------- -------- ----------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....... $ 865 $ 3,053 $ 1,118
Accounts receivable, net........ 74 1,182 1,865
Inventories, net................ 189 281 819
Prepaid expenses and other...... 35 271 482
------- -------- --------
Total current assets.......... 1,163 4,787 4,284
Note receivable from officer..... 45 45 45
Investment in, and advances to
unconsolidated affiliate........ 207 211 214
Property, equipment and software,
net............................. 253 444 862
Deferred financing costs......... 397
Other assets, net................ 120 138 213
------- -------- --------
Total assets.................. $ 1,788 $ 5,625 $ 6,015
======= ======== ========
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
Current Liabilities:
Line of credit.................. $ -- $ 250 $ 900
Current portion of notes
payable and capital leases..... 31 98 189
Accounts payable................ 318 486 887
Deferred revenues............... 6 442 1,644
Other current liabilities....... 91 1,168 1,119
------- -------- --------
Total current liabilities..... 446 2,444 4,739
Notes payable and capital leases,
net of current portion.......... 60 151 218
Convertible notes................ 1,581 -- --
------- -------- --------
Total liabilities............. 2,087 2,595 4,957
Commitments and contingencies
(Note 11)
Mandatorily redeemable and
convertible preferred stock,
$0.01 par value; 5,200,000
authorized:
Series A preferred stock,
187,500 authorized, 187,500
issued and outstanding;
aggregate liquidation
preference of $150,000 at
December 31, 1998 and June 30,
1999 respectively.............. 134 134 134 --
Series B preferred stock,
1,232,657 authorized,
1,232,646 issued and
outstanding; aggregate
liquidation preference of
$3,944,500, $5,140,506 and
$5,298,286 at December 31,
1997 and 1998 and June 30,
1999 respectively 4,732 5,066 5,233 --
Series C preferred stock,
1,187,817 authorized,
1,187,809 issued and
outstanding; aggregate
liquidation preference of
$3,801,014, $4,476,542 and
$4,628,571 at December 31,
1997 and 1998 and June 30,
1999 respectively.............. 4,061 4,388 4,551 --
Series D preferred stock,
2,450,000 authorized,
2,296,734 issued and
outstanding at December 31,
1998 and June 30, 1999;
aggregate liquidation
preference of $9,738,635 and
$10,106,114 respectively....... 9,660 10,038 --
------- -------- -------- --------
8,927 19,248 19,956 --
------- -------- -------- --------
Stockholders' (Deficit) Equity
Common stock, $.001 par value,
15,000,000 shares authorized;
1,402,246, 1,402,839 and
1,420,180 shares issued and
outstanding, and 6,324,869
pro forma respectively, and
additional paid-in capital..... 713 1,321 2,082 $ 22,038
Deferred compensation........... -- (552) (764) (764)
Accumulated deficit............. (9,939) (16,987) (20,216) (20,216)
------- -------- -------- --------
Total stockholders' (deficit)
equity....................... (9,226) (16,218) (18,898) $ 1,058
------- -------- -------- ========
Total liabilities, mandatorily
redeemable preferred stock
and stockholders' (deficit)
equity....................... $ 1,788 $ 5,625 $ 6,015
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
DATA CRITICAL CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
---------------------------- ------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue...................... $ 190 $ 471 $ 4,137 $ 658 $ 3,585
Cost of revenue.............. 27 348 1,841 323 1,417
-------- -------- -------- -------- --------
Gross margin.............. 163 123 2,296 335 2,168
-------- -------- -------- -------- --------
Operating expenses:
Research and development... 957 1,702 2,194 1,065 1,078
Sales and marketing........ 512 1,200 3,512 1,440 1,997
General and
administrative............ 738 1,268 2,564 1,228 1,620
-------- -------- -------- -------- --------
Total operating expenses.. 2,207 4,170 8,270 3,733 4,695
-------- -------- -------- -------- --------
Loss from operations...... (2,044) (4,047) (5,974) (3,398) (2,527)
Interest income.............. 46 71 202 88 41
Interest expense............. (6) (26) (50) (40) (35)
-------- -------- -------- -------- --------
Net loss..................... $ (2,004) $ (4,002) $ (5,822) $ (3,350) $ (2,521)
======== ======== ======== ======== ========
Preferred stock dividends and
accretion of mandatory
redemption obligations...... 420 685 1,226 598 708
-------- -------- -------- -------- --------
Net loss attributable to
common stock............. $ (2,424) $ (4,687) $ (7,048) $ (3,948) $ (3,229)
======== ======== ======== ======== ========
Basic and diluted loss per
common share................ $ (2.44) $ (4.28) $ (5.03) $ (2.82) $ (2.30)
======== ======== ======== ======== ========
Weighted average shares used
to calculate basic and
diluted loss per common
share....................... 994 1,095 1,402 1,402 1,403
======== ======== ======== ======== ========
Pro forma basic and diluted
loss per common share....... $ (1.01) $ (0.40)
======== ========
Weighted average shares used
to calculate pro forma basic
and diluted loss per common
share....................... 5,762 6,308
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
DATA CRITICAL CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock
and Additional
Paid-in Capital
---------------- Deferred Accumulated Stockholders'
Shares Amount Compensation Deficit Deficit
--------- ------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 993,746 $ 57 $ -- $ (2,828) $ (2,771)
Common stock options
and warrants
exercised............ 2,250 2 -- -- 2
Stock warrants issued
for consulting
services............. -- 2 -- -- 2
Accretion of mandatory
redemption
obligations.......... -- -- -- (38) (38)
Series B and C
mandatorily
redeemable preferred
stock dividend
accruals............. -- -- -- (382) (382)
Net loss.............. -- -- -- (2,004) (2,004)
--------- ------ ----- -------- --------
Balance, December 31,
1996................... 995,996 61 -- (5,252) (5,191)
Common stock options
and warrants
exercised............ 406,250 650 -- -- 650
Stock warrants issued
for consulting
services............. -- 2 -- -- 2
Accretion of mandatory
redemption
obligations.......... -- -- -- (67) (67)
Series B and C
mandatorily
redeemable preferred
stock dividend
accruals............. -- -- -- (618) (618)
Net loss.............. -- -- -- (4,002) (4,002)
--------- ------ ----- -------- --------
Balance, December 31,
1997................... 1,402,246 713 -- (9,939) (9,226)
Common stock options
and warrants
exercised............ 593 1 -- -- 1
Stock warrants issued
for consulting
services............. -- 2 -- -- 2
Deferred stock
compensation......... -- 605 (605) -- --
Amortization of
deferred stock
compensation......... -- -- 53 -- 53
Accretion of mandatory
redemption
obligations.......... -- -- -- (52) (52)
Series B, C and D
mandatorily
redeemable preferred
stock dividend
accruals............. -- -- -- (1,174) (1,174)
Net loss.............. -- -- -- (5,822) (5,822)
--------- ------ ----- -------- --------
Balance, December 31,
1998................... 1,402,839 1,321 (552) (16,987) (16,218)
Common stock options
and warrants
exercised............ 17,341 32 -- -- 32
Deferred stock
compensation......... -- 354 (354) -- --
Amortization of
deferred stock
compensation......... -- -- 142 -- 142
Accretion of mandatory
redemption
obligations.......... -- -- -- (31) (31)
Series B, C and D
mandatorily
redeemable preferred
stock dividend
accruals............. -- -- -- (677) (677)
Warrants issued in
conjunction with the
issuance of certain
credit facilities.... -- 375 -- -- 375
Net loss.............. -- -- -- (2,521) (2,521)
--------- ------ ----- -------- --------
Balance, June 30, 1999
(unaudited)............ 1,420,180 $2,082 $(764) $(20,216) $(18,898)
========= ====== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
DATA CRITICAL CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months
Ended
Years Ended December 31, June 30,
---------------------------- ----------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities:
Net loss...................... $ (2,004) $ (4,002) $ (5,822) $(3,350) $(2,521)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 133 171 208 103 126
Amortization of deferred
stock compensation......... -- -- 53 -- 142
Issuance of preferred stock
for legal services......... 25 -- -- -- --
Issuance of warrants for
consulting services........ 2 2 2 1 1
Changes in assets and
liabilities:
Accounts receivable........ (30) (28) (1,108) (241) (683)
Inventories................ 4 (8) (92) (188) (538)
Prepaid expenses and other
current assets............ (46) 28 (263) (83) (307)
Accounts payable and other
current liabilities....... 157 156 1,681 377 590
Customer deposits.......... -- -- -- 141 (236)
Deferred revenues.......... -- -- -- 143 1,202
-------- -------- -------- ------- -------
Net cash used in operating
activities............... (1,759) (3,681) (5,341) (3,097) (2,224)
-------- -------- -------- ------- -------
Cash Flows From Investing
Activities:
Purchases of marketable
securities................... (1,813) -- -- -- --
Sales of marketable
securities................... 640 1,813 -- -- --
Issuance of notes receivable
from officer................. -- (44) -- -- --
Investment in and advances to
unconsolidated affiliate..... (201) -- -- -- --
Purchases of property and
equipment.................... (75) (197) (380) (202) (539)
Other assets.................. (83) (9) (14) (2) (12)
-------- -------- -------- ------- -------
Net cash (used in)
provided by investing
activities............... (1,532) 1,563 (394) (204) (551)
-------- -------- -------- ------- -------
Cash Flows From Financing
Activities:
Proceeds from issuance of
common stock, net............ 2 650 1 -- 32
Proceeds from issuance of
mandatorily redeemable
preferred stock, net......... 3,223 -- 6,975 6,901 --
Redemption of preferred
stock........................ (20) -- -- -- --
Proceeds from line of credit.. -- -- 250 -- 650
Proceeds from notes payable... -- 94 200 131 214
Payment on notes payable...... -- (3) (42) (16) (56)
Issuance of convertible
notes........................ 400 1,581 539 539 --
-------- -------- -------- ------- -------
Net cash provided by
financing activities..... 3,605 2,322 7,923 7,555 840
-------- -------- -------- ------- -------
Net increase in cash........... 314 204 2,188 4,254 (1,935)
Cash at beginning of period.... 347 661 865 865 3,053
-------- -------- -------- ------- -------
Cash at end of period.......... $ 661 $ 865 $ 3,053 $ 5,119 $ 1,118
======== ======== ======== ======= =======
Supplemental disclosure of cash
flow information:
Cash paid for interest........ $ 6 $ 5 $ 72 $ 56 $ 23
======== ======== ======== ======= =======
Supplemental disclosure of
noncash financing activities:
Conversion of notes payable to
mandatorily redeemable
preferred stock.............. $ 400 $ -- $ 2,120 $ 2,120 $ --
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Amounts and disclosures for the six months ended
June 30, 1998 and 1999 are unaudited)
1. Nature of Business and Summary of Significant Accounting Policies:
Nature of Business
Data Critical Corporation (the Company) designs, manufactures, markets and
supports open personal information communications systems that provide
individuals with mobile interactive access to highly complex and life-critical
data. The Company's market focus is the healthcare industry, including
hospital, clinical, extended care and home care markets. The Company's systems
combine wireless technology and proprietary software to allow access to patient
vital signs and other diagnostic data from remote locations, both inside and
outside the hospital environment, either through an interactive access device,
a personal computer server or the Internet. To date, the Company has directed a
significant portion of its efforts to research and development, development of
markets for its products, application for patents, raising capital and
planning. The Company performed selected contract development services during
this period as well as commenced sales of related products during 1995. During
1997, the Company focused on addressing its technology to specific medical
applications. The resulting products are regulated by the U.S. Food and Drug
Administration and therefore require pre-market approval from the FDA prior to
making sales. The first of these approvals was granted in November 1997.
The Company commenced sales of its current products and services late in the
third quarter of 1997. The Company continues to be subject to a number of risks
similar to other companies in a comparable stage of development including:
reliance on key personnel; successful marketing of its products; competition
from other companies with greater technical, financial, management and
marketing resources; successful development of new products and the enhancement
of existing products; and the ability to secure adequate financing to support
future growth, if and when required.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity when
purchased of 90 days or less to be cash equivalents. Cash and cash equivalents
consist of cash on deposit with banks and money market investments.
Inventories
The Company's initial medical product is made up of the Company's
proprietary software applications which it integrates with hardware that is
acquired from third parties as well as hardware made by third parties to the
Company's specifications. Inventories consist primarily of the Company's
hardware product, components to make such product and other third-party
equipment, all of which is stated at the lower of cost or market, using the
first-in, first-out method.
Property, Equipment and Software
Property, equipment and software are stated at historical cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally three to five
years. Ordinary repairs and maintenance and purchases of less than $500 are
F-7
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures for the six months ended
June 30, 1998 and 1999 are unaudited)
expensed as incurred. Leasehold improvements are amortized over the lesser of
the term of the lease or the estimated useful life of the asset.
Investment In and Advances To Unconsolidated Affiliate
The Company accounts for its investments in entities in which it owns less
than a 20% interest under the cost method.
Other Assets
Other assets include licensed intellectual property rights and other
intangible assets which are stated at historical cost less accumulated
amortization provided on a straight-line basis over the estimated useful lives
of the asset, generally seven years. Other assets also include capitalized
legal expenses associated with patent applications. These costs will be
amortized over their estimated useful lives upon patent issuance by the U.S.
Patent Office. Amortization expense on other assets was $11,000, $15,000 and
$19,000 in 1996, 1997 and 1998, respectively, and 7,000 and 9,000 for the
six months ended June 30, 1998 and 1999, respectively. Accumulated amortization
was $28,000, $42,000 and $54,000 at December 31, 1997 and 1998, and June 30,
1999, respectively.
Revenue Recognition
The Company's revenue recognition policies are in conformity with Statement
of Position 97-2, as amended, of the American Institute of Certified Public
Accountants. License revenue is earned under software license agreements to end
users and distributors and is recognized when delivery has occurred, the fee is
fixed and determinable, evidence of an arrangement exists, collection of the
receivable is probable and there are no significant post-delivery obligations
remaining. Maintenance and support revenue is recognized over the term of the
agreement. In 1996 and 1997, the Company recognized revenue from software
development contracts involving significant production, modification or
customization of software, based on performance milestones specified in the
contract where such milestones fairly reflect progress toward contract
completion; no such revenue occurred in 1998 and the first quarter of 1999.
Major Customers
In January 1997, Data Critical signed a distribution and license agreement
with GE Marquette Medical Systems, Inc. for the non-exclusive licensing and
distribution of a medical wireless data product. Approximately 17.3%, 38.3%,
54.5%, 99.7% and 20.6% of the Company's revenues for the years ended December
31, 1996, 1997 and 1998, and the six months ended June 30, 1998 and 1999,
respectively, is attributable to GE Marquette Medical Systems, Inc.
Approximately 65.3% and 20.3% of the Company's revenue for the years ended
December 31, 1996 and 1997, respectively, is attributable to Hewlett-Packard
Company (HP) pursuant to a 1994 license agreement which provided HP exclusive
distribution rights to a specific implementation of the Company's medical
wireless data technology. In September 1997, the 1994 license agreement between
the Company and HP was terminated by mutual agreement thus allowing the Company
to sell directly to HP customers.
F-8
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures for the six months ended
June 30, 1998 and 1999 are unaudited)
Approximately 1.5% and 22.1% of the Company's revenue for the years ended
December 31, 1996 and 1997, respectively, is attributable to federal and state
governmental agencies. The Company had no sales to federal and state
governmental agencies in 1998 or 1999.
Warranty Obligations
The Company generally provides product warranties for 12 months after date
of purchase. Estimated warranty obligations are provided at the time of the
sale of the Company's products.
Royalty Expense
During 1997 and 1998, the Company entered into two nonexclusive licenses to
sell products using patented technology. In exchange for the licenses the
Company is required to make quarterly royalty payments based on the number of
products invoiced. Amounts charged to expense for the two nonexclusive licenses
were $14,000 and $142,000 in 1997 and 1998, respectively, and $59,600 and
$99,500 for the six months ended June 30, 1998 and 1999, respectively.
Research and Development Costs
The Company's accounting policy is to capitalize eligible computer software
development costs upon the establishment of technological feasibility, which
the Company has defined as completion of a working model. For the periods ended
December 31, 1997 and 1998, the amount of eligible costs to be capitalized has
not been material and accordingly, the Company has charged all software
development costs to research and development in the accompanying statements of
operations.
Advertising Costs
Costs related to advertising the Company's products are expensed in the
period incurred. Advertising costs incurred during the years ended December 31,
1998, 1997 and 1996 were $67,000, $31,600 and $20,400, respectively.
Income Taxes
Deferred income taxes are accounted for using the asset and liability
method. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of temporary differences by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes for a change in tax rates is
recognized in income in the period that includes the enactment date. To date,
the Company has fully reserved for its net deferred tax assets.
Stock Options
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." In
accordance with the provisions of SFAS 123, the Company has elected the
disclosure only provisions related to employee stock
F-9
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures for the six months ended
June 30, 1998 and 1999 are unaudited)
options and follows the provisions of Accounting Principals Board Opinion No.
25 (APB 25) in accounting for stock options issued to employees. Under APB 25,
compensation expense, if any, is recognized as the difference between the
exercise price and the fair value of the common stock on the measurement date,
which is typically the date of grant, and is recognized over the service
period, which is typically the vesting period.
The Company discloses the pro forma effect on net income as if it had
accounted for option grants to employees under the "fair value" method
prescribed by SFAS 123. The fair-value based model values stock options using
an acceptable valuation model. Pro forma compensation cost is measured at the
grant date based upon the fair value of the award and is recognized over the
service period, which is typically the vesting period.
Warrants and options granted to non-employees are accounted for under the
fair value provisions of SFAS 123.
Concentrations of Credit Risk
Financial instruments which subject the Company to concentrations of credit
risk consist principally of cash and trade receivables. The risk for cash and
cash equivalents is limited by the Company's policy of maintaining cash and
equivalents in multiple, highly rated, liquid investments. The Company has
credit risk with respect to trade accounts receivables as most of these
receivables are with healthcare institutions or with distributors to healthcare
institutions. To mitigate this risk, the Company has a credit policy under
which it verifies the creditworthiness of its customers.
Financial Instruments
The Company enters into various types of financial instruments in the normal
course of business and in raising capital. Fair values of cash, trade
receivables, notes receivable and notes payable all approximate market value.
The fair value of mandatorily redeemable preferred stock at December 31, 1998
and 1997 were estimated to be approximately $32,822,000 and $9,917,000,
respectively. These estimates of fair value were determined by management using
recent sales of preferred stock, consideration of significant milestones
achieved by the Company and other market considerations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Loss Per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Computation of Earnings Per Share," basic loss per share is computed by
dividing net loss attributable to common
F-10
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures for the six months ended
June 30, 1998 and 1999 are unaudited)
stock (net loss less preferred stock redemption obligation accretion and
dividend requirements) by the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share is computed by dividing
net loss by the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the shares of common stock issuable upon the conversion of the
mandatorily redeemable preferred stock (using the if-converted method) and
shares issuable upon the exercise of stock options and warrants (using the
treasury stock method); common equivalent shares are excluded from the
calculation as their effect is antidilutive. Accordingly, basic and diluted
loss per share are equivalent. The Company has not had any issuances or grants
for nominal consideration as defined under U.S. Securities and Exchange
Commission Staff Accounting Bulletin 98.
Pro forma basic and diluted net loss per share is computed based on the
weighted average number of shares of common stock outstanding giving effect to
the conversion of mandatorily redeemable preferred stock outstanding as of
December 31, 1998, that will automatically convert upon completion of the
Company's initial public offering (using the if-converted method from the
original issuance date). Pro forma diluted net loss per share excludes the
impact of stock options and warrants as the effect of their inclusion would be
antidilutive.
Unaudited Interim Financial Statements
The interim financial information contained herein is unaudited but, in the
opinion of management, reflects all adjustments which are necessary for a fair
presentation of the financial position, results of operations and cash flows
for the periods presented. All such adjustments are of a normal, recurring
nature. Results of operations for interim periods presented herein are not
necessarily indicative of results of operations for the entire year.
Unaudited Pro Forma Amounts
If the offering contemplated by this prospectus is completed, all of the
mandatorily redeemable preferred stock outstanding as of the closing date will
automatically be converted into an aggregate of 4,904,689 shares of common
stock. The unaudited pro forma balance sheet at June 30, 1999, is adjusted for
the conversion of preferred stock.
Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," (SFAS
131) during 1998. SFAS 131 requires companies to disclose certain information
about operating segments. Based on the criteria within SFAS 131, the Company
has determined that it has one reportable segment, wireless data products.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Cost of Computer
Software Developed or Obtained
F-11
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures for the six months ended
June 30, 1998 and 1999 are unaudited)
for Internal Use." SOP 98-1 is effective for financial statements for years
beginning after December 15, 1998. SOP 98-1 provides guidance over accounting
for computer software developed or obtained for internal use including the
requirement to capitalize specified costs and amortization of such costs. The
implementation of SOP 98-1 is not expected to have a material impact on the
Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The implementation of SOP 98-5
is not expected to have a material impact on the Company's financial position
or results of operations.
2. Accounts Receivable:
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
------------- --------
(in thousands)
<S> <C> <C> <C>
Accounts receivable................................. $ 80 $ 1,203 $1,906
Less: Allowance for doubtful accounts............... 6 21 41
---- ------- ------
$ 74 $ 1,182 $1,865
==== ======= ======
</TABLE>
3. Inventories:
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
------------- --------
(in thousands)
<S> <C> <C> <C>
Purchased components................................ $ 184 $ 246 $ 485
Finished goods...................................... 5 35 334
----- ------- ------
$ 189 $ 281 $ 819
===== ======= ======
4. Property, Equipment and Software:
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
------------- --------
(in thousands)
<S> <C> <C> <C>
Computers, equipment and purchased software......... $ 592 $ 888 $1,278
Furniture and fixtures.............................. 27 111 179
Leasehold improvements.............................. 19 19 97
----- ------- ------
638 1,018 1,554
Less: Accumulated depreciation...................... 385 574 692
----- ------- ------
$ 253 $ 444 $ 862
===== ======= ======
</TABLE>
Depreciation expense was $122,000, $156,000 and $189,000 in 1996, 1997 and
1998, respectively.
F-12
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures for the six months ended
June 30, 1998 and 1999 are unaudited)
5. Other Current Liabilities:
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
------------- --------
(in thousands)
<S> <C> <C> <C>
Accrued expenses.................................... $ 36 $ 184 $ 383
Accrued royalties................................... -- 96 146
Customer deposits................................... -- 296 60
Accrued product warranties.......................... 5 374 293
Accrued payroll and benefits........................ 50 218 237
---- ------- ------
$ 91 $ 1,168 $1,119
==== ======= ======
</TABLE>
6. Notes Payable:
The Company has a secured bank line of credit with maximum available
borrowings of $1.5 million, subject to a borrowing base of 75% of accounts
receivable. The line bears interest at the bank's prime rate plus 0.75% (10.5%
and 8.5% at December 31, 1997 and 1998). The Company had outstanding borrowings
of $250,000 and $900,000, and outstanding letters of credit of $170,000 and
$340,000, as of December 31, 1998 and June 30, 1999, respectively. The Company
had available balances on the line of $480,000 and $260,000 as of December 31,
1998 and June 30, 1999, respectively. There were no outstanding borrowings at
December 31, 1997. The line of credit expires in April 2000 and requires the
Company to comply with various financial covenants including tangible net worth
and liquidity ratios.
The Company has notes payable to a bank, secured by certain equipment, with
a total outstanding balance of $91,000, $249,000 and $200,000 at December 31,
1997, 1998 and June 30, 1999. The loans bear interest at the bank's prime rate
plus 1.0% to 2.5% (11.0% at December 31, 1997 and 8.75% to 10.25% at
December 31, 1998), due in monthly installments maturing through October 2001.
Under these credit arrangements, the Company is restricted as to its ability
to pay dividends prior to obtaining approval from the lenders.
In July and September 1996, the Company consummated private placements of
its 8% convertible bridge notes, for $300,000 and $100,000, respectively. Under
the terms of the notes, on September 27, 1996, the notes were converted into
125,000 shares of Series C mandatorily redeemable preferred stock at the
conversion price of $3.20 per share.
During 1997 and 1998, the Company issued convertible notes totaling $2.1
million and bearing interest at 9.0%. With these notes, the Company also issued
warrants to purchase 198,792 shares of common stock for $1.60 per share. In
March 1998, all accrued interest was paid and the principal balances were
converted into approximately 530,119 shares of Series D mandatorily redeemable
preferred stock.
F-13
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures for the six months ended
June 30, 1998 and 1999 are unaudited)
The future scheduled maturities at December 31, 1998 are as follows (in
thousands):
<TABLE>
<S> <C>
1999........................................ $348
2000........................................ 95
2001........................................ 56
----
Total....................................... $499
====
</TABLE>
7. Capital Structure
Mandatorily Redeemable Preferred Stock
As of December 31, 1998, there were approximately 4.9 million shares of
preferred stock outstanding, all of which are convertible preferred stock with
mandatory redemption requirements of 33 1/3% of the outstanding shares of each
class on January 31, 2002, 2003 and 2004. Failure to redeem on the redemption
dates results in a reduction in the common stock conversion price by 10.0% per
quarter until redemption occurs. Series D mandatorily redeemable preferred
stock has liquidation and dividend preference over Series C mandatorily
redeemable preferred stock which has liquidation and dividend preference over
Series B mandatorily redeemable preferred stock which has liquidation
preference over Series A mandatorily redeemable preferred stock. Liquidation
preference includes cumulative accrued dividends, which accrue on the Series B,
C and D preferred stock at 8.0% per annum. A summary of mandatorily redeemable
preferred stock follows (in thousands, except share amounts):
<TABLE>
<CAPTION>
Mandatorily
Redeemable
Preferred Stock
------------------
Shares Amount
--------- -------
<S> <C> <C>
Balance, December 31, 1995.................................. 1,426,396 $ 4,194
Redemption of Series B mandatorily redeemable preferred
stock.................................................... (6,250) (20)
Issuance of Series C mandatorily redeemable preferred
stock, net of issuance costs of $152..................... 1,054,997 3,223
Conversion of notes payable to Series C mandatorily
redeemable preferred stock............................... 125,000 400
Series C mandatorily redeemable preferred stock issued for
legal services........................................... 7,812 25
Accretion of mandatory redemption obligations............. -- 38
Series B and C mandatorily redeemable preferred stock
dividend accruals........................................ -- 382
--------- -------
Balance, December 31, 1996.................................. 2,607,955 8,242
Accretion of mandatory redemption obligations............. -- 67
Series B and C mandatorily redeemable preferred stock
dividend accruals........................................ -- 618
--------- -------
Balance, December 31, 1997.................................. 2,607,955 8,927
Issuance of Series D mandatorily redeemable preferred
stock, net of issuance costs of $91...................... 1,766,615 6,975
Conversion of notes payable to Series D mandatorily
redeemable preferred stock............................... 530,119 2,120
Accretion of mandatory redemption obligations............. -- 52
Series B, C and D mandatorily redeemable preferred stock
dividend accruals........................................ -- 1,174
--------- -------
Balance, December 31, 1998.................................. 4,904,689 19,248
--------- -------
Accretion of mandatory redemption obligations............. -- 31
Series B, C and D mandatorily redeemable preferred stock
dividend accruals........................................ -- 677
--------- -------
Balance, June 30, 1999...................................... 4,904,689 $19,956
========= =======
</TABLE>
F-14
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures for the six months ended
June 30, 1998 and 1999 are unaudited)
Issuance costs associated with the mandatorily redeemable preferred stock
offerings were recorded as a reduction to preferred stock. The preferred stock
is being accreted to its redemption amount over the period ending with the
mandatory redemption dates. Accretion of mandatory redemption costs is computed
using the straight-line method, which approximates the effective interest rate
method. The redemption price is equal to the liquidation preference.
Upon the closing of an initial public offering of common stock with gross
proceeds of greater than $10.0 million and at a price of at least $8.00 per
share, all of the mandatorily redeemable preferred stock will convert into
common shares on a one-for-one basis.
Warrants
The Company has issued warrants to purchase common stock in connection with
its stock and debt offerings. A summary of warrant activity follows:
<TABLE>
<CAPTION>
Warrants Outstanding
---------------------------
Number of Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Balance, December 31, 1995..................... 461,299 $1.80
Issued....................................... 117,630 3.20
Exercised.................................... -- --
-------- -----
Balance, December 31, 1996..................... 578,929 2.08
Issued....................................... 148,257 1.60
Exercised.................................... (406,250) 1.60
-------- -----
Balance, December 31, 1997..................... 320,936 2.48
Issued....................................... 50,535 1.60
Exercised.................................... -- --
-------- -----
Balance, December 31, 1998..................... 371,471 $2.34
======== =====
</TABLE>
These warrants generally expire within five years from grant (2000 to 2002).
The warrants were recorded as a component of additional paid-in capital at
their estimated fair value at the date of issuance.
On April 27, 1999, we issued a warrant to purchase 12,500 shares of Series D
preferred stock at an exercise price of $4.00 per share to a commercial lender
in connection with an equipment lease line. This warrant expires upon the
earlier of April 27, 2006 or five years after our initial public offering.
Generally, each outstanding warrant contains provisions for the adjustment of
the exercise price and the aggregate number of shares issuable upon the
exercise of the warrant in the case of stock dividends, stock splits,
reorganizations, reclassifications, consolidations and dilutive issuances of
securities at prices below the then existing warrant exercise price.
There is a purchase option outstanding to purchase 105,000 shares of Series
D preferred stock at an exercise price of $5.00 per share issued to a
commercial lender in connection with a debt facility. This option expires upon
an initial public offering or merger, consolidation or sale of substantially
all of the Company's assets.
F-15
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures for the six months ended
June 30, 1998 and 1999 are unaudited)
8. Stock Option Plan:
Under the Company's 1994 Stock Option Plan (the Plan), 950,000 shares of
common stock have been reserved for issuance to key management, directors or
key professional employees. Directors who are not key management employees of
the Company can be granted only nonqualified stock options. Options vest
ratably over one to four years from the date of grant. In the event option
holders cease to be employed by the Company, all unvested options are forfeited
and all vested options can be exercised within a three-month period; otherwise
the options are forfeited.
Incentive options are granted at not less than the fair value of common
stock on the date of grant, and nonqualified options are granted at not less
than 50% of fair value on the date of grant. All options expire no later than
seven years from the date of grant.
Information relating to stock options outstanding and stock options
exercisable is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
------- --------
<S> <C> <C>
Options outstanding, January 1, 1997..................... 266,331 0.80
Options granted......................................... 267,917 1.06
Options canceled........................................ (5,375) 1.43
-------
Options outstanding, December 31, 1997................... 528,873 0.92
Options granted......................................... 317,987 2.33
Options exercised....................................... (593) 0.97
Options canceled........................................ (9,845) 1.65
-------
Options outstanding, December 31, 1998................... 836,422 1.45
Options granted......................................... 91,637 3.60
Options exercised....................................... (17,341) 1.67
Options canceled........................................ (41,407) 2.50
-------
Options outstanding, June 30, 1999....................... 869,311 $1.62
=======
</TABLE>
At December 31, 1996, 1997 and 1998, options to purchase 154,657, 238,176,
and 339,624 shares were exercisable, respectively.
Under the Plan, options to purchase 110,734 shares of common stock were
available for future grant. As of December 31, 1998 the 836,423 options
outstanding under the Plan have exercise prices between $0.80 and $3.20 and a
weighted-average remaining contractual life of 5.24 years. During 1998 and the
six months ended June 30, 1999, the Company recorded $605,000 and $354,000,
respectively, of deferred compensation from the issuance of stock options with
exercise prices less than the fair value of common stock. This deferred
compensation is recognized as expense ratably over the vesting period of the
options. In 1998 and the six months ended June 30, 1999, the Company recognized
$53,000 and $142,000, respectively, of expense related to this deferred
compensation. The fair value of common stock on the dates of stock option
grants was determined by management using recent sales of preferred stock,
consideration of significant milestones achieved by
F-16
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures for the six months ended
June 30, 1998 and 1999 are unaudited)
the Company and other market considerations. The following table summarizes
information regarding stock options outstanding and exercisable as of December
31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Number Exercise Contractual Number Exercise
Range of Exercise Prices Outstanding Price Life Exercisable Price
------------------------ ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.800 - $0.800 442,581 $0.800 4.16 295,208 $0.800
$1.200 - $1.600 137,655 $1.585 5.99 44,416 $1.589
$2.400 - $2.400 225,812 $2.400 6.71 0 $0.000
$3.200 - $3.200 30,374 $3.200 6.87 0 $0.000
------- ------ ---- ------- ------
836,422 $1.450 5.25 339,624 $0.903
</TABLE>
For purposes of pro forma disclosure, the estimated fair value of each
option grant is estimated on the date of grant using the minimum value method,
which considers the time-value of money, with the following assumptions for
grants in 1996, 1997 and 1998: risk-free interest rates of 6.25% to 6.35%;
expected lives of five years; no dividends. The weighted average fair value of
options granted in 1996, 1997 and 1998 were $0.20, $0.27 and $0.58,
respectively. The pro forma effect upon net loss and net loss per share, taking
into account only the additional compensation expense that would be recognized
using the fair value method, are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net loss....................................... $(2,004) $(4,002) $(5,822)
Pro forma net loss............................. (2,004) (4,012) (5,865)
Basic and diluted loss per share............... (2.44) (4.28) (5.03)
Pro forma basic and diluted loss per share..... (2.44) (4.29) (5.06)
</TABLE>
9. Income Taxes:
At December 31, 1997 and 1998, the Company had net operating loss
carryforwards of approximately $7,571,000 and $13,225,000, respectively. The
Company is limited in its ability to use these carryforwards in any one year to
$1,300,000 due to preferred stock sales. Management believes that, based on a
number of factors, the available objective evidence creates significant
uncertainty regarding the realization of the net deferred tax assets.
Accordingly, a valuation allowance has been provided for the net deferred tax
assets of the Company. This valuation allowance increased in 1996, 1997 and
1998 by $661,000, $1,417,000 and $2,232,000, respectively. These carryforwards,
which may provide future tax benefits, expire from 2008 to 2018.
The difference between the statutory tax rate of approximately 35% (34%
federal and 1% state, net of federal benefits) and the tax benefit of zero
recorded by the Company is primarily due to the Company's full valuation
against its net deferred tax assets.
F-17
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures for the six months ended
June 30, 1998 and 1999 are unaudited)
The components of the deferred tax asset and liabilities were as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward......................... $ 2,574 $ 4,629
Other................................................... 107 284
------- -------
Deferred tax assets...................................... 2,681 4,913
Valuation allowance...................................... (2,681) (4,913)
------- -------
Total.................................................. $ -- $ --
======= =======
</TABLE>
10. Related Party Transactions:
Investment in and Advance to Unconsolidated Affiliate
On July 10, 1996, the Company loaned Nomadics, Inc. $50,000 in exchange for
a promissory note, which matures on July 10, 2000. The note is convertible into
approximately a 3.6% equity interest in Nomadics, Inc., at the earlier of July
10, 2000 or upon an initial public offering of the Company's stock. Interest
accrues at 8.0% per year. On November 7, 1996, the Company acquired Nomadics,
Inc. common stock representing a 10.8% interest for a cash payment of $151,000.
Note Receivable from Officer
As a part of the employment contract with a senior executive, the Company
loaned $45,000 on July 18, 1997, in exchange for a promissory note, which
matures on July 17, 2001. Interest of 6.7% on the unpaid principal balance is
due annually.
11. Commitments And Contingencies:
Commitments
The Company leases office space under lease agreements which expire over the
next two years. In December 1998, the Company entered into a lease for a new
facility which will expire five years after the scheduled June 1999 occupancy.
The leases require minimum monthly payments over the term of the lease. The
Company's rent expense during 1996, 1997 and 1998 was $76,000, $124,000 and
$243,000, respectively. Future minimum payments required under non-cancelable
leases as of December 31, 1998, are as follows (in thousands):
<TABLE>
<S> <C>
1999...................................... $ 263
2000...................................... 311
2001...................................... 252
2002...................................... 264
2003...................................... 271
Thereafter................................ 113
------
$1,474
======
</TABLE>
F-18
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures for the six months ended
June 30, 1998 and 1999 are unaudited)
Contingencies
Under a Registration Rights Agreement between the Company and its common and
preferred stockholders, the Company may be required to register its common
stock under the Federal Securities Act at the request of 40% of the common and
preferred stockholders. The expenses of the registration would be borne by the
Company.
12. Valuation and Qualifying Amounts:
<TABLE>
<CAPTION>
Charged Balance
Balance at to costs at end
Beginning and of
Description of period expenses Deductions(1) period
- ----------- ---------- -------- ------------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
December 31, 1996................... 0 1,505 0 1,505
December 31, 1997................... 1,505 4,078 0 5,583
December 31, 1998................... 5,583 15,618 (575) 20,626
</TABLE>
- --------
(1) Amounts include write-offs of accounts receivable deemed uncollectable.
13. Subsequent Events:
In April 1999, the Company established a subordinated debt facility totaling
$1.5 million that expires in October 1999. Loans made under this facility will
be secured by substantially all of the Company's assets, subordinated to the
commercial bank loans. Advances under the subordinated debt agreement are
subject to certain conditions, and these advances are limited to $500,000 or
more per advance and are payable at 11.0% interest only for the first 12 months
and in equal monthly principal and interest payments for the following 24
months. In connection with this debt facility, the lender received an option to
purchase up to 105,000 shares of Series D preferred stock at a purchase price
of $5.00 per share. This option expires upon an initial public offering or
merger, consolidation or sale of substantially all of the Company's assets.
The same lender has also provided a lease line of credit for up to $1.0
million, comprised of $800,000 to finance equipment and $200,000 to finance
equipment, leasehold improvements and software. Advances made under the lease
line are payable over 36 equal monthly installments. As part of this lease
line, the lender received a warrant to purchase 12,500 shares of Series D
preferred stock at an exercise price of $4.00 per share. This warrant expires
upon the earlier of April 27, 2006 or five years after an initial public
offering.
On May 7, 1999, the board of directors approved the filing with the U.S.
Securities and Exchange Commission a registration statement and prospectus for
the initial public offering of the Company's common stock.
On May 7, 1999, the board of directors approved a one-for-four reverse stock
split of all outstanding common and mandatorily redeemable preferred stock. All
common share and per share amounts in the accompanying consolidated financial
statements have been adjusted retroactively to give effect to the reverse stock
split.
F-19
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures for the six months ended
June 30, 1998 and 1999 are unaudited)
In May, 1999 the Directors' Stock Option Plan was adopted by the board of
directors and approved by the stockholders. 100,000 shares of common stock have
been reserved for issuance under the Directors' Plan. The Directors' Plan
provides for the grant of nonstatutory stock options to non-employee directors
of Data Critical. As of June 30, 1999, no options to purchase shares of common
stock had been granted by Data Critical.
In May 1999 the Employee Stock Purchase Plan was adopted by the board of
directors and approved by the stockholders. 100,000 shares plus an annual
increase in each of the next five years equal to the lessor of 150,000 shares
or one percent of the outstanding shares of common stock on the last day of the
preceding fiscal year of common stock have been reserved for issuance under the
Purchase Plan. As of June 30, 1999, no rights to purchase stock under this plan
had been granted by Data Critical.
In March and June 1999 the Company entered into capital leases for computer
software and hardware, which expire in fiscal 2002 and have effective interest
rates ranging from 15.2% to 16.6%. Capital lease obligations as of June 30,
1999 were $207,000.
F-20
<PAGE>
[Inside back cover of prospectus]
Page titled "Internet ECG" with the words "Under Development" immediately
beneath the title. The bottom left corner of the page contains a rendering of a
prototype Internet ECG transmitter. This photograph is linked by an arrow to a
photograph immediately to the right labeled "Home" that shows a home user
holding the Internet ECG transmitter to her chest while sitting at a personal
computer. There is a line connecting the photograph of the home user to an icon
immediately above it labeled "Internet," which is in turn linked to an icon
above it labeled "Server." The "Server" icon is depicted as connecting to screen
shots of a personal computer displaying vital sign waveforms.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[LOGO OF DATA CRITICAL]
3,500,000 Shares of Common Stock
----------------
PROSPECTUS
----------------
Donaldson, Lufkin & Jenrette
U.S. Bancorp Piper Jaffray
Warburg Dillon Reed LLC
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Data
Critical have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers that
effect transactions in these shares of common stock may be required to deliver
a prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Data Critical in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fee and the Nasdaq National
Market listing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
SEC registration fee.............................................. $14,546
NASD filing fee................................................... $ 5,232
Nasdaq National Market listing fee................................ *
Printing and engraving expenses................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
Blue Sky qualification fees and expenses.......................... *
Transfer agent and registrar fees................................. *
Miscellaneous fees and expenses................................... *
-------
Total........................................................... *
=======
</TABLE>
- --------
* to be filed by amendment
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's board of directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article IX of our Certificate of
Incorporation (Exhibit 3.2 hereto) and Article VI of our Bylaws (Exhibit 3.3
hereto) provide for indemnification of our directors, officers, employees and
other agents to the maximum extent permitted by Delaware Law. In addition, we
have entered into Indemnification Agreements (Exhibit 10.22 hereto) with its
officers and directors. The Underwriting Agreement (Exhibit 1.1) also provides
for cross-indemnification among Data Critical and the Underwriters with respect
to certain matters, including matters arising under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
Since March 31, 1996, Data Critical has issued and sold the following
securities:
1. On April 4, 1996, Data Critical issued 15,625 shares of its Series B
preferred stock to Elizabeth M. Riley in exchange for services rendered by
Mazza & Riley.
2. From September 27, 1996 to November 1, 1996, Data Critical issued
1,187,809 shares of its Series C preferred stock to 38 accredited investors
for an aggregate cash consideration of $3,800,988.80.
II-1
<PAGE>
3. From March 11, 1998 to May 29, 1998, Data Critical issued 2,296,734
shares of its Series D preferred stock to 39 accredited investors for an
aggregate cash consideration of $9,186,936.
4. Since inception Data Critical has issued and sold 20,184 shares of
common stock to employees at prices ranging from $0.80 to $3.20 per share,
in cash, upon exercise of stock options pursuant to the 1994 stock option
plan.
5. On July 10, 1996, Data Critical issued warrants to purchase 99,682
shares of its common stock with an exercise price of $3.20 per share to two
holders in part consideration for entering into a product development
agreement with Data Critical; on October 18, 1996, Data Critical issued
warrants to purchase 54,888 shares of its common stock with an exercise
price of $0.80 per share to six accredited investors in partial
consideration for the Series C preferred stock financing; and on November
4, 1997, Data Critical issued warrants to purchase 198,798 shares of common
stock with an exercise price of $1.60 per share to 15 accredited investors
in partial consideration for providing a bridge loan to Data Critical.
6. On April 27, 1999, Data Critical issued a warrant to purchase
12,500 shares of its Series D preferred stock with an exercise price of
$4.00 per share to one holder in partial consideration for financing an
equipment lease to Data Critical.
7. On April 27, 1999, Data Critical granted a purchase option to convert
up to $525,000 of the outstanding principal on a subordinated loan into
105,000 shares of Series D preferred stock at a price of $5.00 per share at
the lender's option.
8. On August 10, 1999, Data Critical issued to Michael Singer 7,500
shares of its common stock in connection with his employment agreement.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) or Regulation
D, or other applicable exemption of such Securities Act as transactions by an
issuer not involving any public offering. In addition, certain issuances
described in Item 4 were deemed exempt from registration under the Securities
Act in reliance upon Rule 701 promulgated under the Securities Act. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationships with Data Critical,
to information about Data Critical.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1** Form of Underwriting Agreement dated , .
3.1* Amended and Restated Certificate of Incorporation of Data Critical.
3.2* Amended and Restated Certificate of Incorporation of Data Critical
(proposed).
3.3* Amended and Restated Bylaws of Data Critical.
4.1** Specimen Stock Certificate.
4.2* Amended and Restated Registration Rights Agreement dated February 22,
1995, as amended.
4.3* Warrant Agreement dated April 13, 1995 between Data Critical and
Spencer Trask Securities Incorporated with Form of Common Stock
Purchase Warrant issued in connection with the Series B and Series C
Preferred Stock financings.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
4.4* Form of Common Stock Purchase Warrant issued in connection with the
bridge loan financing.
4.5* Common Stock Purchase Warrant dated July 10, 1996 issued by Data
Critical in favor of Nomadics, Inc.
4.6* Common Stock Purchase Warrant dated July 10, 1996 issued by Data
Critical in favor of Colin Cumming.
4.7* Warrant Agreement to purchase shares of Series D Preferred Stock dated
April 27, 1999 issued by Data Critical in favor of Comdisco, Inc.
5.1** Opinion of Venture Law Group regarding the legality of the common stock
being registered.
10.1+* Termination and Patent License Agreement dated September 16, 1997
between Data Critical and Hewlett-Packard Company.
10.2+* Distribution and License Agreement dated January 23, 1997 between Data
Critical and Marquette Medical Systems, Inc.
10.3+* Addendum to Marquette Distribution and License Agreement dated
September 14, 1998 between Data Critical and Marquette Medical
Systems, Inc.
10.4* Subordinated Loan and Security Agreement dated April 27, 1999 between
Data Critical and Comdisco, Inc.
10.5* Master Lease Agreement dated April 27, 1999 between Data Critical and
Comdisco, Inc.
10.6* Business Loan Agreement dated April 10, 1997 between Data Critical and
Silicon Valley Bank.
10.7* Loan Modification Agreement dated June 17, 1997 between Data Critical
and Silicon Valley Bank.
10.8* Loan Modification Agreement dated October 15, 1997 between Data
Critical and Silicon Valley Bank.
10.9* Loan Modification Agreement dated April 14, 1998 between Data Critical
and Silicon Valley Bank.
10.10* Loan Modification Agreement dated May 8, 1998 between Data Critical and
Silicon Valley Bank.
10.11* Loan Modification Agreement dated September 1, 1998 between Data
Critical and Silicon Valley Bank.
10.12* Loan Modification Agreement dated February 12, 1999 between Data
Critical and Silicon Valley Bank.
10.13* Loan Modification Agreement dated March 26,1999 between Data Critical
and Silicon Valley Bank.
10.14* Loan Modification Agreement dated May 6, 1999 between Data Critical and
Silicon Valley Bank.
10.15* Promissory Note dated April 10, 1997 between Data Critical and Silicon
Valley Bank with an original principal amount of $100,000.00.
10.17* Promissory Note dated April 10, 1997 between Data Critical and Silicon
Valley Bank with an original principal amount of $500,000.00.
10.18* Promissory Note dated April 14, 1998 between Data Critical and Silicon
Valley Bank with an original principal amount of $250,000.00.
10.19 Employment Agreement dated June 14, 1999 between Data Critical and
Michael E. Singer.
10.20* Facility Lease dated December 21, 1998 between S/I Northcreek II,
L.L.C. and Data Critical.
10.21* Amendment dated March 30, 1999 to the Facility Lease dated December 21,
1998 between S/I Northcreek II, L.L.C. and Data Critical.
10.22* Form of Indemnification Agreement between Data Critical and each of its
Officers and Directors.
10.23* 1999 Stock Option Plan (adopted May 7, 1999).
10.24* 1999 Directors' Stock Option Plan (adopted May 7, 1999).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.25* 1999 Employee Stock Purchase Plan (adopted May 7, 1999).
10.26* 1994 Stock Option Plan (dated December 19, 1994).
23.1 Consent of Arthur Andersen LLP.
23.2** Consent of Venture Law Group (included in Exhibit 5.1)
24.1* Power of Attorney (included in signature page to Registration
Statement).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment has been requested for the portions in the copy of
the exhibit filed with the Securities and Exchange Commission. The omitted
information has been filed separately with the Securities and Exchange
Commission pursuant to the application for confidential treatment.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth is not applicable or is shown in the financial
statements or their related notes.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Bothell, State of
Washington on September 15, 1999.
DATA CRITICAL CORPORATION
/s/ Jeffrey S. Brown
By: ____________________________
Jeffrey S. Brown
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment has been signed by the following person in the capacities and on the
date indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jeffrey S. Brown President, Chief Executive September 15,
____________________________________ Officer and Director 1999
Jeffrey S. Brown
* Vice President, Chief September 15,
____________________________________ Financial Officer 1999
Michael E. Singer
* Director September 15,
____________________________________ 1999
David E. Albert, M.D.
* Director September 15,
____________________________________ 1999
George M. Middlemas
* Director September 15,
____________________________________ 1999
Richard Earnest
* Director September 15,
____________________________________ 1999
Ronald Kase
* Director September 15,
____________________________________ 1999
David B. Swedlow
</TABLE>
/s/ Jeffrey S. Brown
*By: _____________________
Jeffrey S. Brown
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1** Form of Underwriting Agreement dated , .
3.1* Amended and Restated Certificate of Incorporation of Data Critical.
3.2* Amended and Restated Certificate of Incorporation of Data Critical
(proposed).
3.3* Amended and Restated Bylaws of Data Critical.
4.1** Specimen Stock Certificate.
4.2* Amended and Restated Registration Rights Agreement dated February 22,
1995, as amended.
4.3* Warrant Agreement dated April 13, 1995 between Data Critical and
Spencer Trask Securities Incorporated with Form of Common Stock
Purchase Warrant issued in connection with the Series B and Series C
Preferred Stock financings.
4.4* Form of Common Stock Purchase Warrant issued in connection with the
bridge loan financing.
4.5* Common Stock Purchase Warrant dated July 10, 1996 issued by Data
Critical in favor of Nomadics, Inc.
4.6* Common Stock Purchase Warrant dated July 10, 1996 issued by Data
Critical in favor of Colin Cumming.
4.7* Warrant Agreement to purchase shares of Series D Preferred Stock dated
April 27, 1999 issued by Data Critical in favor of Comdisco, Inc.
5.1** Opinion of Venture Law Group regarding the legality of the common stock
being registered.
10.1+* Termination and Patent License Agreement dated September 16, 1997
between Data Critical and Hewlett-Packard Company.
10.2+* Distribution and License Agreement dated January 23, 1997 between Data
Critical and Marquette Medical Systems, Inc.
10.3+* Addendum to Marquette Distribution and License Agreement dated
September 14, 1998 between Data Critical and Marquette Medical
Systems, Inc.
10.4* Subordinated Loan and Security Agreement dated April 27, 1999 between
Data Critical and Comdisco, Inc.
10.5* Master Lease Agreement dated April 27, 1999 between Data Critical and
Comdisco, Inc.
10.6* Business Loan Agreement dated April 10, 1997 between Data Critical and
Silicon Valley Bank.
10.7* Loan Modification Agreement dated June 17, 1997 between Data Critical
and Silicon Valley Bank.
10.8* Loan Modification Agreement dated October 15, 1997 between Data
Critical and Silicon Valley Bank.
10.9* Loan Modification Agreement dated April 14, 1998 between Data Critical
and Silicon Valley Bank.
10.10* Loan Modification Agreement dated May 8, 1998 between Data Critical and
Silicon Valley Bank.
10.11* Loan Modification Agreement dated September 1, 1998 between Data
Critical and Silicon Valley Bank.
10.12* Loan Modification Agreement dated February 12, 1999 between Data
Critical and Silicon Valley Bank.
10.13* Loan Modification Agreement dated March 26, 1999 between Data Critical
and Silicon Valley Bank.
10.14* Loan Modification Agreement dated May 6, 1999 between Data Critical and
Silicon Valley Bank.
10.15* Promissory Note dated April 10, 1997 between Data Critical and Silicon
Valley Bank with an original principal amount of $100,000.00.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.17* Promissory Note dated April 10, 1997 between Data Critical and Silicon
Valley Bank with an original principal amount of $500,000.00.
10.18* Promissory Note dated April 14, 1998 between Data Critical and Silicon
Valley Bank with an original principal amount of $250,000.00.
10.19 Employment Agreement dated June 14, 1999 between Data Critical and
Michael E. Singer.
10.20* Facility Lease dated December 21, 1998 between S/I Northcreek II,
L.L.C. and Data Critical.
10.21* Amendment dated March 30, 1999 to the Facility Lease dated December 21,
1998 between S/I Northcreek II, L.L.C. and Data Critical.
10.22* Form of Indemnification Agreement between Data Critical and each of its
Officers and Directors.
10.23* 1999 Stock Option Plan (adopted May 7, 1999).
10.24* 1999 Directors' Stock Option Plan (adopted May 7, 1999).
10.25* 1999 Employee Stock Purchase Plan (adopted May 7, 1999).
10.26* 1994 Stock Option Plan (dated December 19, 1994).
23.1 Consent of Arthur Andersen LLP.
23.2** Consent of Venture Law Group (included in Exhibit 5.1).
24.1* Power of Attorney (included in signature page to Registration
Statement).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment has been requested for the portions in the copy of
the exhibit filed with the Securities and Exchange Commission. The omitted
information has been filed separately with the Securities and Exchange
Commission pursuant to the application for confidential treatment.
<PAGE>
EXHIBIT 10.19
DATA CRITICAL CORPORATION
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is dated as of June 14, 1999,
by and between Michael E. Singer ("Employee") and Data Critical Corporation, a
Delaware corporation (the "Company").
1. Term of Agreement. This Agreement shall commence on the date hereof
and shall have a term of five (5) years (the "Original Term"). During the first
year of the Original Term, the Company may only terminate this Agreement for
Cause (as defined in Section 6 below). Thereafter, subject to Section 5, this
Agreement may be terminated by either party, with or without cause, on thirty
(30) days' written notice to the other party. This Agreement may be extended for
an additional one (1) year term after the end of the Original Term if the
parties mutually agree in writing to such extension.
2. Duties.
(a) Position. Employee shall be employed as the Company's Chief
Financial Officer, and as such will have responsibility for the Company's
finance, accounting and treasury functions, mergers and acquisitions, investor
relations, oversight of human resources and other operational duties that may
change from time to time. Employee will report to the Company's Chief Executive
Officer.
(b) Obligations to the Company. Employee agrees to the best of his
ability and experience that he will at all times loyally and conscientiously
perform all of the duties and obligations required of and from Employee pursuant
to the express and implicit terms hereof, and to the reasonable satisfaction of
the Company. During the term of Employee's employment relationship with the
Company, Employee further agrees that he will devote all of his or her business
time and attention to the business of the Company, the Company will be entitled
to all of the benefits and profits arising from or incident to all such work
services and advice, Employee will not render commercial or professional
services of any nature to any person or organization, whether or not for
compensation, without the prior written consent of the Company's Board of
Directors, and Employee will not directly or indirectly engage or participate in
any business that is competitive in any manner with the business of the Company.
Nothing in this Agreement will prevent Employee from accepting speaking or
presentation engagements in exchange for honoraria or from serving on boards of
charitable organizations, or from owning no more than 1% of the outstanding
equity securities of a corporation whose stock is listed on a national stock
exchange or the Nasdaq National Market. Employee will comply with and be bound
by the Company's operating policies, procedures and practices from time to time
in effect during the term of Employee's employment.
3. At-Will Employment. Except as provided in Section 1 above, the Company
and Employee acknowledge that Employee's employment is and shall continue to be
at-will, as defined under applicable law, and that Employee's employment with
the Company may be terminated by either party at any time for any or no reason.
If Employee's employment
<PAGE>
terminates for any reason, Employee shall not be entitled to any payments,
benefits, damages, award or compensation other than as provided in this
Agreement. The rights and duties created by this Section 3 may not be modified
in any way except by a written agreement executed by the Chief Executive Officer
of the Company.
4. Compensation. For the duties and services to be performed by Employee
hereunder, the Company shall pay Employee, and Employee agrees to accept, the
salary, stock options, bonuses and other benefits described below in this
Section 4.
(a) Salary. Employee shall receive a minimum monthly salary of
$13,333, which is equivalent to $160,000 on an annualized basis. Employee's
salary shall be reviewed on at least an annual basis. Employee's monthly salary
will be payable pursuant to the Company's normal payroll practices. In the
event this Agreement is extended beyond the Original Term, the base salary shall
be reviewed at the time of such extension by the Board, its Compensation
Committee or the Chief Executive Officer of the Company, and any increase will
be effective as of the date determined appropriate by the Board, its
Compensation Committee or the Chief Executive Officer.
(b) Bonus
(i) If Employee is still employed by the Company, the Company
shall issue Employee 7,500 shares of the Company's Common Stock on August 10,
1999. Employee shall surrender these shares to the Company for cancellation if
he leaves his employment with the Company prior to December 31, 1999. Employee
acknowledges that he shall be liable for the payment of income taxes related to
receipt of these shares.
(ii) For each calendar year beginning in the year 2000, Employee
shall be eligible to receive a bonus based on achievement of goals to be
determined by the Company's Board of Directors.
(c) Stock Options and Other Incentive Programs.
(i) In connection with the commencement of Employee's employment,
the Board of Directors shall grant to Employee an option to purchase 100,000
shares of the Company's Common Stock, which will have an exercise price of
$6.00, the fair market value on the date of the grant. Twenty-five percent (25%)
of the option shares shall be vested and immediately exercisable on the date of
grant. Twenty-five percent (25%) of the remaining option shares will vest on the
one-year anniversary of commencement of employment, and the remainder will vest
quarterly over the following three years. Vesting will, of course, depend on
Employee's continued employment with the Company. If, during the term of his
employment, Employee dies or suffers a Disability (as defined in Section 7
below), the option shares shall become full vested and exercisable. In the event
of a sale of all or substantially all of the assets of the Company, or the
merger of the Company with or into another corporation, or other change in
control (a "Change in Control"), the exercisability of each outstanding option
shall automatically be accelerated completely so that one hundred percent (100%)
of the number of shares of Common Stock covered by such Option shall be fully
vested.
-2-
<PAGE>
(ii) The Board of Directors shall also grant to Employee an
option to purchase 75,000 shares of the Company's Common Stock, which will have
an exercise price of $6.00, the fair market value on the date of the grant. This
option will become fully vested and exercisable on the earlier of (1) five (5)
years after the date of grant or (2) on the date of consummation of a Sale of
the Company (as defined below) or (3) on a Pro Rata basis on the date (or dates)
of consummation of Acquisition(s) by the Company (as defined below) having a
Fair Market Value (as defined below) of $60 million or more.
As used herein, "Acquisition by the Company" means any
purchase of assets, merger, acquisition, acquisition of any interest in any
joint venture, partnership, limited liability company or any other form of
acquisition of all or any part of another business by the Company, and "Sale of
the Company" means a transaction or series of related transactions whereby,
directly or indirectly, control of the Company or all or substantially all of
its business or assets is acquired by or merged with another entity in a sale or
exchange of stock, merger or consolidation, sale of assets or other similar
transaction. As used herein, a "Transaction" means an Acquisition by the Company
or a Sale of the Company.
As used herein, "Fair Market Value" means the sum of (1)
cash paid or payable, fair market value of marketable equity securities or
interests, fair value of unmarketable equity securities or interests, face
amount of straight and convertible debt instruments or obligations issued or
issuable (including any amounts paid into escrow) from the Company or any entity
affiliated with the Company in connection with aTransaction, (2) the amount of
indebtedness (excluding trade payables) of an acquired company assumed directly
or indirectly by the Company or any entity affiliated with the Company in
connection with a Transaction and (3) the fair value of contingent future
payment obligations (e.g. earn-outs) arising in connection with a Transaction.
Fair Market Value will be determined at the time the Company reaches a
definitive agreement for a Transaction.
As used herein, "Pro Rata" means the Fair Market Value of
any Transaction divided by $60 million.
For example, if the Company consummates an Acquisition by
the Company with a Fair Market Value of $20 million, followed by an Transaction
with a Fair Market Value of $10 million, Employee's option will become vested
with respect to 25,000 shares and then 12,500 shares, for an aggregate vesting
of 37,500 shares or fifty percent (50%) of the shares subject to the option.
Vesting will, of course, depend on Employee's continued employment with the
Company.
(iii) Both of Employee's options will be incentive stock options
to the maximum extent allowed by the Internal Revenue Code of 1986, as amended,
and will be subject to the terms of the Company's 1999 Stock Plan and the Stock
Option Agreement between Employee and the Company. Subject to the discretion of
the Company's Board of Directors, you may be eligible to receive additional
grants of stock options or purchase rights from time to time in the future, on
such terms and subject to such conditions as the Board of Directors shall
determine as of the date of any such grant.
-3-
<PAGE>
(d) Additional Benefits. Employee will be eligible to participate in
the Company's employee benefit plans of general application, including without
limitation, those plans covering medical, disability and life insurance in
accordance with the rules established for individual participation in any such
plan and under applicable law. Employee will be eligible for vacation and sick
leave in accordance with the policies in effect during the term of this
Agreement and will receive such other benefits as the Company generally provides
to its other employees of comparable position and responsibility.
(e) Reimbursement of Expenses.
(i) Employee shall be authorized to incur on behalf and for the
benefit of, and shall be reimbursed by, the Company for reasonable expenses,
provided that such expenses are substantiated in accordance with Company
policies.
(ii) In addition, the Company will reimburse Employee for (1)
reasonable expenses incurred in making two trips from San Francisco to the
Seattle area to look for housing, (2) the rental of an apartment in the Seattle
area from June 1999 through the end of July 1999, (3) reimbursement of expenses
incurred up to an aggregate of $2,000 for weekend trips from Seattle to San
Francisco until Employee's family relocates to the Seattle area and (4)
reasonable relocation expenses incurred for Employee and his family to move from
San Francisco to the Seattle area (collectively, "Moving Expenses"). The
Company will gross up Employee's reimbursement of Moving Expenses for any income
taxes incurred by Employee thereon.
(iii) The Company shall reimburse Employee for up to $6,000 in
hourly legal and accounting fees incurred by Employee in connection with (i)
entering into this Agreement and (ii) analyzing the tax consequences of
compensation paid to Employee upon consummation of a change of control
transaction of the Company.
5. Termination of Employment and Severance Benefits.
(a) Termination of Employment. This Agreement may be terminated
during its Original Term (or any extension thereof) upon the occurrence of any
of the following events:
(i) The Company's determination in good faith that it is
terminating Employee for Cause (as defined in Section 6 below) ("Termination for
Cause");
(ii) The Company's determination that it is terminating Employee
without Cause, which determination may be made by the Company at any time at the
Company's sole discretion, for any or no reason ("Termination Without Cause");
(iii) The effective date of a written notice sent to the Company
from Employee stating that Employee is electing to terminate his or her
employment with the Company ("Voluntary Termination");
-4-
<PAGE>
(iv) A change in Employee's status such that a Constructive
Termination (as defined in Section 5(b)(iv) below) has occurred; or
(v) Following Employee's death or Disability (as defined in
Section 7 below).
(b) Severance Benefits. Employee shall be entitled to receive
severance benefits upon termination of employment only as set forth in this
Section 5(b):
(i) Voluntary Termination. If Employee's employment terminates
by Voluntary Termination, then Employee shall not be entitled to receive payment
of any severance benefits. Employee will receive payment(s) for all salary and
unpaid vacation accrued as of the date of Employee's termination of employment
and Employee's benefits will be continued under the Company's then existing
benefit plans and policies in accordance with such plans and policies in effect
on the date of termination and in accordance with applicable law.
(ii) Involuntary Termination. If Employee's employment is
terminated under Section 5(a)(ii) or 5(a)(iv) (such termination, an "Involuntary
Termination"), Employee will be entitled to receive payment of severance
benefits equal to Employee's regular salary for one year (the "Severance
Period"). Such payments shall be made at the time of termination. Employee will
receive payment(s) for all salary and unpaid vacation accrued as of the date of
Employee's termination of employment, and Employee's benefits will be continued
under the Company's then existing benefit plans and policies in accordance with
such plans and policies in effect on the date of termination and in accordance
with applicable law. (iii)
(iii) Termination for Cause. If Employee's employment is
terminated for Cause, then Employee shall not be entitled to receive payment of
any severance benefits. Employee will receive payment(s) for all salary and
unpaid vacation accrued as of the date of Employee's termination of employment
and Employee's benefits will be continued under the Company's then existing
benefit plans and policies in accordance with such plans and policies in effect
on the date of termination and in accordance with applicable law.
(iv) Constructive Termination. "Constructive Termination" shall
be deemed to occur if (A)(1) there is a change in Employee's position that in
Employee's reasonable judgment represents a substantial reduction in status,
title, position or responsibilities, (2) a reduction of Employee's base
compensation or (3) Employee's refusal to relocate to a facility or location
more than 30 miles from the Company's current location; and (B) within the 30-
day period immediately following such material change or reduction Employee
elects to terminate his employment voluntarily.
(v) Termination by Reason of Death or Disability. In the event
that Employee's employment with the Company terminates as a result of Employee's
death or Disability (as defined in Section 7 below), Employee or Employee's
estate or representative will receive all salary and unpaid vacation accrued as
of the date of Employee's death or Disability and any other benefits payable
under the Company's then existing benefit plans and policies in accordance with
such plans and policies in effect on the date of death or Disability and in
-5-
<PAGE>
accordance with applicable law. In addition, Employee's estate or representative
will receive the amount of Employee's target bonus for the fiscal year in which
the death or Disability occurs to the extent that the bonus has been earned as
of the date of Employee's death or Disability, as determined by the Board of
Directors or its Compensation Committee based on the specific corporate and
individual performance targets established for such fiscal year.
6. Definition of Cause. For purposes of this Agreement, "Cause" for
Employee's termination will exist at any time after the happening of one or more
of the following events:
(a) Employee's willful misconduct or gross negligence in performance
of his duties hereunder, including Employee's refusal to comply in any material
respect with the legal directives of the Company's Board of Directors so long as
such directives are not inconsistent with the Employee's position and duties,
and such refusal to comply is not remedied within 10 working days after written
notice from the Company, which written notice shall state that failure to remedy
such conduct may result in Termination for Cause;
(b) Dishonest or fraudulent conduct, a deliberate attempt to do an
injury to the Company, or conduct that materially discredits the Company or is
materially detrimental to the reputation of the Company, including conviction of
a felony; or
(c) Employee's incurable material breach of any element of the
Company's Confidential Information and Invention Assignment Agreement, including
without limitation, Employee's theft or other misappropriation of the Company's
proprietary information.
7. Definition of Disability. For purposes of this Agreement,
"Disability" shall mean that Employee has been unable to perform his duties
hereunder as the result of his incapacity due to physical or mental illness, and
such inability, which continues for at least one hundred twenty (120)
consecutive calendar days or one hundred fifty (150) calendar days during any
consecutive twelve-month period, if shorter, after its commencement, is
determined to be total and permanent by a physician selected by the Company and
its insurers and acceptable to Employee or to Employee's legal representative
(with such agreement on acceptability not to be unreasonably withheld).
8. Confidentiality Agreement. Employee shall sign, or has signed, a
Proprietary Information and Inventions Agreement (the "Confidentiality
Agreement") substantially in the form attached hereto as Exhibit A. Employee
hereby represents and warrants to the Company that he has complied with all
obligations under the Confidentiality Agreement and agrees to continue to abide
by the terms of the Confidentiality Agreement and further agrees that the
provisions of the Confidentiality Agreement shall survive any termination of
this Agreement or of Employee's employment relationship with the Company.
9. Noncompetition Covenant. Employee hereby agrees that he shall not,
during the term of his employment pursuant to this Agreement and until the later
of (a) one year after termination of Employee's employment with the Company or
(b) the end of the Severance Period, if any, do any of the following without the
prior written consent of the Company's Board of Directors:
-6-
<PAGE>
(a) Compete. Carry on any business or activity (whether directly or
indirectly, as a partner, stockholder, principal, agent, director, affiliate,
employee or consultant) relating to wireless telecommunications products or
services or medical equipment or products, in each case that directly compete
with the Company's products or services then commercially available or under
development during the term of Employee's employment, or engage in any other
activities that conflict with Employee's obligations to the Company.
(b) Solicit Business. Solicit or influence or attempt to influence
any client, customer or other person either directly or indirectly, to direct
his or its purchase of the Company's products and/or services to any person,
firm, corporation, institution or other entity in competition with the business
of the Company.
(c) Solicit Personnel. Solicit or influence or attempt to influence
any person employed by the Company to terminate or otherwise cease his
employment with the Company or become an employee of any competitor of the
Company. This Section 9(c) is to be read in conjunction with Section 6 of the
Confidential Information and Invention Assignment Agreement executed by
Employee.
10. Limitation on Stock Option Acceleration Benefits.
The Company shall use its best efforts to obtain approval of the terms of
this Agreement from at least seventy-five percent (75%) of the Company's
stockholders prior to the Company's initial public offering. If the Company is
unable to obtain such stockholder approval, or if notwithstanding such
stockholder approval any stock option acceleration benefits provided to Employee
under this Agreement (i) constitute "parachute payments" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and
(ii) are subject to the excise tax imposed by Section 4999 of the Code ("Excise
Tax"), then the Company shall reimburse Employee for the full amount of the
Excise Tax imposed upon Employee as a direct result of such parachute payments
(which shall include a "gross up" for income taxes on the amounts reimbursed by
the Company such that Employee shall have no liability as a result of the
imposition of any Excise Tax).
11. Conflicts. Employee represents that his performance of all the terms
of this Agreement will not breach any other agreement to which Employee is a
party. Employee has not, and will not during the term of this Agreement, enter
into any oral or written agreement in conflict with any of the provisions of
this Agreement. Employee further represents that he is entering into or has
entered into an employment relationship with the Company of his or her own free
will and that he has not been solicited as an employee in any way by the
Company.
12. Successors. Any successor to the Company (whether direct or indirect
and whether by purchase, lease, 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 agrees 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. The terms of this Agreement and all of Employee's rights hereunder
shall inure to
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<PAGE>
the benefit of, and be enforceable by, Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.
13. Miscellaneous Provisions.
(a) No Duty to Mitigate. Employee shall not be required to mitigate
the amount of any payment contemplated by this Agreement (whether by seeking new
employment or in any other manner), nor, except as otherwise provided in this
Agreement, shall any such payment be reduced by any earnings that Employee may
receive from any other source.
(b) Amendments and Waivers. Any term of this Agreement may be
amended or waived only with the written consent of the parties.
(c) Sole Agreement. This Agreement, including any Exhibits hereto,
constitutes the sole agreement of the parties and supersedes all oral
negotiations and prior writings with respect to the subject matter hereof.
(d) Notices. Any notice required or permitted by this Agreement
shall be in writing and shall be deemed sufficient upon receipt, when delivered
personally or by a nationally-recognized delivery service (such as Federal
Express or UPS), or 48 hours after being deposited in the U.S. mail as certified
or registered mail with postage prepaid, if such notice is addressed to the
party to be notified at such party's address as set forth below or as
subsequently modified by written notice.
(e) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Washington, without giving effect to the principles of conflict of laws.
(f) Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.
(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.
(h) Arbitration. Any dispute or claim arising out of or in
connection with this Agreement will be finally settled by binding arbitration in
Seattle, Washington in accordance with the rules of the American Arbitration
Association by one arbitrator appointed in accordance with said rules. The
arbitrator shall apply Washington law, without reference to rules of conflicts
of law or rules of statutory arbitration, to the resolution of any dispute.
Judgment on the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. Notwithstanding the foregoing, the parties may
apply to any court of competent jurisdiction for
-8-
<PAGE>
preliminary or interim equitable relief, or to compel arbitration in accordance
with this paragraph, without breach of this arbitration provision. This Section
13(h) shall not apply to the Confidentiality Agreement.
(i) Advice of Counsel. EACH PARTY TO THIS AGREEMENT ACKNOWLEDGES
THAT, IN EXECUTING THIS AGREEMENT, SUCH PARTY HAS HAD THE OPPORTUNITY TO SEEK
THE ADVICE OF INDEPENDENT LEGAL COUNSEL, AND HAS READ AND UNDERSTOOD ALL OF THE
TERMS AND PROVISIONS OF THIS AGREEMENT. THIS AGREEMENT SHALL NOT BE CONSTRUED
AGAINST ANY PARTY BY REASON OF THE DRAFTING OR PREPARATION HEREOF.
[Signature Page Follows]
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<PAGE>
The parties have executed this Agreement the date first written above.
DATA CRITICAL CORPORATION
By: /s/ Jeffrey S. Brown
--------------------
Title: President and Chief Executive Officer
Address: 2733 152nd Avenue, N.E.
Redmond, Washington 98052
Fax: (425) 885-3500
MICHAEL E. SINGER
Signature: /s/ Michael E. Singer
---------------------
Address: 3048 Jackson Street
San Francisco, California 94115
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<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Seattle, Washington
September 14, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 3,053 1,118
<SECURITIES> 0 0
<RECEIVABLES> 1,203 1,906
<ALLOWANCES> 21 41
<INVENTORY> 281 819
<CURRENT-ASSETS> 4,787 4,284
<PP&E> 1,018 1,554
<DEPRECIATION> 574 692
<TOTAL-ASSETS> 5,625 6,015
<CURRENT-LIABILITIES> 2,444 4,739
<BONDS> 0 0
(19,248) (19,956)
0 0
<COMMON> 1,321 2,082
<OTHER-SE> 17,539 20,980
<TOTAL-LIABILITY-AND-EQUITY> 5,625 6,015
<SALES> 4,137 3,585
<TOTAL-REVENUES> 4,137 3,585
<CGS> 1,841 1,417
<TOTAL-COSTS> 1,841 1,417
<OTHER-EXPENSES> 8,270 4,695
<LOSS-PROVISION> 21 20
<INTEREST-EXPENSE> 50 35
<INCOME-PRETAX> (5,822) (2,521)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,822) (2,521)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,822) (2,521)
<EPS-BASIC> (5.03) (2.30)
<EPS-DILUTED> (5.03) (2.30)
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