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PROSPECTUS Filed pursuant to Rule 424(b)(1)
November 9, 1999 Registration No. 333-78059
[DATA CRITICAL LOGO APPEARS HERE]
3,500,000 Shares of Common Stock
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The Offering: Trading Symbol & Market:
<S> <C>
. We are offering 3,500,000 shares of . DCCA/Nasdaq National Market
our common stock.
. The underwriters have a 30-day
option to purchase up to an additional
525,000 shares from us to cover over-
allotments.
. This is our initial public offering, and no
public market currently exists for our
shares.
. Closing: November 15, 1999.
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<CAPTION>
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Per Share Total
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<S> <C> <C>
Public offering price: $10.00 $35,000,000
Underwriter fees: 0.70 2,450,000
Proceeds to Data Critical Corporation: 9.30 32,550,000
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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 the prospectus]
Top of page displays "Data Critical" logo. The remainder of the page is divided
into 3 columns. Starting from the left the first column contains the text
"Remote Access To Patient Data". Underlying the text is a photograph displaying
the hallway of a hospital. The center column contains four photographs placed
vertically on top of each other. Starting from the top, the first photograph
displays a partial view of a keyboard and screen of the MobileView System
receiver. The next photograph is a view of two hands holding a StatView
receiver. The next photograph in the column displays an up-close view of the
StatView receiver. The final photograph in the column is of a MobileView System
receiver displaying wave graphics. The right column is a full photograph of a
physician using a MobileView System receiver.
<PAGE>
[Inside front gatefold of prospectus]
The page is divided into three horizontal rows.
The top left corner of the first row contains a text box with the heading :
"Hospital: StatView System." Starting from the left, immediately below the text
box, is a column containing three bullet points for the StatView system. The
first bullet point reads: "Targeted to nurses, addressing networked monitors."
The next bullet point reads: "Transmits critical clinical data in less that 10
seconds within the hospital." The third bullet point reads: "Installed in over
100 hospitals." To the right of the column containing the bullet points is a
photograph labeled "Bedside Monitors" displaying two healthcare providers
reviewing a patient's hospital bedside monitor. To the right of the bedside
monitors photograph are three icons. An arrow connects the photograph of the
bedside monitors to an icon of a monitor labeled "Central Station," which is in
turn linked by another arrow to its right to an icon of a server labeled "WT
Server(TM) Windows NT." The server icon is connected to a third icon of a
transmitter labeled "Wireless Transmitter" which is depicted as transmitting
signals to a StatView receiver photograph to the its right. To the right of the
StatView receiver photograph is a photograph of a healthcare provider using a
StatView receiver.
The top left corner of the middle row contains a text box with the heading:
"Physician: MobileView System." Starting from the left, immediately below the
text box, is a column containing three bullet points for the MobileView system.
The first bullet points reads: "Integrates with StatView system." The next
bullet point reads: "Allows remote access to hospital information for
physicians." The third bullet point reads: "Promotes faster and more informed
decision making." To the right of the column containing the three bullet points
is a photograph labeled "Bedside Monitors" displaying two healthcare providers
reviewing a patient's hospital bedside monitor. To the right of the bedside
monitors photograph are three icons. An arrow connects the photograph of the
bedside monitors to an icon of a monitor labeled "Central Station," which is in
turn linked by another arrow to its right to an icon of a server labeled "WT
Server(TM) Windows NT." The server icon is connected to a third icon labeled
"Cellular System." The "Cellular System" icon depicts a communication tower
transmitting signals to a photograph of a MobileView system receiver displaying
waveforms. To the right of the MobileView receiver photograph is a photograph of
a physician using a MobileView receiver.
The bottom row extends across only three-quarters of the page. The top left
corner of the middle row contains a text box with the heading: "Hospital:
AlarmView System." Below the heading box is a column containing three bullet
points. The first bullet point reads: "Addresses stand-alone equipment market."
The second bullet points reads: "Delivers information to central monitoring
database via wireless network." The third bullet points reads: "Expected to be
commercially available in the first half of year 2000." To the right of the
column containing the bullet points are four rows of icons. The top icon is an
IV pump labeled "IV Pump." Below the pump icon is an icon in the form of a
ventilator labeled "Ventilator. Immediately underneath the ventilator icon is an
icon of a pulse oximeter labeled "Pulse Oximeter." Below the pulse oximeter icon
is an icon of a monitor labeled "Multi Parameter Monitor." Each of the four
icons is individually linked to its own icon of a transmitter labeled "Alarm
View," which is depicted as transmitting signals. To the right of the AlarmView
transmitter icons are two icons: the first is of a receiver labeled "AlarmView
Receiver." Below the receiver icon is an icon of a computer and monitor linked
to an "AlarmView" transmitter, labeled "AlarmView Central."
The bottom right hand corner displays the "Data Critical" logo. Underneath the
logo is the following text: "19820 North Creek Parkway, Suite 100"; "Bothell,
Washington 98011"; "(425) 482-7000" and "www.datacritical.com."
<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 these 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.
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
Agilent Technologies, Inc., formerly a division of Hewlett-Packard Company. All
other brand names or trademarks appearing in this prospectus are the property
of their respective holders.
TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
Forward Looking Statements............................................... 16
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>
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Page
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Management............................................................... 45
Certain Transactions..................................................... 55
Principal Stockholders................................................... 56
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 61
Underwriting............................................................. 63
Legal Matters............................................................ 66
Experts.................................................................. 66
Additional Information................................................... 66
Index to Financial Statements............................................ F-1
</TABLE>
3
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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 our outstanding shares of preferred stock into
common stock; and
. a 1-for-4 reverse split of our common stock.
Data Critical Corporation
Our Business
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.
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 electrocardiograms (ECGs), which are graphic
representations of electrical changes occurring during a heartbeat, and
other vital signs, to the StatView receiving unit generally carried by
nurses within a hospital.
. 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, creating a
virtual network for stand-alone medical monitoring equipment at a
relatively low-cost per unit. We submitted our AlarmView system for
approval by the 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 monitors to portable, wireless hand-held devices
carried by physicians or other caregivers at remote locations, usually
outside of the hospital.
. 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.
. We have completed development of the initial release of the Internet ECG
system, but it is not yet commercially available.
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Our systems are currently being used in more than 100 hospitals in over 30
states. We sell our systems through our direct sales force and jointly with the
following strategic partners who assist us in the development, marketing and/or
distribution of our systems:
. GE Marquette Medical Systems, Inc., a subsidiary of General Electric
Company;
. Agilent Technologies, Inc., formerly a division of Hewlett-Packard
Company;
. Nellcor Puritan Bennett, a subsidiary of Mallinckrodt, Inc.;
. Protocol Systems, Inc.;
. Siemens Medical Systems, Inc., a subsidiary of Siemens AG; and
. Medical Data Electronics, Inc., a subsidiary of Thermo Electron
Corporation.
Our Market Opportunity
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, resulting in improved
security and confidentiality of sensitive patient information.
Our Strategy
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; and
. maintaining and building on our technology leadership.
Our History
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
that information as part of this prospectus.
5
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The Offering
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<S> <C>
Common stock offered by Data Critical........ 3,500,000 shares
Common stock to be outstanding after this
offering.................................... 9,833,619 shares
Use of proceeds.............................. For general corporate purposes, including
working capital, capital expenditures and
possible acquisitions.
Nasdaq National Market symbol................ DCCA
</TABLE>
The common stock to be outstanding after this offering is based on shares
outstanding as of September 30, 1999, and excludes 1,138,354 shares of common
stock issuable upon the exercise of outstanding stock options at a weighted
average price of $2.74 per share, 383,971 shares of common stock issuable upon
the exercise of warrants at a weighted average exercise price of $2.39 per
share and 105,000 shares of Series D preferred stock issued upon exercise of a
purchase option on October 25, 1999 at an exercise price of $5.00 per share.
Summary Financial Data
(In thousands except per share 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 statement of operations data 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 balance sheet data reflects the conversion of all
outstanding shares of preferred stock into shares of common stock.
. The pro forma as adjusted balance sheet data in the table below reflects
the sale of 3,500,000 shares of common stock offered at the initial
public offering price of $10.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses
payable by Data Critical.
<TABLE>
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Nine Months
Years Ended December Ended September
31, 30,
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1996 1997 1998 1998 1999
(Unaudited)
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Statement of Operations Data:
Revenue.......................... $ 190 $ 471 $ 4,137 $ 2,211 $ 5,906
Gross margin..................... 163 123 2,296 1,209 3,610
Net loss......................... (2,004) (4,002) (5,822) (4,516) (3,780)
Basic and diluted loss per common
share........................... $ (2.44) $ (4.28) $ (5.03) $ (3.65) $ (3.43)
Unaudited pro forma basic and
diluted loss per share.......... (1.01) (0.60)
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At September 30, 1999
---------------------------------
Pro Pro Forma
Actual Forma As Adjusted
(Unaudited)
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Balance Sheet Data:
Cash and cash equivalents................... $ 1,796 $1,796 $33,446
Working capital............................. 59 59 31,709
Total assets................................ 6,454 6,454 38,104
Short-term obligations...................... 1,149 1,149 1,149
Long-term obligations, net of current
portion.................................... 1,714 1,714 1,714
Mandatorily redeemable preferred stock,
$0.01 par value............................ 20,310 -- --
Stockholders' (deficit) equity.............. (20,161) 149 31,799
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6
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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 revenue, growth, marketability and sales would likely
suffer materially. In that 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 revenue 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 similar to ours by the healthcare industry. Conversion
from traditional methods of communication may not occur as rapidly as we
expect. Even if 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 reduce our
growth and revenue.
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 $8.6 million
from inception through December 31, 1997, $5.8 million in 1998 and $3.8 million
in the first nine months of 1999. As of September 30, 1999, we had an
accumulated deficit of $21.8 million. We expect to continue to incur net losses
for at least the next 18 months. 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; if these strategic partners
terminate their relationships with us, our competitive position and revenue
would suffer.
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 Agilent
Technologies, Inc., formerly a division of Hewlett-Packard Company, Protocol
Systems, Inc., Siemens Medical Systems, Inc. and Medical Data Electronics,
Inc., whose larger sales forces sell our systems on a commission basis. In
addition, we have original equipment manufacturing and
7
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distribution partnerships with GE Marquette Medical Systems, Inc. and Nellcor
Puritan Bennett, a subsidiary of Mallinckrodt Inc.
A substantial portion of our revenue in 1998 and the first nine months of
1999 was derived from the sale of systems marketed or distributed through
Agilent Technologies, Inc. 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 revenue 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 the growth of our business would be hurt 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 revenue in excess
of these commitments, we will not be able to achieve profitability.
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 we implement our system development and distribution
strategies, we will not be able to achieve profitability. In addition, we may
not experience any revenue growth in the future, and our revenue could
decrease. 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 profitability
with any degree of certainty.
Our quarterly financial statements are not a good indication of our future
performance because our revenue is 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. Any unexpected delays or cancellations of
shipments or installations at the end of a quarter could substantially reduce
revenue in that quarter, hurt our revenue 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 profitability 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 financial statements
are not a good indication of our future performance. It is likely that in
future quarters our revenue and earnings may be below the expectations of
securities analysts and investors and, as a result, the price of our common
stock may fall. Our revenue and earnings have varied in the past, and we expect
that they will continue to vary significantly from quarter to quarter.
8
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Our success is dependent on sales of StatView for a large portion of our
revenue; failure to maintain and continue to grow sales of StatView systems
would likely reduce our revenue.
In 1998 and the first nine months of 1999, substantially all of our revenue
was derived from sales 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 that reduce the pricing of, demand for or market
acceptance of our StatView system, including competition or technological
change, could significantly reduce our revenue.
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
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 sales will be harmed. 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, and as a result, hinder 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 $2.2 million in the first nine months of 1998 to $5.9 million
in the first nine 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, and as a result, could face reduced
revenue and earnings.
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. 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
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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 growth and earnings could be harmed.
We may experience substantial delays or difficulties in obtaining required
governmental approvals; failure to obtain governmental approvals would hinder
our ability to provide our existing systems or introduce future systems and
could reduce our sales.
As a manufacturer of wireless telecommunications systems, we are regulated
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 state
public service commissions. Regulatory requirements affecting our operations
may change. Any changes may hurt our business by hindering our ability to
compete with other wireless telecommunications product manufacturers, to
continue providing our existing systems or to introduce future systems or
system enhancements.
Our systems are also considered medical devices and are regulated 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 require 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.
Because we are a provider of healthcare related systems, extensive and
frequently changing federal regulations 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
these standards through periodic inspections. Although we have been found to be
in compliance with all these 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 must also comply with 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 materially hurt by
the cost of the compliance.
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Furthermore, we may expand sales of our systems to international markets. 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 revenue could be
materially reduced.
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
regulated, the FDA recently has been more active in reviewing health-related
activities on the internet, and any regulatory overview could delay
substantially or indefinitely the release of our Internet ECG 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 and may be forced to reduce prices, leading to decreased
revenue.
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,
including direct patient oversight and monitoring through wired systems and
voice communications, are well positioned to compete with us. If these
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; and
. 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 sales to decline.
11
<PAGE>
If we lose members of our senior management team, we may not be able to
successfully manage our business or achieve our objectives and our competitive
position and growth would suffer.
Our success will depend significantly on the continued contributions of our
senior management team, many of whom would be difficult to replace. In
particular, we believe that our future success depends on 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. We
maintain key person life insurance on the life of Jeffrey Brown in the amount
of $1.0 million.
We may not be able to hire and retain the personnel necessary to support our
expanding business, which could threaten our future growth.
We believe our future success will depend in large part on our ability to
identify, attract and retain engineering, sales and marketing, and customer
service and support personnel. Because of the complexity of our systems and
technologies, we are substantially dependent upon the continued service of our
existing engineering personnel as well as future hiring of engineers with high
levels of experience in designing complex systems like ours. In addition,
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. Furthermore,
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 personnel is highly competitive in our industry due
to the limited number of people available with the necessary technical skills.
We face intense competition for this personnel, and we cannot assure you that
we will be able to hire and retain them in sufficient numbers.
We will incur more deferred compensation expense in the fourth quarter of 1999,
which could hurt our profitability.
During 1998, and for the nine month period ended September 30, 1999, we have
recorded $605,000 and $1.3 million, respectively, of deferred compensation from
the issuance of stock options with exercise prices deemed to be less than the
fair market value of our common stock. This deferred compensation is recognized
as expense ratably over the vesting period of the options. In 1998 and for the
nine month period ended September 30, 1999, we recognized $53,000 and $415,000,
respectively, of expense related to this deferred compensation.
Since September 30, 1999, we have not granted any options to employees or
consultants. If we grant additional options at less than fair market value, we
will record deferred compensation expense in the fourth quarter of 1999, which
would hurt our profitability.
Our sales are dependent on third party single-source and limited-source
suppliers; this dependency reduces our control over the manufacturing process
of our products, which could reduce our revenue and earnings.
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, including 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,
12
<PAGE>
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 these components or key parts, when
needed, could delay the delivery of complete systems, result in the delayed
payment or cancellation of orders by our customers and cause our revenue and
earnings to decline.
We may fail to protect our proprietary technology and to maintain access to the
proprietary information of third parties that support our competitive position;
as a result, our growth may be hurt.
Our owned and licensed intellectual property is important to our business.
We could have intellectual property infringement claims asserted against us 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.
Political, economic and regulatory changes in the healthcare industry could
force us to make costly modifications to how we price and sell our systems.
The healthcare industry is highly regulated and is influenced by changing
political, economic and regulatory factors. 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 or postponing investment decisions,
including investments in our systems. We do not know what effect these
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 revenue and earnings would
be harmed. As the healthcare industry consolidates, competition for customers
will become more intense.
If our systems are not Year 2000 compliant, we may face unexpected material
expenses.
Year 2000 issues 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
revenue and earnings may suffer 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. We have no way to test
whether all those configurations and systems will properly handle the
transition to the year 2000.
13
<PAGE>
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. For example, if the systems provided
by one of our strategic partners are not Year 2000 compliant, there could be
delays in installation of our system. These potential delays may result in the
loss or delay in recognition of revenue for the quarters ending December 31,
1999 and March 31, 2000. We 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.
Our existing capital resources may not be sufficient to fund our system
development efforts and marketing plans; if we are required to raise additional
capital, 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. In addition, we have from time to time failed to comply with
covenants required by our working capital line of credit and subordinated debt
facility agreements. Both of our lenders have granted us waivers for this
noncompliance, but if we are unable to comply with these covenants in the
future, and if our lenders do not waive our noncompliance, we may need to raise
additional capital sooner than anticipated through the sale of debt or equity
securities or by entering into strategic alliances or other arrangements. If we
are unable to raise additional capital on reasonable terms and in a timely
fashion, our financial position will decline. Furthermore, any additional
issuance of equity securities will dilute your investment.
Trading in our shares may be affected by extreme price fluctuations, and you
could experience difficulties selling your shares.
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
decrease the trading price of our common stock, regardless of our actual
operating performance, and may make it difficult for you to resell your shares
at or above the initial offering price.
Significant fluctuations in the market price of our common stock could result
in securities class action claims against us, which could seriously harm our
cash position.
Securities class action claims have been brought against companies in the
past where volatility of the market price of that company's securities has
taken place. This kind of litigation could be very costly and could divert our
management's attention and resources. Any negative determination in this
litigation could also subject us to significant liabilities, any or all of
which could seriously harm our cash position.
State laws and our certificate of incorporation may inhibit potential
acquisition bids that could be beneficial for stockholders.
Delaware law and Washington law may inhibit potential acquisition proposals.
We are restricted by 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 the stockholder became an interested
stockholder.
14
<PAGE>
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 the 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.
The laws of Washington, where our principal executive offices are located,
also impose restrictions on some transactions between foreign corporations and
significant stockholders. Chapter 23B.19 of the Washington Business
Corporation Act prohibits a target corporation, with exceptions, from engaging
in significant business transactions with an acquiring person for a period of
five years after the acquisition, unless the transaction or acquisition of the
shares is approved by a majority of the members of the target corporation's
board of directors prior to the time of acquisition. A corporation may not
"opt out" of this statute and, therefore, we anticipate this statute will
apply to us. Depending upon whether we meet the definition of a target
corporation, Chapter 23B.19 of the WBCA may have the effect of delaying,
deferring or preventing a change in control of us.
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 the 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; and
. stockholders cannot take action by written consent.
Future sales by our existing stockholders could hurt the market price of our
common stock.
Sales of our common stock in the public market following this offering
could hurt the market price of our common stock. Of the 9,833,619 million
shares that will be outstanding upon the consummation of this offering:
. The 3,500,000 million shares sold in this offering will be freely
tradeable in the public market; and
. The other 6,333,619 shares will be "restricted securities" as defined in
Rule 144 under the Securities Act, and may be sold in the future without
registration under the Securities Act so long as the sale is in
compliance with the provisions of Rule 144 or any other applicable
exemption under the Securities Act.
Holders of 6,105,765 outstanding shares and 1,606,046 shares issuable upon
exercise of outstanding options and warrants have entered into 180-day lock-up
agreements with our underwriters.
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 like "believe," "anticipate,"
"plan," "seek," "expect," "intend" and similar expressions. Our actual results
may differ materially from the results expressed or implied by these forward-
looking statements because of the risk factors and other factors disclosed 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 $31.7 million ($36.5 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
using an initial public offering price of $10.00 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 these
uses, we intend to invest the net proceeds from this offering in short-term,
investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or 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. The terms of our credit agreement restrict our
ability to pay dividends and in the future the terms of our other credit
agreements or contractual provisions may impose restrictions or limitations on
the payment of dividends. In the absence of these restrictions or limitations,
the payment of any dividends will be at the discretion of our board of
directors.
16
<PAGE>
CAPITALIZATION
(In thousands, except share data)
The following table sets forth our capitalization as of September 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; and
. on a pro forma as adjusted basis to reflect the sale of common stock by
Data Critical at an initial public offering price of $10.00 per share and
the application of net proceeds.
This table should be read in conjunction with our financial statements and
the related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
At September 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
<S> <C> <C> <C>
Long-term obligations, net of current portion.. $ 1,714 $ 1,714 $ 1,714
Mandatorily redeemable preferred stock, $0.01
par value; 5,200,000 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)............................ 20,310 -- --
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; 15,000,000
shares authorized, 1,428,930 shares issued
and outstanding (actual); 25,000,000 shares
authorized, 6,333,619 shares issued and
outstanding (pro forma); 25,000,000 shares
authorized, 9,833,619 shares issued and
outstanding (pro forma as adjusted).......... 3,102 23,412 55,062
Deferred compensation......................... (1,434) (1,434) (1,434)
Accumulated deficit........................... (21,829) (21,829) (21,829)
-------- -------- --------
Total stockholders' (deficit) equity.......... (20,161) 149 31,799
-------- -------- --------
Total capitalization........................... $ 1,863 $ 1,863 $ 33,513
======== ======== ========
</TABLE>
The common stock to be outstanding after this offering is based on shares
outstanding as of September 30, 1999 and excludes:
. 1,138,354 shares of common stock issuable upon the exercise of
outstanding stock options at a weighted average price of $2.74 per share,
383,971 shares of common stock issuable upon the exercise of warrants and
a purchase option at a weighted average exercise price of $2.39 per share
and 105,000 shares of Series D preferred stock issued upon exercise of a
purchase option on October 25, 1999 at an exercise price of $5.00 per
share; and
. 80,725 additional shares of common stock available for issuance under our
1994 Stock Option Plan and 909,487 additional shares of common stock
available for issuance under our 1999 stock option and employee stock
purchase plans approved in May 1999.
17
<PAGE>
DILUTION
As of September 30, 1999, our pro forma net tangible book value was
$(772,000), or $(0.12) 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 our total tangible
assets less its total liabilities. After giving effect to the sale of the
3,500,000 shares of common stock offered by us at an initial public offering
price of $10.00 per share, and the adjustments above, our pro forma as adjusted
net tangible book value as of September 30, 1999 would have been $30.9 million,
or $3.14 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 $31.7 million. Based on the foregoing,
there would be at September 30, 1999 an immediate increase in net tangible book
value of $3.26 per share to existing stockholders and an immediate dilution of
$6.86 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $10.00
Pro forma net tangible book value per share at September
30, 1999................................................. $(0.12)
Increase per share attributable to new investors.......... 3.26
------
Pro forma as adjusted net tangible book value per share
after this offering........................................ 3.14
------
Dilution per share to new investors......................... $ 6.86
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1999, the differences between the existing stockholders and new investors
regarding:
. the number of shares of common stock purchased from us;
. the total consideration paid to us; and
. the average price paid per share.
This table assumes no exercise of stock options or warrants outstanding upon
completion of this offering. 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....... 6,333,619 64.4% $17,800,000 33.7% $ 2.81
New investors............... 3,500,000 35.6 35,000,000 66.3% 10.00
--------- ----- ----------- -----
Total................... 9,833,619 100.0% $52,800,000 100.0%
========= ===== =========== =====
</TABLE>
As of September 30, 1999, there were:
. 1,138,354 shares of common stock issuable upon the exercise of
outstanding stock options at a weighted average price of $2.74 per share;
. 383,971 shares of common stock issuable upon the exercise of stock
warrants at a weighted average exercise price of $2.39 per share; and
. 105,000 shares of Series D preferred stock issued upon the exercise of a
purchase option on October 25, 1999 at an exercise price of $5.00 per
share.
Assuming all vested and "in the money" options and warrants to purchase
975,604 shares of capital stock at a weighted average exercise price of $2.26
are exercised, there would be further dilution to new investors of $0.08 per
share for a total dilution per share to new investors of $6.94.
18
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except for per share data)
The following historical selected financial and operating data 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 our unaudited financial statements
not included in this prospectus. The selected statement of operations data for
the nine months ended September 30, 1998 and September 30, 1999 and the
selected balance sheet data as of September 30, 1999 have been derived from our
unaudited financial statements 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 and financial position for these periods. These
historical results are not necessarily indicative of results to be expected for
any future period.
<TABLE>
<CAPTION>
Years Ended Years Ended Nine Months Ended
September 30, December 31, September 30,
------------------------ ------------------------- ------------------
1994 1995 1996 1996 1997 1998 1998 1999
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 60 $ 232 $ 187 $ 190 $ 471 $ 4,137 $ 2,211 $ 5,906
Cost of revenue......... 38 393 35 27 348 1,841 1,002 2,296
------ ------- ------- ------- ------- ------- -------- --------
Gross margin............ 22 (161) 152 163 123 2,296 1,209 3,610
------ ------- ------- ------- ------- ------- -------- --------
Operating expenses:
Research and
development.......... 85 270 883 957 1,702 2,194 1,601 1,602
Sales and marketing... -- 282 543 512 1,200 3,512 2,361 2,863
General and
administrative....... 269 720 756 738 1,268 2,564 1,871 2,881
------ ------- ------- ------- ------- ------- -------- --------
Total operating
expenses............... 354 1,272 2,182 2,207 4,170 8,270 5,833 7,346
------ ------- ------- ------- ------- ------- -------- --------
Loss from operations.... (332) (1,433) (2,030) (2,044) (4,047) (5,974) (4,624) (3,736)
Other income (expense),
net.................... (11) 37 28 40 45 152 108 (44)
------ ------- ------- ------- ------- ------- -------- --------
Net loss................ $ (343) $(1,396) $(2,002) $(2,004) $(4,002) $(5,822) $ (4,516) $ (3,780)
====== ======= ======= ======= ======= ======= ======== ========
Basic and diluted loss
per common share....... $(0.32) $ (1.55) $ (2.21) $ (2.44) $ (4.28) $ (5.03) $ (3.65) $ (3.43)
====== ======= ======= ======= ======= ======= ======== ========
Pro forma basic and
diluted loss per common
share.................. $ (1.01) $ (0.60)
======= ========
</TABLE>
<TABLE>
<CAPTION>
At September 30, At December 31, At September 30,
---------------------- ----------------------- ----------------
1994 1995 1996 1996 1997 1998 1999
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 142 $ 398 $ 792 $ 661 $ 865 $ 3,053 $ 1,796
Working capital
(deficit).............. (372) 1,620 628 2,552 717 2,343 59
Total assets............ 256 2,057 1,459 3,311 1,788 5,625 6,454
Short-term obligations.. 500 -- -- -- 31 348 1,149
Long-term obligations,
net of current
portion................ -- -- -- -- 1,641 151 1,714
Mandatorily redeemable
preferred stock........ 134 4,119 5,536 8,282 8,927 19,248 20,310
Stockholders' (deficit)
equity................. (413) (2,189) (4,527) (5,189) (9,226) (16,218) (20,161)
</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 nine 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, like 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; and
. 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 $913,000 at September
30, 1999. This deferred revenue resulted primarily from the recognition of
systems shipped but not installed and software maintenance fees. We recognize
revenue that had been deferred upon shipment when the system is installed 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
20
<PAGE>
strategic partners, in particular Agilent Technologies, Inc., 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 variability between
direct and OEM sales channels, future variations in mix of sales between these
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 $13.2 million of net
operating loss carry forwards for federal income tax purposes, which expire
beginning in 2008. Federal and state law restrictions, including 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>
Year Ended Nine Months Ended
December 31, 1998 September 30,
----------------- --------------------
1998 1999
(Unaudited)
<S> <C> <C> <C>
Revenue............................. 100.0% 100.0% 100.0%
Cost of revenue..................... 44.5 45.3 38.9
------ --------- --------
Gross margin........................ 55.5 54.7 61.1
------ --------- --------
Operating expenses:
Research and development........... 53.0 72.4 27.1
Sales and marketing................ 84.9 106.8 48.5
General and administrative......... 62.0 84.6 48.8
------ --------- --------
Total operating expenses............ 199.9 263.8 124.4
------ --------- --------
Loss from operations................ (144.4) (209.1) (63.3)
Other income (expense), net......... 3.7 4.8 (0.7)
------ --------- --------
Net loss............................ (140.7)% (204.3)% (64.0)%
====== ========= ========
</TABLE>
Nine Months ended September 30, 1999 compared to Nine Months ended September
30, 1998
Revenue. Revenue increased $3.7 million or 167.1% to $5.9 million compared
to $2.2 million for the nine months ended September 30, 1999 and 1998,
respectively. While our average selling price remained relatively constant, the
increase in revenue was primarily due to increased sales volumes of StatView
systems from our OEM arrangement with GE Marquette Medical Systems, Inc.
combined with sales generated by our direct sales force and co-marketing
activities with our strategic partners.
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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 for assembly and installation, and overhead.
Gross margin increased $2.4 million or 198.6%, in the nine months ended
September 30, 1999 compared to the comparable period of 1998. Gross margin as a
percentage of revenue increased to 61.1% in the nine months ended September 30,
1999 from 54.7% 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 nine months ended September 30, 1999 and
from higher costs per system in the nine months ended September 30, 1998 due to
inefficiencies related to production start-up costs, changing contract
manufacturers and very low production volumes.
Research and development. Research and development expenses consist
primarily of personnel and related costs, travel and contract engineering
services. Research and development expenses were $1.6 million for both nine
month periods ended September 30, 1999 and 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 $0.5 million or 21.3% to $2.9 million compared to $2.4
million for the nine months ended September 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 $1.0 million
or 54.0% to $2.9 million compared to $1.9 million for the nine months ended
September 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 $1.5 million or 25.9% to
$7.3 million compared to $5.8 million for the nine months ended September 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 124.4% in the nine months ended September 30, 1999 from
263.8% in the comparable period of 1998.
Other income (expense), net. Other income (expense), net, decreased $152,000
or 140.7% to a net other income (expense) of $(44,000) in the nine months ended
September 30, 1999 from a net other income (expense) of $108,000 in the
comparable period of 1998. This resulted primarily from an increase in
borrowings in the nine months ended September 30, 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;
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. increased StatView system sales to GE Marquette Medical Systems, Inc.;
and
. direct sales of StatView systems for Agilent Technologies 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 of StatView systems.
The margin percentage increase resulted primarily from our write off of
$197,000 in inventory related to a discontinued product, which hurt 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
other income of $152,000 in 1998 from a net other 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
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<PAGE>
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.
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 seven quarters through September 30, 1999, including
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.
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<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, Sept. 30,
1998 1998 1998 1998 1999 1999 1999
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 265 $ 393 $ 1,553 $ 1,926 $ 1,758 $ 1,827 $ 2,321
Cost of revenue......... 132 191 679 839 660 757 879
------- ------- ------- ------- ------- ------- -------
Gross margin............ 133 202 874 1,087 1,098 1,070 1,442
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development............ 492 573 536 593 551 527 524
Sales and marketing..... 628 812 921 1,151 1,073 924 866
General and
administrative......... 595 633 643 693 726 894 1,261
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 1,715 2,018 2,100 2,437 2,350 2,345 2,651
------- ------- ------- ------- ------- ------- -------
Loss from operations.... (1,582) (1,816) (1,226) (1,350) (1,252) (1,275) (1,209)
Other income (expense),
net.................... (15) 63 60 44 17 (11) (50)
------- ------- ------- ------- ------- ------- -------
Net loss................ $(1,597) $(1,753) $(1,166) $(1,306) $(1,235) $(1,286) $(1,259)
======= ======= ======= ======= ======= ======= =======
Percentage of Revenue:
Revenue................. 100.0 % 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 37.9
------- ------- ------- ------- ------- ------- -------
Gross margin............ 50.2 51.4 56.3 56.4 62.4 58.6 62.1
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development............ 185.7 % 145.8 % 34.5 % 30.7 % 31.3 % 28.9 % 22.6 %
Sales and marketing..... 237.0 206.6 59.3 59.8 61.0 50.6 37.3
General and
administrative......... 224.5 161.1 41.4 36.0 41.3 48.9 54.3
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 647.2 513.5 135.2 126.5 133.6 128.4 114.2
------- ------- ------- ------- ------- ------- -------
Loss from operations.... (597.0) (462.1) (78.9) (70.1) (71.2) (69.8) (52.1)
Other income (expense),
net.................... (5.6) 16.0 3.8 2.3 1.0 (0.6) (2.1)
------- ------- ------- ------- ------- ------- -------
Net loss................ (602.6)% (446.1)% (75.1)% (67.8)% (70.2)% (70.4)% (54.2)%
======= ======= ======= ======= ======= ======= =======
</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 $2.9 million in the nine months
ended September 30, 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 $59,000 at
September 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
issuance of $539,000 of convertible notes and net proceeds of $7.0 million
received from the private sale of our Series D preferred stock.
Investing activities used net cash of $798,000 in the nine months ended
September 30, 1999 and $394,000 in 1998, provided net cash of $1.6 million in
1997 and used net cash of $1.5 million in
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<PAGE>
1996. Net cash used in investing activities for the nine months ended September
30, 1999 and for 1998 primarily consisted of 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 $2.4 million for the first
nine 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 nine
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 due to the issuance of $539,000 of convertible notes, net
proceeds of $7.0 million from the issuance of preferred stock, and proceeds
from the issuance of $450,000 of 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 September 30, 1999, we have invested a total of
approximately $1.7 million in fixed assets, consisting primarily of computer
equipment, related software and office furniture. We expect to spend an
additional $400,000 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 September 30,
1999.
As of September 30, 1999, we had $1.8 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 60%
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, liquidity ratios and maximum quarterly operating losses. As of September
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.
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
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 September 30, 1999, $1.5
million was outstanding under this debt facility. In connection with this debt
facility, we also granted the lender an option to purchase up to
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<PAGE>
105,000 shares of our Series D preferred stock at a purchase price of $5.00 per
share. Comdisco exercised this option in full on October 25, 1999.
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 September 30, 1999,
$96,500 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 $4.00 per share. This warrant expires upon the earlier
of April 27, 2006 or five years after our initial public offering.
In the past, we have from time to time failed to comply with some of the
financial covenants required by our working capital line of credit and
subordinated debt facility agreements. Both of our lenders have granted us
waivers for this noncompliance.
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, the
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 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
November 1999;
. an assessment of repair or replacement requirements, which has identified
no material issues to date;
. implementation, which is ongoing; and
. creation of contingency plans in the event of Year 2000 failures, which
will be a continuous assessment.
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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 implementing a new integrated management information system
primarily in order to manage our growth. We are currently in the process of
testing this new system for Year 2000 compliance and expect the testing to be
completed during the week of December 13, 1999. In order to minimize the
possible risks of business disruption, we also intend to operate this new
management information system parallel with our existing system through January
or until we are satisfied that the new system if fully functional and not
susceptible to any year 2000 disruptions.
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 testing is complete and our 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, our revenue could be hurt materially. 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 harm our revenue or earnings.
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 harm our revenue and earnings. 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, including a prolonged
internet, telecommunications or electrical failure, which could also prevent us
from delivering our systems to our customers, and therefore harm our revenue
and earnings.
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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 these costs. The implementation of SOP 98-1 is not expected to
have a material impact on our cash position or earnings.
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 cash position or earnings.
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 . 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;
. Agilent Technologies, Inc., formerly a division of Hewlett-Packard
Company;
. Nellcor Puritan Bennett, a subsidiary of Mallinckrodt Inc.;
. Protocol Systems, Inc.;
. Siemens Medical Systems, Inc., a subsidiary of Siemens AG; and
. Medical Data Electronics, Inc., a subsidiary of Thermo Electron
Corporation.
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
. The Mayo Clinic in Scottsdale, AZ . St. Mary's Hospital in Pueblo, CO
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, including 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.
30
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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% 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 the
population which is 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. Due to this trend of moving patients out of critical areas of the
hospital sooner, hospitals are converting more of their general
medical/surgical beds to step-down or patient-monitoring 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, have 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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direct sales force, we distribute our systems through leading vendors of
complementary medical equipment. We expect to build upon the expertise we gain
through these strategic alliances to facilitate additional alliances and move
into new markets. We will continue to review mutually beneficial opportunities
to share new technologies, including 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, like
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, including
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 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 . Designed to enable consumers to view their ECGs
through an application downloaded via the
internet
. Designed to permit 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 ECGs, vital signs and other patient information as
graphic representations in the shape of waves 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 wireless receiver that sounds alarm tones or vibrates
whenever a patient monitor generates an alarm. The receiver then displays
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bed number, patient name, diagnosis (i.e. ventricular tachycardia), heart
rate, and, with one button click, a six second ECG graphic. By looking at the
ECG, 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; and
. 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.
AlarmView has the following key features and benefits:
. increases efficiency and flexibility within hospital wards;
. low cost per unit;
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<PAGE>
. can store information not recorded by stand-alone devices; and
. can integrate with StatView.
Physician Systems
MobileView
MobileView transmits data that is collected by the StatView system from
individual patient 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 graphics 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 graphics and other patient data to remote locations;
. enables faster clinical consultation and decision making;
. transmits data securely;
. integrates with StatView; and
. provides a dial-up, wireless connection to the patient-monitoring
network.
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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 graphic
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. Our 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; and
. 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; and
. enhance our system portfolio.
We have entered into direct sales and co-marketing arrangements with the
following companies:
Agilent Technologies, Inc. Formerly a division of Hewlett-Packard Company's
Medical Product Group, Agilent 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 Agilent for
the transmission of data over an alphanumeric paging network. This patent is
used in our MobileView system. The Agilent license agreement has an indefinite
duration but will terminate if either party breaches its material obligations
thereunder. We also have an arrangement with Agilent to engage in joint sales
and marketing programs and trade show presentations for StatView and MobileView
systems.
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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 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 but will terminate earlier if either party breaches its
material obligations thereunder. Protocol may elect to extend the agreement for
an additional three year term.
Medical Data Electronics, Inc. Medical Data Electronics, Inc., a subsidiary
of Thermo Electron Corporation, is a leading manufacturer of patient-monitoring
equipment. In October 1999, we entered into an agreement with Medical Data
Electronics for the development and distribution of our StatView system with
Medical Data Electronics' Escort-Vision wireless patient monitoring systems. We
have also agreed to engage in joint sales and marketing programs for our
StatView systems. Either party may terminate the agreement if the other party
enters bankruptcy or defaults in the performance of any material provision.
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 custom features so long as GE Marquette meets
minimum purchase requirements. The GE Marquette agreement is effective through
January 2000 but will terminate earlier 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 but will terminate earlier 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 these groups would benefit from using the StatView and AlarmView
systems,
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<PAGE>
by reducing costs and increasing productivity. Our target markets also include
aggregators of individual physicians including 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 MobileView systems. Although
currently our products are only being used by hospitals and physicians, we are
targeting our Internet ECG product to 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
DataView cardiology-related physicians
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
. The Mayo Clinic in Scottsdale, . Northwest Hospital in Seattle, WA
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
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<PAGE>
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' 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 must undergo periodic audits for compliance with the FDA's quality
system regulations. In September 1999, we were recommended for ISO 9001 and
EN46001 Certification to the U.S. Registrar Accreditation Board. ISO 9001 is
the highest level of certification for quality manufacturing in the U.S. and
EN46001 Certification requires meeting additional quality standards in order to
manufacture medical devices sold in Europe.
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; and
. 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.
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In the nine months ended September 30, 1999 and the years 1998, 1997 and
1996, expenses attributable to research and development totaled $1.6 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.
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, including 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; and
. 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 graphics. 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.
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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 breaches.
Government Regulation
Federal Communications Commission
In the U.S., we are regulated by the FCC. The FCC requires that wireless
access devices meet various standards, including safety standards regarding
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 regulated under the Telecommunications Act of 1996 and other
federal, state and international laws and regulations. Additional laws and
regulations may also be adopted concerning wireless communications networks
covering issues like 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 revenue and sales.
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 regulated 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 including labeling, pre-market
notification and adherence to good manufacturing practices. Class II requires
general and specific controls including 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 Agilent Technologies
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 require 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
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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 these
systems will be delayed substantially or indefinitely.
Healthcare Regulations
Because we are a provider of healthcare related systems, extensive and
frequently changing federal regulations also 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
standards through periodic inspections and required participation in
proficiency testing programs. Although we have been found to be in compliance
with all these 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 substantially
regulated 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 September 30, 1999, we had 69 employees, including 6 in manufacturing,
24 in sales and marketing, 7 in services and support, 14 in research and
development, 4 in regulatory affairs and 14 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 September 30,
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).......... 41 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. Mr. Harlow
earned both a B.S. in 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.
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<PAGE>
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. Mr. Earnest holds a B.S. degree in engineering
and a M.S. degree in management from the U.S. Navel Academy.
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 holds a B.S. degree from Purdue University and an M.B.A. from the
University of Chicago. Mr. Kase also serves as a director of several privately-
held information technology and 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
46
<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, Tut Systems, Inc., a telecommunications products company, Online
Resources Communications Corp., a provider of electronic banking transaction
services, and Purecycle Corporation, a water resources development corporation
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 and 16,125 shares of common stock under our 1999 stock option plan at
an exercise price of $6.00 per share in July 1999. Except for the option
granted to Mr. Swedlow, which was fully vested and exercisable upon grant,
these options vest over a four-year period.
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<PAGE>
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 audit and meets with our independent
auditors to review our internal controls and financial management practices.
The 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 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 the
officer.
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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. In
accordance with the rules of the Securities and Exchange Commission, also shown
below is the potential realizable value over the term of the option, the period
from the grant date to the expiration date, giving effect to an initial public
offering price of $10.00 per share and based on assumed rates of stock
appreciation of 5% and 10%, compounded annually. These rates are mandated by
the SEC and do not represent our estimate of future stock price. Actual gains,
if any, on stock option exercises will depend on the future performance of our
common stock. In the fiscal year ended December 31, 1998, we granted options to
acquire up to an aggregate of 317,987 shares of common stock to employees and
directors, all under our stock option plan and all at an exercise price equal
to the fair market value of our common stock on the date of grant as determined
in good faith by our board of directors, considering recent sales of our stock,
key milestones in our business and the changes in stock prices of companies in
the technology industry.
Option Grants in 1998
<TABLE>
<CAPTION>
Potential
Individual Grants Realizable Value at
----------------------------------------------- Assumed Annual
Number of Percent of Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to Exercise or for 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 $875,325 $1,281,538
Bradley R. Harlow....... 75,000 23.6 2.40 9/28/05 875,325 1,281,538
Craig S. Kairis......... 32,500 10.2 2.40 9/28/05 379,308 555,333
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.
49
<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 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 granted 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 September 30, 1999, no options to purchase common stock
had been exercised, options to purchase a total of 274,388 shares at a weighted
average exercise price of $6.24 per share were outstanding and 725,612 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 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 underlying 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
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<PAGE>
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.
Options granted under the 1999 Stock Plan generally become exercisable at
the rate of 25% of the total number of shares underlying the options 12 months
after the date of grant, and 25% of the total number of shares underlying 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 the action does
not negatively impact any outstanding option and provided that stockholder
approval shall be required for an amendment to increase the number of shares
issuable under 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 September 30,
1999, options to purchase 21,434 shares of common stock had been exercised,
options to purchase a total of 847,841 shares at a weighted average exercise
price of $1.55 per share were outstanding and 80,725 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 underlying 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 underlying the
options 12 months after the vesting commencement date, and 25% of the total
number of shares underlying 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 the action does not negatively impact any
outstanding option. Stockholder approval is required for an amendment to
increase the number of shares issuable under 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.
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<PAGE>
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 the Directors' Plan. As of September 30, 1999,
16,125 options to purchase shares of common stock with a weighted average price
of $6.00 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 conflicts will be addressed by having any interested
director abstain from both deliberations and voting regarding matters in which
the 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 that 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 under a qualified domestic relations order, and each option is exercisable,
during the lifetime of the option holder, only by that 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 the option within the 90 day period, the 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 the 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 September 30, 1999, no rights to
purchase stock under this plan had been granted by Data Critical.
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<PAGE>
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 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 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 negatively impact 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. Under 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;
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. unlawful payments of dividends or unlawful stock repurchases or
redemptions or other distributions; and
. any transaction from which a director derives an improper personal
benefit.
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 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 indemnification. Data Critical believes that its charter
provisions and indemnification agreements are necessary to attract and retain
qualified persons as directors and officers.
54
<PAGE>
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 upon receiving a note from Nomadics 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 September 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.
Under 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 September 30, 1999 and as adjusted to
reflect the sale of 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 as required under applicable community property laws, we believe each
stockholder identified in the table possesses sole voting and investment power
regarding all shares of common stock beneficially owned by the stockholder and
all shares underlying options and warrants listed below. The number of shares
underlying options and warrants listed below includes only those shares
underlying options and warrants immediately exercisable or exercisable within
60 days of September 30, 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>
Shares Percentage of Shares
Underlying Beneficially Owned
Number of Shares Options ------------------------------
Name of Beneficial Owner Beneficially Owned & Warrants Before Offering After Offering
<S> <C> <C> <C> <C>
Ronald H. Kase......... -- 3,125
New Enterprise
Associates
VII, L.P. ............ 1,075,000 --
NEA Presidents Fund,
L.P. ................. 18,750 --
NEA Ventures 1998,
L.P. ................. 1,250 --
2490 Sand Hill Road
Menlo Park, CA 94025
Subtotal................. 1,095,000 3,125 17.4% 11.2%
Kimberlin Family
Partners, L.P. ....... 582,906 93,750
Oshkim Limited
Partners, L.P. ....... 218,875 45,326
Oshkim Family
Partners.............. 39,062 --
Spencer Trask Holdings,
Inc. ................. -- 14,177
535 Madison Ave., 18th
Floor
New York, NY 10022
Subtotal................. 840,843 153,253 15.3 10.0
George M. Middlemas.... 21,875 12,500
Apex Investment Fund
II, L.P. ............. 663,392 28,332
233 South Wacker Dr.,
Suite 9500
Chicago, IL 60606
Subtotal................. 685,267 40,832 11.4 7.4
ML Oklahoma Venture
Partners, L.P. ......... 553,125 -- 8.7 5.6
10830 E. 45th St., Suite
307
Tulsa, OK 74146
Acacia Venture
Partners, L.P. ....... 451,250 --
South Pointe Venture
Partners, L.P. ....... 48,750 --
101 California Street,
Suite 3160
San Francisco, CA
94111
Subtotal................. 500,000 -- 7.9 5.1
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of Shares
Underlying Beneficially Owned
Number of Shares Options ------------------------------
Name of Beneficial Owner Beneficially Owned & Warrants Before Offering After Offering
<S> <C> <C> <C> <C>
David E. Albert, M.D.... 525,937 -- 8.3% 5.4%
100 North Broadway,
Suite 2200
Oklahoma City, OK 73102
Jeffrey S. Brown........ -- 248,166 3.8 2.5
Bradley R. Harlow(1).... -- 93,750 1.5 *
Craig S. Kairis......... -- 36,875 * *
Robert W. Benson........ -- 31,250 * *
David Swedlow........... -- 19,250 * *
Richard L. Earnest...... -- 6,250 * *
2194 San Dieguito Drive
Del Mar, CA 32014
All officers and
directors as a group
(10 people)............. 2,333,704 504,498 41.5% 27.5%
</TABLE>
- --------
(1) Includes 37,500 shares that will vest upon the completion of this offering.
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 September 30, 1999, there were 6,333,619 shares of common stock
outstanding held of record by 115 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, there will be 9,833,619
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. Preferences may be applicable
to any outstanding preferred stock, but otherwise holders of common stock are
entitled to receive 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, and after 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 hurt 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 September 30, 1999, there were 43 warrants outstanding to purchase an
aggregate of 383,971 shares of capital stock, with a weighted average exercise
price of $2.39, expiring between April 14, 2000 and April 27, 2006. 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
58
<PAGE>
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
In April 1999, we granted an option to purchase 105,000 shares of Series D
preferred stock at an exercise price of $5.00 per share to a commercial lender
in connection with a debt facility. The lender exercised this option in full on
October 25, 1999.
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. Generally, 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
the registration, so long as the underwriters do not choose 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 the form becomes available
to us, provided that the proposed aggregate selling price net of any
underwriters' discounts or commissions is at least $250,000. Data Critical 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 and Washington Law and Data Critical Charter and Bylaw Provisions
Provisions of Delaware and Washington 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
these proposals because negotiation of these proposals could result in terms
more favorable to our stockholders.
Data Critical is restricted by 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
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.
59
<PAGE>
The laws of Washington, where our principal executive offices are located,
also impose restrictions on some transactions between foreign corporations and
significant stockholders. Chapter 23B.19 of the Washington Business Corporation
Act prohibits a target corporation, with exceptions, from engaging in
significant business transactions with a person or group of persons who
beneficially own 10% or more of the voting securities of the target corporation
for a period of five years after the acquisition, unless the transaction or
acquisition of the shares is approved by a majority of the members of the
target corporation's board of directors prior to the time of acquisition. After
the five-year period, a significant business transaction may take place as long
as it complies with fair price provisions of the statute. A corporation may not
"opt out" of this statute and, therefore, we anticipate this statute will apply
to us. Depending upon whether we meet the definition of a target corporation,
Chapter 23B.19 of the WBCA may have the effect of delaying, deferring or
preventing a change in control of us.
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 hurt 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 contain 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 Services LLC. The transfer agent's address is 520 Pike Street,
Suite 1220, Seattle, WA 98101, and telephone number is (206) 674-3030.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 9,833,619 shares of common
stock issued and outstanding, or 10,358,619 shares if the underwriters' over-
allotment option is exercised in full, and 1,627,325 shares issuable upon the
exercise of outstanding warrants and options, in each case as of September 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 6,333,619 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, like 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 98,336 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 the sale. Sales under Rule 144 are restricted by
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 an "affiliate" and who has beneficially owned shares for at least two years
is entitled to sell these shares at any time under Rule 144 without regard to
the limitations described above. We estimate that 2,049,875 outstanding shares
fall in this category. Of the 6,333,619 shares outstanding before the offering,
affiliates beneficially own over 50% of these shares.
Any employee, officer, director, advisor or consultant who purchased his or
her shares under 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 September 30, 1999, there were outstanding stock options to purchase
an aggregate of 1,138,354 shares of common stock, of which 512,883 are
presently exercisable or exercisable within 60 days. These outstanding stock
options are held by our executive officers, directors, and current or former
employees and consultants. Following the offering, we intend to file a
registration statement on Form S-8 covering the 2,050,000 shares of common
stock issuable under our stock plans, including shares underlying outstanding
options, thus permitting the resale of these shares in the public market
without restriction under the Securities Act, other than restrictions
applicable to affiliates.
As of September 30, 1999, there were also outstanding warrants and a
purchase option to purchase an aggregate of 383,971 shares of common stock,
which are all presently exercisable. The warrants have a weighted-average
exercise price of $2.39 per share. In addition there were 105,000 shares of
Series D preferred stock issued upon exercise of a purchase option on October
25, 1999 at an exercise price per share of $5.00
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<PAGE>
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.
We, our executive officers and directors, and many of our stockholders have
agreed that, with 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 other securities, in cash or
otherwise.
In addition, during the same period, we have agreed not to file any
registration statement regarding, 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 regarding, 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 6,105,765 shares, and an additional
1,606,046 shares issuable upon exercise of outstanding options and warrants. Of
the 249,133 outstanding shares and shares issuable upon exercise of outstanding
options and warrants not restricted by lock-up agreements, only 204,738 of
these shares will be freely tradable immediately following the offering under
Rule 144 as discussed above.
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
these 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 hurt
prevailing market prices.
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<PAGE>
UNDERWRITING
Based on 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 each agreed to
purchase from us the number of shares of common stock opposite their names
below.
<TABLE>
<CAPTION>
Number
Underwriters of Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............. 1,300,000
U.S. Bancorp Piper Jaffray, Inc. ................................ 650,000
Warburg Dillon Read LLC.......................................... 650,000
DLJdirect, Inc. ................................................. 100,000
Bear Stearns & Co. Inc .......................................... 40,000
A.G. Edwards & Sons, Inc. ....................................... 40,000
ING Barings LLC.................................................. 40,000
Lazard Freres & Co. LLC.......................................... 40,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated............... 40,000
Morgan Stanley & Co. Incorporated................................ 40,000
J.P. Morgan Securities Inc. ..................................... 40,000
Salomon Smith Barney Inc. ....................................... 40,000
SoundView Technology Group, Inc. ................................ 40,000
C.E. Unterberg, Towbin........................................... 40,000
Thomas Weisel Partners LLC....................................... 40,000
Advest, Inc. .................................................... 20,000
Arnhold and S. Bleichroeder, Inc. ............................... 20,000
Robert W. Baird & Co. Incorporated............................... 20,000
J.C. Bradford & Co. ............................................. 20,000
Fahnestock & Co. Inc. ........................................... 20,000
Gerard Klauer Mattison & Co., LLC................................ 20,000
Gruntal & Co., L.L.C. ........................................... 20,000
Janney Montgomery Scott LLC...................................... 20,000
Johnston, Lemon & Co. Incorporated............................... 20,000
Legg Mason Wood Walker, Incorporated............................. 20,000
McDonald Investments Inc., a KeyCorp Company..................... 20,000
Ragen Mackenzie Incorporated..................................... 20,000
The Robinson-Humphrey Company, LLC............................... 20,000
Sanders Morris Mundy Inc. ....................................... 20,000
Sands Brothers & Co., Ltd. ...................................... 20,000
Suntrust Equitable Securities Corporation........................ 20,000
Sutro & Co. Incorporated......................................... 20,000
Tucker Anthony Cleary Gull....................................... 20,000
---------
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 requires the approval of legal matters by their
counsel and specific conditions being met. 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.
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<PAGE>
The underwriters propose to initially offer some of the shares of common
stock directly to the public at the public offering price listed 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 $0.42 per share. The
underwriters may allow, and the dealers may re-allow, a concession not in
excess of $0.10 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 the 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.......................................... $ 0.70 $ 0.70
Total.............................................. $2,450,000 $2,817,500
</TABLE>
We will pay the offering expenses, estimated to be $900,000.
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 their option solely to cover over-allotments, if any,
made in connection with the offering. To the extent that the underwriters
exercise their option, each underwriter will become obligated to purchase a
number of additional shares approximately proportionate to the underwriter's
initial purchase commitment.
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 regarding
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 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 of these
shares be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of that 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
64
<PAGE>
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 10% of the shares included in the offering, to be
sold to certain of our directors, officers, employees, distributors, dealers,
hospital administrators, key employees of strategic partners, and friends and
family of executive officers. The number of shares available for sale to the
general public will be reduced to the extent these persons purchase the
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.
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 the 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 the 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.
65
<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 included in the registration statement and
its exhibits and schedules. For further information on Data Critical and the
common stock offered, 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 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.
66
<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 September 30, 1999
(Unaudited).............................................................. F-3
Statements of Operations for the Years Ended December 31, 1996, 1997 and
1998, and for the Nine Months Ended September 30, 1998 and September 30,
1999 (Unaudited)......................................................... F-4
Statements of Stockholders' Deficit for the Years Ended December 31, 1996,
1997 and 1998, and for the Nine Months Ended September 30, 1999
(Unaudited).............................................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and
1998, and for the Nine Months Ended September 30, 1998 and September 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'
Equity
At December 31, (Note 1) at
----------------- September 30, September 30,
1997 1998 1999 1999
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..... $ 865 $ 3,053 $ 1,796
Accounts receivable, net...... 74 1,182 935
Inventories, net.............. 189 281 1,017
Prepaid expenses and other.... 35 271 353
Deferred offering costs....... -- -- 549
------- -------- --------
Total current assets........ 1,163 4,787 4,650
Note receivable from officer... 45 45 45
Investment in, and advances to
unconsolidated affiliate...... 207 211 213
Property, equipment and
software, net................. 253 444 970
Deferred financing costs....... -- -- 372
Other assets, net.............. 120 138 204
------- -------- --------
Total assets................ $ 1,788 $ 5,625 $ 6,454
======= ======== ========
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
Current Liabilities:
Line of credit................ $ -- $ 250 $ 900
Current portion of notes
payable and capital leases... 31 98 249
Accounts payable.............. 318 486 853
Deferred revenues............. 6 442 913
Other current liabilities..... 91 1,168 1,676
------- -------- --------
Total current liabilities... 446 2,444 4,591
Notes payable and capital
leases, net of current
portion....................... 60 151 1,714
Convertible notes.............. 1,581 -- --
------- -------- --------
Total liabilities........... 2,087 2,595 6,305
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, 1997 and 1998
and September 30, 1999
respectively................. 134 134 134
Series B preferred stock,
1,232,657 authorized,
1,232,646 issued and
outstanding; aggregate
liquidation preference of
$4,824,913, $5,140,506 and
$5,377,176 at December 31,
1997 and 1998 and
September 30, 1999
respectively................. 4,732 5,066 5,317
Series C preferred stock,
1,187,817 authorized,
1,187,809 issued and
outstanding; aggregate
liquidation preference of
$4,170,090, $4,476,542 and
$4,704,592 at December 31,
1997 and 1998 and
September 30, 1999
respectively................. 4,061 4,388 4,633
Series D preferred stock,
2,450,000 authorized,
2,296,734 issued and
outstanding at December 31,
1998 and September 30, 1999;
aggregate liquidation
preference of $9,738,635 and
$10,289,852 respectively..... -- 9,660 10,226
------- -------- --------
8,927 19,248 20,310
------- -------- --------
Stockholders' (Deficit) Equity
Common stock, $.001 par
value, 15,000,000 shares
authorized; 1,402,246,
1,402,839 and 1,428,930
shares issued and
outstanding, and 6,333,619
pro forma respectively, and
additional paid-in capital... 713 1,321 3,102 $ 23,412
Deferred compensation......... -- (552) (1,434) (1,434)
Accumulated deficit........... (9,939) (16,987) (21,829) (21,829)
------- -------- -------- --------
Total stockholders'
(deficit) equity........... (9,226) (16,218) (20,161) $ 149
------- -------- -------- ========
Total liabilities,
mandatorily redeemable
preferred stock and
stockholders' (deficit)
equity..................... $ 1,788 $ 5,625 $ 6,454
======= ======== ========
</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>
Nine Months Ended
Years Ended December 31, September 30,
---------------------------- ------------------
1996 1997 1998 1998 1999
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue...................... $ 190 $ 471 $ 4,137 $ 2,211 $ 5,906
Cost of revenue.............. 27 348 1,841 1,002 2,296
-------- -------- -------- -------- --------
Gross margin.............. 163 123 2,296 1,209 3,610
-------- -------- -------- -------- --------
Operating expenses:
Research and development... 957 1,702 2,194 1,601 1,602
Sales and marketing........ 512 1,200 3,512 2,361 2,863
General and
administrative............ 738 1,268 2,564 1,871 2,881
-------- -------- -------- -------- --------
Total operating expenses.. 2,207 4,170 8,270 5,833 7,346
-------- -------- -------- -------- --------
Loss from operations...... (2,044) (4,047) (5,974) (4,624) (3,736)
Interest income.............. 46 71 202 152 62
Interest expense............. (6) (26) (50) (44) (106)
-------- -------- -------- -------- --------
Net loss..................... $ (2,004) $ (4,002) $ (5,822) $ (4,516) $ (3,780)
======== ======== ======== ======== ========
Preferred stock dividends and
accretion of mandatory
redemption obligations...... 420 685 1,226 598 1,062
-------- -------- -------- -------- --------
Net loss attributable to
common stock............. $ (2,424) $ (4,687) $ (7,048) $ (5,114) $ (4,842)
======== ======== ======== ======== ========
Basic and diluted loss per
common share................ $ (2.44) $ (4.28) $ (5.03) $ (3.65) $ (3.43)
======== ======== ======== ======== ========
Weighted average shares used
to calculate basic and
diluted loss per common
share....................... 994 1,095 1,402 1,402 1,411
Pro forma basic and diluted
loss per common share....... $ (1.01) $ (0.60)
======== ========
Weighted average shares used
to calculate pro forma basic
and diluted loss per common
share....................... 5,762 6,309
</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............ 18,591 31 -- -- 31
Common stock issued... 7,500 77 -- -- 77
Deferred stock
compensation......... -- 1,297 (1,297) -- --
Amortization of
deferred stock
compensation......... -- -- 415 -- 415
Accretion of mandatory
redemption
obligations.......... -- -- -- (46) (46)
Series B, C and D
mandatorily
redeemable preferred
stock dividend
accruals............. -- -- -- (1,016) (1,016)
Warrants issued in
exchange for
services............. -- 1 -- -- 1
Warrants issued in
conjunction with the
issuance of certain
credit facilities.... -- 375 -- -- 375
Net loss.............. -- -- -- (3,780) (3,780)
--------- ------ ------- -------- --------
Balance, September 30,
1999................... 1,428,930 $3,102 $(1,434) $(21,829) $(20,161)
========= ====== ======= ======== ========
</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>
Nine Months
Ended
Years Ended December 31, September 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) $(4,516) $(3,780)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 133 171 208 151 209
Amortization of deferred
stock compensation......... -- -- 53 -- 415
Issuance of common stock for
compensation............... -- -- -- -- 77
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) (747) 247
Inventories................ 4 (8) (92) (96) (736)
Prepaid expenses and other
current assets............ (46) 28 (263) (240) (84)
Deferred Offering Costs.... (549)
Accounts payable and other
current liabilities....... 157 150 949 597 757
Customer deposits.......... -- -- 296 191 118
Deferred revenues.......... -- 6 436 361 471
-------- -------- -------- ------- -------
Net cash used in operating
activities............... (1,759) (3,681) (5,341) (4,298) (2,854)
-------- -------- -------- ------- -------
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) (249) (410)
Other assets.................. (83) (9) (14) (5) (79)
-------- -------- -------- ------- -------
Net cash (used in)
provided by investing
activities............... (1,532) 1,563 (394) (254) (489)
-------- -------- -------- ------- -------
Cash Flows From Financing
Activities:
Proceeds from issuance of
common stock, net............ 2 650 1 -- 31
Proceeds from issuance of
mandatorily redeemable
preferred stock, net......... 3,223 -- 6,975 6,975 --
Redemption of preferred
stock........................ (20) -- -- -- --
Proceeds from line of credit.. -- -- 250 179 650
Proceeds from notes payable... -- 94 200 -- 1,500
Payment on notes payable and
capital leases............... -- (3) (42) (24) (95)
Issuance of convertible
notes........................ 400 1,581 539 539 --
-------- -------- -------- ------- -------
Net cash provided by
financing activities..... 3,605 2,322 7,923 7,669 2,086
-------- -------- -------- ------- -------
Net increase (decrease) in
cash.......................... 314 204 2,188 3,117 (1,257)
Cash at beginning of period.... 347 661 865 865 3,053
-------- -------- -------- ------- -------
Cash at end of period.......... $ 661 $ 865 $ 3,053 $ 3,982 $ 1,796
======== ======== ======== ======= =======
Supplemental disclosure of cash
flow information:
Cash paid for interest........ $ 6 $ 5 $ 72 $ 65 $ 104
Equipment acquired through
capital lease arrangements... -- -- -- -- $ 309
Conversion of notes payable to
mandatorily redeemable
preferred stock.............. $ 400 -- $ 2,120 $ 2,120 --
Issuance of warrants to
purchase common stock in
connection with certain
financing arrangements....... -- -- -- -- $ 375
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Amounts and disclosures as of and for the nine months ended
September 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 face 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 the 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
expensed as incurred. Leasehold improvements are amortized over the lesser of
the term of the lease or the estimated useful life of the asset.
F-7
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures as of and for the nine months ended
September 30, 1998 and 1999 are unaudited)
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 $11,000 and $22,000 for the
nine months ended September 30, 1998 and 1999, respectively. Accumulated
amortization was $27,000, $46,000 and $59,000 at December 31, 1997 and 1998,
and September 30, 1999, respectively.
Revenue Recognition
The Company's revenue recognition policies are in conformity with Statement
of Position 97-2 "Software Revenue Recognition" as amended, of the American
Institute of Certified Public Accountants. License revenue is earned when
delivery has occurred, the fee is fixed and determinable, evidence of an
arrangement exists, collection of the receivable is probable and no significant
post-delivery obligations remain. For sales to end users, revenue is recognized
upon installation. For sales to distributors, revenue is recognized upon
delivery. Maintenance and support revenue is recognized over the term of the
agreement.
The Company recognizes revenue from software development contracts involving
significant production, modification or customization of software, based on
performance milestones specified in the contract where these milestones fairly
reflect progress toward contract completion.
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%, 73.9% and 27.0% of the Company's revenues for the years ended December
31, 1996, 1997 and 1998, and the nine months ended September 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 Agilent
Technologies, Inc. (Agilent) pursuant to a 1994 license agreement which
provided Agilent 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 Agilent was terminated by mutual
agreement thus allowing the Company to sell directly to Agilent customers.
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.
F-8
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures as of and for the nine months ended
September 30, 1998 and 1999 are unaudited)
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 $135,500 and
$143,600 for the nine months ended September 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. 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,
1996, 1997, 1998 and the nine month period ended September 30, 1999 were
$20,400, $31,600, $67,000 and $10,800, 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 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.
F-9
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures as of and for the nine months ended
September 30, 1998 and 1999 are unaudited)
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 regarding 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, 1997
and 1998 and September 30, 1999, were estimated to be approximately $9,917,000,
$32,822,000 and $43,161,000, 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 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
F-10
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures as of and for the nine months ended
September 30, 1998 and 1999 are unaudited)
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 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 September 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 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 these 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
F-11
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures as of and for the nine months ended
September 30, 1998 and 1999 are unaudited)
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,
------------- September 30,
1997 1998 1999
(In thousands)
<S> <C> <C> <C>
Accounts receivable............................ $ 80 $ 1,203 $1,009
Less: Allowance for doubtful accounts.......... 6 21 74
---- ------- ------
$ 74 $ 1,182 $ 935
==== ======= ======
</TABLE>
3. Inventories:
<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
(In thousands)
<S> <C> <C> <C>
Purchased components.......................... $ 184 $ 246 $ 860
Finished goods................................ 5 35 157
----- ------- ------
$ 189 $ 281 $1,017
===== ======= ======
4. Property, Equipment and Software:
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
(In thousands)
<S> <C> <C> <C>
Computers, equipment and purchased software... $ 592 $ 888 $1,388
Furniture and fixtures........................ 27 111 244
Leasehold improvements........................ 19 19 106
----- ------- ------
638 1,018 1,738
Less: Accumulated depreciation................ 385 574 768
----- ------- ------
$ 253 $ 444 $ 970
===== ======= ======
Depreciation expense was $122,000, $156,000, $189,000 and $193,000 in 1996,
1997, 1998, and the nine month period ended September 30, 1999 respectively.
5. Other Current Liabilities:
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
(In thousands)
<S> <C> <C> <C>
Accrued expenses.............................. $ 36 $ 184 $ 516
Accrued royalties............................. -- 96 181
Customer deposits............................. -- 296 414
Accrued product warranties.................... 5 374 385
Accrued payroll and benefits.................. 50 218 180
----- ------- ------
$ 91 $ 1,168 $1,676
===== ======= ======
</TABLE>
F-12
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures as of and for the nine months ended
September 30, 1998 and 1999 are unaudited)
6. Notes Payable:
Line of credit
The Company has a secured bank line of credit with maximum available
borrowings of $1.5 million and with a variable borrowing base of 60% to 75% of
accounts receivable based on maintaining certain minimum financial covenants.
The line bears interest at the bank's prime rate plus 0.75% (10.5% at December
31, 1997, 8.5% and at December 31, 1998 and 9% at September 30, 1999). 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
September 30, 1999, respectively. The Company had available balances on the
line of $480,000 as of December 31, 1998. 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, liquidity ratios and maximum quarterly operating losses. As of September
30, 1999, the Company was not in compliance with these covenants, but has
obtained an appropriate waiver from the bank. These covenants were amended in
October 1999. The Company expects to be in compliance with the amended
covenants during the remaining term of the line of credit.
Notes Payable
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, 8.75% to 10.25% at December 31,
1998 and 9.25% to 10.75% at September 30, 1999), due in monthly installments
maturing through October 2001.
The future scheduled maturities at December 31, 1998 are as follows (in
thousands):
<TABLE>
<S> <C>
1999........................................ $ 98
2000........................................ 95
2001........................................ 56
----
Total....................................... $249
====
</TABLE>
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 as of and for the nine months ended
September 30, 1998 and 1999 are unaudited)
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
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. As of September 30, 1999, $1.5 million was
outstanding under this debt facility. 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. Comdisco exercised this option in
full on October 25, 1999.
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 September 30, 1999,
$96,500 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 $4.00 per share. This warrant expires upon the earlier
of April 27, 2006 or five years after an initial public offering.
All of the notes payable have cross default provisions that could be
triggered by the line of credit non-compliance situation discussed above. The
Company has obtained appropriate waivers of the cross default provisions.
7. Capital Structure
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.
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 September 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 duration. The initial offering period is expected to commence on the date of
an initial public offering and end on July 31, 2001; the initial purchase
period is expected to end on January 31, 2000.
F-14
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures as of and for the nine months ended
September 30, 1998 and 1999 are unaudited)
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.
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............. -- 46
Series B, C and D mandatorily redeemable preferred stock
dividend accruals........................................ -- 1,016
--------- -------
Balance, September 30, 1999 (Unaudited)..................... 4,904,689 $20,310
========= =======
</TABLE>
F-15
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures as of and for the nine months ended
September 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
Issued....................................... -- --
Exercised.................................... -- --
-------- -----
Balance, September 30, 1999 (unaudited)........ 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.
In addition to the warrants outstanding shown in the table above, the
Company has warrants to purchase 117,500 shares of Series D preferred stock as
discussed below. On April 27, 1999, the Company 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 an
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
F-16
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures as of and for the nine months ended
September 30, 1998 and 1999 are unaudited)
prices below the then existing warrant exercise price. The determination of
fair value of the warrants was made using the Black-Scholes option pricing
model and effective borrowing rate of the Company.
In addition to the warrants outstanding shown in the table above, a purchase
option is 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. The lender exercised this option in full on October 25, 1999.
8. Stock Option Plan:
The Company has three stock option plans, the 1994 Stock Plan, the 1999
Stock Plan and the 1999 Directors Stock Plan (collectively, the "Plans"). The
1994 and 1999 Stock Plans provide for the grant of incentive and nonstatutory
stock options to employees, directors and consultants. The 1999 Directors Stock
Plan provides for the grant of nonstatutory stock options to non-employee
directors of the Company. Options generally terminate if unexercised within 90
days after the employee leaves the company or, in the case of the Directors
Stock Plan, 90 days after the director ceases to be a director of the Company.
Under the 1994 and 1999 Stock Plans, options generally become exercisable at
the rate of 25% of the total number of shares underlying the options 12 months
after the vesting commencement date, and 25% every 12 months thereafter.
Options generally expire no later than seven years after grant, or five years
in the case of an incentive stock option granted to a 10% stockholder.
Options granted under the Directors Stock Plan are fully vested at the date
of grant and expire ten years after they are granted.
Under the 1994 Plan, 950,000 shares of common stock were reserved for
issuance. After the completion of an initial public offering, no further
options will be granted under the 1994 Stock Plan. Under the 1999 Stock Plan,
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 Directors Stock Plan, 100,000 shares
of common stock have been reserved for issuance.
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 that date, he or she has served on our board of directors for at least
six months.
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.
F-17
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures as of and for the nine months ended
September 30, 1998 and 1999 are unaudited)
Information relating to stock options outstanding under the Plans 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...................................... 373,212 5.59
Options exercised.................................... (18,591) 1.67
Options canceled..................................... (52,689) 2.80
---------
Options outstanding, September 30, 1999 (unaudited)... 1,138,354 $2.74
=========
</TABLE>
At December 31, 1996, 1997 and 1998, and September 30, 1999, options to
purchase 154,657, 238,176, 339,624, and 486,633 shares were exercisable,
respectively.
Under the Plans, options to purchase 890,212 shares of common stock were
available for future grant. As of December 31, 1998, the 836,422 options
outstanding under the 1994 Stock 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 nine months ended September 30, 1999, the Company recorded
$605,000 and $1,297,000, 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 nine months ended
September 30, 1999, the Company recognized $53,000 and $415,000, 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 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>
F-18
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures as of and for the nine months ended
September 30, 1998 and 1999 are unaudited)
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; and 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 the carryforwards that existed at
March 4, 1998 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
2019.
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.
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>
F-19
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures as of and for the nine months ended
September 30, 1998 and 1999 are unaudited)
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, 1998 and the nine months ended
September 30, 1999 was $76,000, $124,000, $243,000 and $259,000, respectively.
Future minimum payments required under non-cancelable leases as of September
30, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
<S> <C> <C>
1999..................................................... $ 88 $ 32
2000..................................................... 331 128
2001..................................................... 254 128
2002..................................................... 265 52
2003..................................................... 271 --
Thereafter............................................... 113 --
----- ----
1,322 340
=====
Amounts representing interest............................ (55)
----
285
Current portion lease obligations........................ (96)
----
$189
====
</TABLE>
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.
F-20
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Amounts and disclosures as of and for the nine months ended
September 30, 1998 and 1999 are unaudited)
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
September 30, 1999.................. 20,626 53,176 (284) 73,518
------ ---- ------
</TABLE>
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(1) Amounts include write-offs of accounts receivable deemed uncollectable.
F-21
<PAGE>
[Inside back cover of prospectus]
Top left corner of page contains text box with the heading: "Consumer: Internet
ECG System." Immediately below the text box, along the left side of the page, is
a column containing three bullet points. The first bullet point reads: "Designed
to enable viewing of an individuals electrocardiogram through an application
downloaded via the internet." Below the first bullet point, the second bullet
point reads: "System is designed to provide management for: Fitness; Stress;
Education." The last bullet point reads: "Internet ECG System is not yet
commercially available." Below the heading box and to the right of the column
containing bullet points is a rendering of an Internet ECG transmitter
prototype. To the immediate right of the rendering of the Internet ECG
transmitter prototype is a photograph that shows a home user holding the
Internet ECG transmitter to her chest while sitting at a personal computer. The
photograph of the home user is connected to an icon immediately below it labeled
"Internet," which is in turn linked to an icon below it labeled "Data Critical
Server." There are three arrows below the server icon connecting it to three
screen shots of a personal computer displaying vital sign waveforms. Above the
three screens is the label "Internet ECG Users." The label below the far left
screen shot reads "The Consumer." The label below the middle screen shot reads
"The Provider." The label below the far right screen shot reads "The
Institution."
<PAGE>
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November 9, 1999
[LOGO OF DATA CRITICAL]
3,500,000 Shares of Common Stock
----------------
PROSPECTUS
----------------
Donaldson, Lufkin & Jenrette
U.S. Bancorp Piper Jaffray
Warburg Dillon Read LLC
DLJdirect Inc.
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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.
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Until December 4, 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 regarding their unsold
allotments or subscriptions.
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