<PAGE>
As filed with the Securities and Exchange Commission on October 18, 1999
Registration No. 333-78059
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
DATA CRITICAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
--------------
<TABLE>
<S> <C> <C>
Delaware 3663 91-1901482
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
19820 North Creek Parkway, Suite 100, Bothell, Washington 98011
(425) 482-7000
(Address Including Zip Code, and Telephone Number Including Area Code, of
Registrant's Principal Executive Offices)
--------------
Jeffrey S. Brown
President and Chief Executive Officer
Data Critical Corporation
19820 North Creek Parkway, Suite 100, Bothell, Washington 98011
(425) 482-7000
(Name, Address Including Zip Code, and Telephone Number Including Area Code,
of Agent for Service)
--------------
COPIES TO:
<TABLE>
<S> <C>
Craig E. Sherman, Esq. J. Robert Suffoletta, Esq.
Eric L. Dobmeier, Esq. Patrick J. Schultheis, Esq.
Joanna S. Lin Black, Esq. Richard Jay Silverstein, Esq.
VENTURE LAW GROUP Craig N. Lang, Esq.
A Professional Corporation WILSON SONSINI GOODRICH & ROSATI
4750 Carillon Point, Kirkland, Washington 98033 Professional Corporation
(425) 739-8700 650 Page Mill Road, Palo Alto, California 94304
(650) 493-9300
</TABLE>
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
--------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]__________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]__________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]__________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by US federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION -- October 18, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS
, 1999
[DATA CRITICAL LOGO APPEARS HERE]
3,500,000 Shares of Common Stock
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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.
We anticipate that the initial
public offering price will be
between $11.00 and $13.00 per
share.
. Closing: , 1999.
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Per Share Total
- --------------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriter fees:
Proceeds to Data Critical Corporation:
- --------------------------------------------------------------
</TABLE>
This investment involves risk. See "Risk Factors" beginning on page 7.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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. Immediately beneath the logo is a box
containing the following text: "Data Critical Corporation. We design,
manufacture, market, install and support communication and information systems,
using wireless technology and proprietary software to allow access to health
information, including patient vital signs and other diagnostic data. Our
systems provide for information retrieval from remote sources, both inside and
outside the hospital environment, and are integrated and coordinated through
either a wireless network utilizing our interactive device, a personal computer
or the internet. Our focus within health care is on the hospital, physician, and
at-home consumer markets."
Below the text box is a sentence reading: "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:". Listed below this sentence are the following company names: "GE
Marquette Medical Systems, Inc."; "Hewlett-Packard Company"; "Nellcor Puritan
Bennett"; "Protocal Systems, Inc."; "Siemens Medical Systems, Inc."; and
"Medical Data Electronics, Inc."
<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 such offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
MobileView(TM), StatView(TM), AlarmView(TM), Internet ECG(TM), Wireless
Telemedicine(TM), WT(TM) and the Data Critical Corporation name and corporate
logo are all trademarks of Data Critical Corporation. We also have other
trademarks that we use in our business. We license the name PalmVue(TM) from
Hewlett-Packard Company. All other brand names or trademarks appearing in this
prospectus are the property of their respective holders.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
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
Management............................................................... 45
Certain Transactions..................................................... 55
Principal Stockholders................................................... 56
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 61
Underwriting............................................................. 63
Legal Matters............................................................ 65
Experts.................................................................. 65
Additional Information................................................... 65
Index to Financial Statements............................................ F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read this entire prospectus carefully, especially "Risk Factors."
Unless otherwise indicated, all information contained in this prospectus
assumes:
. no exercise of the underwriters' over-allotment option;
. the conversion of all 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.
4
<PAGE>
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;
. 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
such information as part of this prospectus.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by Data Critical........ 3,500,000 shares
Common stock to be outstanding after this
offering.................................... 9,833,619 shares
Use of proceeds.............................. For general corporate purposes, including
working capital, capital expenditures and
possible acquisitions.
Proposed Nasdaq National Market symbol....... DCCA
</TABLE>
The common stock to be outstanding after this offering is based on shares
outstanding as of 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, 488,971 shares of common stock issuable upon
the exercise of warrants at a weighted average exercise price of $2.95 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 assumed
initial public offering price of $12.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses payable by Data Critical.
<TABLE>
<CAPTION>
Nine Months
Years Ended December Ended September
31, 30,
------------------------- ----------------
1996 1997 1998 1998 1999
(Unaudited)
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999
---------------------------------
Pro Pro Forma
Actual Forma As Adjusted
(Unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................... $ 1,796 $1,796 $39,956
Working capital............................. 59 59 38,219
Total assets................................ 6,454 6,454 44,614
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 38,309
</TABLE>
6
<PAGE>
RISK FACTORS
You should consider carefully the risks described below before you decide to
buy our common stock. The risks and uncertainties described below are not the
only ones facing us. The risks below summarize the risks that we currently
believe are material risks of this offering. However, additional risks and
uncertainties that we do not presently know about or that we currently believe
are immaterial may also adversely impact our business. If any of the following
risks actually occur, our business, financial condition and results of
operations would likely suffer materially. In such case, the trading price of
our common stock could fall, and you may lose all or part of the money you paid
to buy our common stock.
If our potential customers in the healthcare industry are not willing to adopt
our communications systems, our growth and 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 such as ours by the healthcare industry. Conversion
from traditional methods of communication may not occur as rapidly as we
expect. Even if such acceptance or conversion does occur, healthcare industry
participants may use alternative products and services offered by others.
We believe that we must gain significant market share in the healthcare
industry with our systems before competitors introduce alternative products or
systems with features and benefits similar to ours. Our business model is based
on our belief that the value and market appeal of our solution will grow as the
number of participants and scope of data transmitted increase. We may not
achieve the critical mass of users that is necessary to become successful. Any
significant shortfall in the number of users of our systems would adversely
affect our 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 financial
results 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 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
distribution partnerships with GE Marquette Medical Systems, Inc. and Nellcor
Puritan Bennett, a subsidiary of Mallinckrodt Inc.
7
<PAGE>
A substantial portion of our revenue in 1998 and the first nine months of
1999 was derived from the sale of systems marketed or distributed through
Hewlett-Packard Company and GE Marquette Medical Systems, Inc. Either of these
companies may decide to discontinue their distribution, marketing or original
equipment manufacturing relationships with us, including as a result of
proposed corporate reorganizations. Our agreements with these companies may be
cancelled on short-term notice. If either company limits or discontinues
marketing or selling our systems, our 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 suffer significantly. We may not
experience increased use of our systems even if we establish and maintain these
strategic alliances.
We expect to commit substantial resources to marketing, development and
operations expenses; if we are unable to generate increasing revenue in excess
of these commitments, our financial condition and results of operations will
decline.
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, our financial condition and results of operations would materially
decline. 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 operating results with any degree of certainty.
We may experience fluctuations in our quarterly operating results 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, adversely affect our operating results and impair our
business in future periods. Because we do not know when, or if, our potential
customers will place orders, finalize contracts and permit installation, we
cannot accurately predict revenue and operating results for future quarters. In
addition, the mix of sales between distribution channels will have a
significant impact on quarterly and annual revenue and profitability because we
receive higher revenue and gross margin on direct sales, including those made
through our alliances with strategic partners, than we do on original equipment
manufacturer sales.
We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of our future performance. It is likely that in future
quarters our operating results may be below the expectations of securities
analysts and investors and, as a result, the price of our common stock may
fall. Our operating results have varied in the past, and we expect that they
will continue to vary significantly from quarter to quarter.
8
<PAGE>
Our success is dependent on sales of 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 adversely affecting the pricing of, demand for or
market acceptance of our StatView system, such as competition or technological
change, could significantly impair our sales and 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 business, financial condition and results of
operations 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 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.
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
<PAGE>
loss of revenue and market share, damage our reputation and result in liability
to us. In addition, our systems may be vulnerable to computer viruses,
programming errors, attacks by third parties or similar disruptive problems.
Furthermore, patient care could suffer and we could be liable if our systems
fail to deliver correct information in a timely manner. Our contracts attempt
to limit our liability arising from our errors; however, these provisions may
not be enforceable and may not protect us from future liability. While we have
general liability and product liability insurance, including coverage for
errors and omissions, we may not be able to maintain this insurance on
reasonable terms in the future. In addition, our insurance may not be
sufficient to cover large claims, and our insurer could disclaim coverage on
claims. If we are liable for an uninsured or underinsured claim, or if our
premiums increase significantly, our business and financial condition 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 subject to
regulation under the Communications Act of 1934, as amended, the
Telecommunications Act of 1996 and Federal Communications Commission
regulations, as well as the applicable laws and regulations of the various
states administered by state public service commissions. Regulatory
requirements affecting our operations are subject to change. Such changes may
adversely affect our business by hindering our ability to compete with other
wireless telecommunications product manufacturers, to continue providing our
existing systems or to introduce future systems or system enhancements.
Our systems are also considered medical devices and are subject to
regulation by the FDA. Before we can market our systems, we must obtain pre-
market notification clearance under Section 510(k) of the Federal Food, Drug,
and Cosmetic Act. In addition, material changes to our systems may also be
subject to FDA review and clearance prior to marketing or sale in the U.S. The
process of obtaining 510(k) clearance can be expensive and time-consuming, and
may require the submission of extensive supporting data. If the 510(k) process
is extended for a considerable length of time for any of our new systems, the
commencement of commercial sales of our new systems will be delayed
substantially or indefinitely. We filed for 510(k) clearance for our AlarmView
system in August 1999.
As a provider of healthcare related systems, we are also subject to
extensive and frequently changing federal regulations that govern the
licensing, conduct of operations, and other aspects of our business. Federal
certification and licensing programs establish standards for day-to-day
operation of our research and manufacturing facilities. Regulatory agencies
verify our compliance with such standards through periodic inspections.
Although we have been found to be in compliance with all such standards to
date, our facilities may not pass future inspections conducted to ensure
compliance with federal or any other applicable licensing or certification
laws.
We also are subject to extensive federal and state regulation relating to
the confidentiality and release of patient medical records. New legislation
governing the distribution of medical records has been proposed at both the
federal and state levels. It may be costly to implement security or other
measures designed to comply with any new legislation. Moreover, we may be
restricted or prevented from delivering patient records electronically. We
cannot assure you that we will not be required to incur significant costs to
comply with current or future laws or that we will not be adversely affected by
the cost of such compliance.
10
<PAGE>
Furthermore, we may expand sales of our systems to international markets.
Such an expansion would require us to comply with a wide variety of foreign
laws and practices, tariffs and other trade barriers. If we fail to obtain the
necessary regulatory approvals in foreign markets on a timely basis, our sales
and revenue could materially decline.
Our Internet ECG system is not proven and may not be accepted by the at-home
consumer healthcare industry.
Our Internet ECG system has not been commercially released and may never be
adequately developed and marketed by us. Developing and marketing our internet
solutions to the at-home consumer healthcare industry will be costly and time-
consuming. Our internet solutions require that consumers exchange information
in a new and different way. In addition, in order to maximize the benefits of
our internet solutions, at-home healthcare consumers must be willing to allow
sensitive personal information to be stored on our internet databases. We have
not yet determined how to commercialize our Internet ECG system, and we cannot
assure you that the at-home consumer healthcare industry will accept this
system. In addition, although we believe that our Internet ECG system is not
subject to regulatory oversight, the FDA 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,
such as 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 financial results 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 such as 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 adversely affect our financial condition and results of operations.
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
could adversely affect our financial condition and results of operations.
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 may directly affect our revenue.
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
12
<PAGE>
components, such as the bitmap display, are presently only available from a
single source. Other parts and components that we rely on are available from
limited sources. Our reliance upon these single or limited-source suppliers and
third party manufacturers involves risks and uncertainties, including the
possibility of a shortage or discontinuation of key components and reduced
control over delivery schedules, manufacturing capability, quality and cost.
Any reduced availability of such components or key parts, when needed, could
delay the delivery of complete systems, result in the delayed payment or
cancellation of orders by our customers and cause our revenue 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.
Our owned and licensed intellectual property is important to our business.
We could be subject to intellectual property infringement claims as the number
of our competitors grows and the functionality of our systems overlaps with
competitive offerings. These claims, even if not meritorious, could be
expensive and divert our attention from our core business operations. If we
become liable to third parties for infringement of their intellectual property
rights, we could be required to pay substantial damages and to develop
alternative non-infringing technology, obtain a license or cease selling the
systems that contain the infringing intellectual property. We may be unable to
develop non-infringing technology or obtain a license on commercially
reasonable terms, if at all. In addition, we may not be able to protect against
misappropriation or infringement of our intellectual property by third parties.
If misappropriation or infringement occurs, we may not be able to detect it or
to effectively enforce our rights.
Changes in the healthcare industry could force us to make costly modifications
to our business model.
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. These factors affect the
purchasing practices and operation of healthcare organizations. Changes in
current healthcare financing and reimbursement systems could cause us to make
unplanned modifications to our systems or result in delays or cancellations of
orders. Federal and state legislatures have periodically considered programs to
reform or amend the U.S. healthcare system at both the federal and state level.
These programs may contain proposals to increase governmental involvement in
healthcare, lower reimbursement rates or otherwise change the environment in
which healthcare industry participants operate. Healthcare industry
participants may respond by reducing 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 financial condition and
results of operations 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 expenses.
Issues with respect to the year 2000 could affect the performance of our
systems. We believe our systems are designed to operate prior to, during and
after the calendar year 2000 without error relating to date data. However, we
have only tested our systems for their intended use on a stand-alone basis in a
test lab. Our business may suffer adverse effects if our systems cause
significant Year 2000 problems in a particular situation or configuration
within the systems of our customers. Our customers use our systems in many
different configurations and in conjunction with many other components and
systems. 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 such 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 condition will decline. Furthermore, any
additional issuance of equity securities will dilute your investment.
Trading in our shares could be subject to 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
adversely affect 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
business.
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 adverse determination in this
litigation could also subject us to significant liabilities, any or all of
which could seriously harm our business and financial condition.
Delaware law and our certificate of incorporation may inhibit potential
acquisition bids that could be beneficial for stockholders.
Delaware law may inhibit potential acquisition proposals. We are subject to
the anti-takeover provisions of the Delaware General Corporation Law, which
regulates corporate acquisitions.
14
<PAGE>
Delaware law prevents us from engaging in a business combination with any
interested stockholder for three years following the date that such stockholder
became an interested stockholder. For purposes of Delaware law, a business
combination includes a merger or consolidation or the sale of more than 10% of
our assets. In general, Delaware law defines an interested stockholder as any
entity or person beneficially owning 15% or more of the outstanding voting
stock of a corporation and any entity or person affiliated with or controlling
or controlled by such entity or person. Under Delaware law, a Delaware
corporation may opt out of the antitakeover provisions. We do not intend to opt
out of these antitakeover provisions of Delaware law.
In addition, we have adopted provisions in our certificate of incorporation
that may discourage potential acquisition proposals and delay or prevent a
change in control of our company.
These provisions include the following:
. our board of directors may issue up to three million shares of preferred
stock and determine the applicable powers, preferences and rights and the
qualifications, limitations or restrictions of such stock, including
voting rights, without any vote or further action by stockholders;
. our directors are elected to staggered three-year terms;
. stockholders cannot call special meetings;
. the nomination of a director or the taking of certain actions requires
advance notice; and
. stockholders cannot take action by written consent.
Future sales by our existing stockholders could adversely affect the market
price of our common stock.
Sales of our common stock in the public market following this offering could
adversely affect the market price of our common stock. Of the 9,833,619 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 subject to compliance with the
provisions of Rule 144 or any other applicable exemption under the
Securities Act.
Holders of 6,048,471 outstanding shares and 1,596,746 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 such as "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 factors such as the risk factors set forth in
this prospectus. We undertake no obligation to update any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of shares in
this offering will be $38.2 million ($44.0 million if the underwriters' over-
allotment option is exercised in full), after deducting the estimated
underwriting discounts and commissions and offering expenses payable by us and
assuming an initial public offering price of $12.00 per share.
We expect to use the net proceeds of this offering for general corporate
purposes, including working capital and capital expenditures. A portion of the
net proceeds may also be used for the acquisition of businesses, products or
technologies that are complementary to those of Data Critical. From time to
time, we may consider and evaluate potential acquisitions; however, we have no
current understandings or agreements regarding any acquisitions. Pending 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. We are subject to the terms of a credit
agreement that restricts our ability to pay dividends and may in the future
become subject to the terms of other credit agreements or other contractual
provisions that impose restrictions or limitations on the payment of dividends.
In the absence of 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 assumed initial public offering price of $12.00 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 61,572
Deferred compensation......................... (1,434) (1,434) (1,434)
Accumulated deficit........................... (21,829) (21,829) (21,829)
-------- -------- --------
Total stockholders' (deficit) equity.......... (20,161) 149 38,309
-------- -------- --------
Total capitalization........................... $ 1,863 $ 1,863 $ 40,023
======== ======== ========
</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
and 488,971 shares of common stock issuable upon the exercise of warrants
and a purchase option at a weighted average exercise price of $2.95 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 assumed initial public
offering price of $12.00 per share, and the adjustments set forth above, our
pro forma as adjusted net tangible book value as of September 30, 1999 would
have been $37.4 million, or $3.80 per share. The pro forma as adjusted net
tangible book value assumes that the proceeds to us, net of underwriting
discounts and commissions and offering expenses, will be approximately $38.2
million. Based on the foregoing, there would be at September 30, 1999 an
immediate increase in net tangible book value of $3.92 per share to existing
stockholders and an immediate dilution of $8.20 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share at September
30, 1999................................................. $(0.12)
Increase per share attributable to new investors.......... 3.92
------
Pro forma as adjusted net tangible book value per share
after this offering........................................ 3.80
------
Dilution per share to new investors......................... $ 8.20
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1999, the differences between the existing stockholders and new investors with
respect to:
. the number of shares of common stock purchased from us;
. the total consideration paid to us; and
. the average price paid per share.
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 29.8% $ 2.81
New investors............... 3,500,000 35.6 42,000,000 70.2% 12.00
--------- ----- ----------- -----
Total................... 9,833,619 100.0% $59,800,000 100.0%
========= ===== =========== =====
</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;
and
. 488,971 shares of common stock issuable upon the exercise of stock
warrants at a weighted average exercise price of $2.97 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 $0.14 per
share for a total dilution per share to new investors of $8.34.
18
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except for per share data)
The following historical selected financial and operating data set forth
below should be read along with the financial statements, their related notes
and other information included elsewhere in this prospectus. The selected
statement of operations data for the years ended December 31, 1996, 1997 and
1998 and the selected balance sheet data as of December 31, 1997 and 1998 have
been derived from our audited financial statements included elsewhere in this
prospectus. The selected statement of operations data for the years ended
September 30, 1994, 1995 and 1996 and the selected balance sheet data as of
September 30, 1994, 1995 and 1996 have been derived from our audited financial
statements not included in this prospectus. Effective January 1, 1996 we
changed our fiscal year end from September 30 to December 31. The selected
balance sheet data as of December 31, 1996 has been derived from 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 December Nine Months Ended
September 30, 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, such as AlarmView, which we expect to
launch for commercial service in the first half of 2000, and MobileView.
Our revenue recognition policy is as follows:
. revenue from direct sales of systems is generally recognized upon
installation;
. revenue from OEM sales of systems is generally recognized upon shipment;
. revenue generated from installation and training fees is recognized upon
completion of the related services; 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 strategic partners, in particular
Hewlett-Packard Company, Siemens Medical Systems, Inc. and Protocol Systems,
Inc. We also sell our systems through OEM relationships with GE Marquette
Medical Systems, Inc. and Nellcor Puritan Bennett, a subsidiary of Mallinckrodt
Inc. Due to revenue
20
<PAGE>
variability between direct and OEM sales channels, future variations in mix of
sales between 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, such as those related to
ownership changes in our voting stock, as defined in the Internal Revenue Code,
will limit our ability to use these net operating losses to offset future
income tax obligations in any one year.
Results of Operations
The following table sets forth for the periods indicated the percentage of
revenue of certain line items included in Data Critical's statement of
operations data:
<TABLE>
<CAPTION>
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.
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
21
<PAGE>
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;
. increased StatView system sales to GE Marquette Medical Systems, Inc.;
and
. direct sales of StatView systems for Hewlett-Packard monitoring devices
beginning in July 1998.
22
<PAGE>
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 adversely
affected our 1997 gross margin. In addition, 1998 gross margins were reduced by
inefficiencies related to production start-up costs, changing contract
manufacturers and minimal production volumes.
Research and development. Research and development expenses increased to
$2.2 million in 1998 from $1.7 million in 1997, an increase of 28.9%. This
increase was primarily due to incurring a full year of salary and benefits for
a Director of Engineering hired in May 1997, additional personnel hired during
1998, an increase in travel expenditures to support an increasing number of
alliances with strategic partners and an increase in contract engineering
services.
Sales and marketing. Sales and marketing expenses increased to $3.5 million
in 1998 from $1.2 million in 1997, an increase of 192.7%. This increase was
primarily due to a full year of costs associated with our direct sales force,
of which hiring began in August 1997, and includes an increase in salaries,
benefits and related costs and increased sales commissions.
General and administrative. General and administrative expenses increased to
$2.6 million in 1998 from $1.3 million in 1997, an increase of 102.2%. This
increase was primarily due to incurring a full year of salary, benefits and
related costs for the addition, from June through November 1997, of several
senior management positions, and their related support staff.
Operating expenses. Operating expenses increased to $8.3 million in 1998
from $4.2 million in 1997, an increase of 98.3%, primarily due to an increase
in the number of employees performing sales and marketing, general and
administrative, and research and development functions.
Other income (expense), net. Other income (expense), net, increased to a net
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 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.
23
<PAGE>
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 such
amounts expressed as a percentage of total revenue. In the opinion of
management, this unaudited quarterly data has been prepared on the same basis
as Data Critical's audited financial statements appearing elsewhere in this
prospectus, and reflect all adjustments consisting only of normal recurring
adjustments, which are necessary for a fair presentation of the information for
the periods presented. You should read the quarterly data presented below along
with the Financial Statements and related Notes appearing elsewhere in this
prospectus.
24
<PAGE>
The results of operations for any quarter are not necessarily indicative of
future quarterly results of operations. See "Risk Factors."
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, 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
25
<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
subject to certain conditions, and these advances are limited to $500,000 or
more per advance and are payable at interest only for the first twelve months
at an 11% rate and in equal monthly principal and interest payments for the
following 24 months. As of 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 105,000 shares of our Series D
preferred stock at a purchase price of $5.00 per share. This option expires
upon an initial public offering or merger,
26
<PAGE>
consolidation or sale of substantially all of our assets. Comdisco has
indicated its intent to exercise this option prior to completion of our initial
public offering.
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, such
financing will be available on terms favorable to us and our stockholders.
Year 2000 Readiness Disclosure
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies and governmental agencies may need
to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
State of Readiness
We have made a preliminary assessment of the Year 2000 readiness of our
information technology systems, including the hardware and software that enable
us to provide and deliver our systems. Our assessment plan consisted of:
. quality assurance testing of our systems, including internally developed
proprietary software incorporated in our systems, which has been
completed for our StatView systems and is ongoing for our other systems;
. contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to
the delivery of our systems, which is scheduled for completion in October
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.
27
<PAGE>
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 will test this new system for Year
2000 compliance during the fourth quarter of 1999, with an expected completion
date of December 1999.
We believe our hardware and software component vendors provide products that
are currently Year 2000 compliant. We will require our material hardware and
software component vendors to provide assurance of their Year 2000 compliance.
We will complete this process during the fourth quarter of 1999. We are
currently assessing our non-information technology systems and will seek
assurance of Year 2000 compliance from providers of material non-information
technology systems. Until 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, it could have a material adverse effect on our
business, financial condition and results of operations. The cost of Year 2000
compliance will be accounted for as an operating expense and funded from
working capital.
Risks
We are not currently aware of any Year 2000 compliance problems relating to
our technology or our internal systems that would have a material adverse
effect on our business, financial condition and results of operations. Third-
party software or hardware incorporated in our systems for sale to customers or
in our internal systems may need to be revised or replaced, all of which could
be time consuming and expensive. In addition, we may discover Year 2000
compliance problems in our technology that will require substantial revisions.
If we fail to fix or replace third-party software or hardware or upgrade our
technology on a timely basis, the result could be lost revenue, increased
operating costs, the loss of customers and other business interruptions, any
one of which could have a material adverse effect on our business, financial
condition and results of operations. Moreover, the failure to adequately
address Year 2000 compliance issues in our technology and our internal systems
could result in claims of mismanagement, misrepresentation or breach of
contract and related litigation, which could be costly and time-consuming to
defend. In addition, there can no assurance that governmental agencies, utility
companies, internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. The failure by these types of
entities to be Year 2000 compliant could result in a systemic failure beyond
our control, such as a prolonged internet, telecommunications or electrical
failure, which could also prevent us from delivering our systems to our
customers, and therefore have a material adverse effect on our business,
financial condition and results of operations.
28
<PAGE>
Contingency Plan
As discussed above, we are engaged in an ongoing Year 2000 assessment and
the development of contingency plans. The responses received from third-party
vendors and service providers will be taken into account in determining the
nature and extent of any contingency plans. We have identified our worst-case
scenario as the interruption of our business resulting from the inability of
our vendors to deliver components or the failure of public utilities to provide
services. We have not yet completed our worst-case scenario contingency plan.
Without a worst-case scenario contingency plan we may not have enough time to
complete remedial measures and implement contingency planning for the worst-
case scenario. We plan to complete our worst-case scenario contingency plan in
accordance with our compliance plan in the fourth quarter of 1999.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The implementation of SOP 98-1 is not expected to
have a material impact on our financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The implementation of SOP 98-5
is not expected to have a material impact on our financial position or results
of operations.
29
<PAGE>
BUSINESS
We design, manufacture, market, install and support communication and
information systems to allow access to health information, including patient
vital signs and other diagnostic data, using wireless technology and
proprietary software. Our systems provide for information retrieval from remote
sources, both inside and outside the hospital environment, and are integrated
and coordinated through either a wireless network utilizing our interactive
device, a personal computer or the internet. Our focus within health care is on
the hospital, physician and at-home consumer markets. The following are
examples of data that can be transmitted using our technology:
. ECG . heart rate
. blood pressure . temperature
. oxygen levels in the blood . patient name and location
. ventilator data . physician and nurse notes
We have entered into strategic alliances with the following leading
manufacturers of patient-monitoring medical equipment to assist us in the
development, marketing and distribution of our systems:
. GE Marquette Medical Systems, Inc., a subsidiary of General Electric
Company;
. Hewlett-Packard Company;
. Nellcor Puritan Bennett, a subsidiary of Mallinckrodt Inc.;
. Protocol Systems, Inc.;
. Siemens Medical Systems, Inc., a subsidiary of Siemens AG; 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
. St. Mary's Hospital in Pueblo, CO
. The Mayo Clinic in Scottsdale, AZ
Industry Background
Recent technological advances in digital wireless communications and the
demands of an increasingly mobile workforce have resulted in the proliferation
of wireless hand-held information communication devices. The capabilities of
these sophisticated devices, which include personal digital assistants,
wireless receivers and smart phones, are fostering the development of
information-intensive applications than can result in greater workforce
productivity and efficiency.
At the same time, healthcare facilities, such as hospitals and extended care
facilities, are focused on reducing costs and enhancing workforce productivity.
These facilities are seeking to improve the response time, decision-making
quality and overall efficiency of caregivers, including physicians and nurses,
who treat patients in life-critical situations.
30
<PAGE>
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, are now subject to some form of managed care. We believe that
consumers increasingly question the motivations of their caregivers and are
more inclined to take an active role in the decisions that affect their health
and wellness as well as that of their families.
The Data Critical Solution
Data Critical's systems extend the power of wireless technology to the
healthcare industry by employing a suite of hardware and software systems that
transmit complex time-critical data over wireless networks and through the
internet. Our systems improve communications and decision-making both in the
hospital and in remote locations, thereby improving the delivery of patient
care and reducing healthcare costs.
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Our solution provides the following key benefits:
Increased Work Efficiency. Our systems extend a hospital's existing patient-
monitoring capability by allowing physicians and nurses to remotely monitor
critically-ill patients and communicate on a near-immediate basis. By gathering
data from a broad array of patient-monitoring and other medical equipment and
distributing that data to a wireless communications device, caregivers can
monitor patient conditions while continuing to perform tasks elsewhere. When
there are adverse changes in a particular patient's condition, caregivers are
immediately alerted. Alarms can then be automatically and simultaneously
transmitted to individual nurses, physicians or other caregivers.
Reduced Costs. Most hospitals employ technicians with the responsibility to
monitor patient data from central locations. Those hospitals that use
monitoring technicians generally employ one to two full time equivalents per
nursing station. Our systems reduce the need for hospitals to maintain large
staffs of monitoring technicians. We believe that in many situations hospitals
can realize full return on their investment within 12 months of purchasing our
systems simply through the redeployment of these hospital personnel.
Improved Quality of Care. Our systems are designed to provide critical
patient information on a near-immediate basis directly to caregivers in and out
of the hospital. This near immediate delivery of information allows for more
rapid response times with better information. Our products allow hospitals to
maintain or improve quality of care, especially in light of the current trend
of declining caregiver-to-patient ratios.
Ease of Use. We have designed our receivers based on feedback from
healthcare professionals that dictated operational simplicity and hand-held
form factors. Device operation is rapidly learned. We believe that our design
features allow our customers to quickly and easily deploy our systems without
requiring extensive or technical training.
Open Architecture. Our systems are designed to interface with medical
equipment manufactured by numerous medical equipment suppliers. By providing a
standard, scaleable system we can interface with the medical equipment that is
already deployed in hospitals. In addition, the ability of our systems to
operate with other similar medical equipment allows us to partner with various
manufacturers.
Security and Confidentiality. Certain of our systems include strict
authentication methods and data encryption technology. These security features
allow for the exchange of confidential patient information without that
information being compromised. In addition, our Wireless Telemedicine (WT)
Server software provides access to the proprietary network software of our
strategic partners' patient monitoring systems.
Our Strategy
Our objective is to be the leader in providing wireless health information
communications systems to industries that depend upon the interactive
transmission of complex and time-critical data to mobile individuals. The
principal elements of our strategy include the following:
Pursue Additional Strategic Alliances. We are continuing to pursue
additional strategic alliances that will augment or expand our distribution
channels and system offerings. In the immediate term, we are pursuing
additional partners for our AlarmView system. In addition to our
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<PAGE>
direct sales force, we distribute our systems through leading vendors of
complementary medical equipment. We expect to build upon the expertise we gain
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, such as cross-licensing opportunities. We also
intend to enter into strategic relationships with one or more internet portals
and other web-based healthcare companies to promote the use of our Internet ECG
system and DataView system.
Increase Market Penetration and Generate Follow-On Sales Opportunities. The
initial target market for our systems includes approximately 5,000 hospitals
and 50,000 cardiology-related physicians in the U.S. Each of these hospitals
has multiple placement opportunities for our systems in various areas
throughout the hospital, including critical care units, step-down units,
emergency rooms, telemetry units and obstetrics. Since commencing distribution
of our systems in late 1997, we have installed our systems in over 100 U.S.
hospitals. We intend to increase our market penetration in major U.S. hospitals
by building upon the existing installed base of products manufactured by our
strategic alliance partners. In addition, once we have introduced our systems
to a hospital and have demonstrated the benefits of these systems to healthcare
professionals, we plan to sell our systems to other areas of practice within
that hospital.
International Expansion. We intend to expand sales of our systems into
international markets, including Europe and Japan. The international healthcare
market makes use of similar networked and stand-alone monitoring devices and
has similar scope to that of the U.S. healthcare market. We believe that there
may be significant demand for our systems in international markets because
hospitals outside the U.S. are even less equipped with remote monitoring and
interconnectivity systems than U.S. hospitals. We intend to build upon our
existing strategic alliances through their dealer and distributor organizations
to further our international expansion strategy.
Expand Use of the Internet to Link Physicians and At-home Consumers. Through
our Internet ECG system and the DataView system, we expect to expand our
ability to rapidly provide complex data to these users. We believe that many of
our existing technologies for the efficient transmission of data may have broad
applications for hospitals, physicians and patients seeking to access and
deliver information from and to remote locations through either wireless or
wired devices linked to the internet. We have developed core technology to
address the need to transmit medical information from homes through the
internet.
Maintain and Build on Technology Leadership. We are a technology leader in
providing for the communication of complex healthcare data through wireless
systems and networks. To strengthen and extend our communications solutions, we
plan to continue investing in research and development to expand the features
and functionality of our systems. For example, future systems may extend the
remote communications network to other types of medical equipment, such as
infusion pumps, ventilators, incubators, medical information systems, smart
beds, nurse call devices and home care devices. In addition, we may apply our
technology to other industries where the rapid communication of detailed
information is critical and where the mobility of end users is key, such as law
enforcement or other government services.
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Our Systems
We design our systems to address the needs of the healthcare industry.
Caregivers are highly dependent on access to complex and time-critical data and
benefit greatly from the rapid transmission of such data.
The following table provides a summary of the features and benefits of our
systems:
<TABLE>
<CAPTION>
Market Focus Systems Features and Benefits
- -------------------------------------------------------------------------------
<C> <C> <S>
Hospitals StatView . Hand-held unit that alerts caregivers within ten
seconds when alarms from patient monitors or
other medical equipment are triggered
. Provides reminder messages and periodic patient
updates
. Enables immediate responses to patient alarms
. Allows caregivers to monitor graphic
representations of data, known as waveforms, and
vital signs while performing tasks elsewhere in
the hospital
------------------------------------------------------------------
AlarmView . Uses wireless technology to deliver alarms and
other information collected by stand-alone
medical equipment to a patient-monitoring
system, creating a virtual network
. Designed to allow rapid response to non-
networked medical equipment
. Designed to increase caregiver efficiency and
flexibility at a low cost per unit
- -------------------------------------------------------------------------------
Physicians MobileView . Uses digital wireless technology on a wide area
network to provide critical patient information
to caregivers in remote locations usually outside
of the hospital
. Allows caregivers to remotely review ECGs, vital
signs parameters, associated waveforms, and nurse
notes
. Permits faster and more informed clinical
consultation and decision-making from remote
locations
. Delivers quality waveforms without faxes or phone
lines
------------------------------------------------------------------
DataView . Allows caregivers to access data collected by
StatView through a personal computer
- -------------------------------------------------------------------------------
Consumers Internet ECG . 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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<PAGE>
bed number, patient name, diagnosis (such as 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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<PAGE>
Consumer System
Internet ECG
We have completed development of the initial release of our Internet ECG
system, which is designed for consumers to view their own ECGs and review them
through an application downloaded via the internet. Through a proprietary hand-
held device, the consumer would be able to relay heart rate and ECG 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:
Hewlett-Packard Company. Hewlett-Packard Company's Medical Product Group is
a worldwide manufacturer and supplier of clinical measurement and diagnostic
equipment for the healthcare industry. In September 1997, we obtained a
nonexclusive license to a patent from Hewlett-Packard for the transmission of
data over an alphanumeric paging network. This patent is used in our MobileView
system. The Hewlett-Packard license agreement has an indefinite duration,
subject to termination if either party breaches its material obligations
thereunder. We also have an arrangement with Hewlett-Packard to engage in joint
sales and marketing programs and trade show presentations for StatView and
MobileView systems.
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<PAGE>
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, subject to early termination if either party breaches its
material obligations thereunder. Protocol may elect to extend the agreement for
an additional three year term.
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 certain custom features, subject to minimum
purchase requirements. The GE Marquette agreement is effective through January
2000, subject to early termination if either party breaches its material
obligations thereunder.
Mallinckrodt Inc. Nellcor Puritan Bennett, a subsidiary of Mallinckrodt
Inc., manufactures and sells a wide range of healthcare products, including
pulse oximetry monitoring devices, in more than 100 countries worldwide. In
February 1999, we entered into an agreement with Nellcor Puritan Bennett under
which Nellcor Puritan Bennett paid us to integrate our AlarmView systems with
Nellcor Puritan Bennett's products. Nellcor Puritan Bennett has also agreed to
serve as a nonexclusive distributor of AlarmView. The Nellcor Puritan Bennett
agreement is effective through February 2004, subject to early termination if
either party breaches its material obligations thereunder.
Customers and Markets
Data Critical currently focuses on the healthcare industry because of the
critical need of healthcare professionals to have immediate access to time-
critical patient data. Our target customers include hospitals and physicians
primarily across the U.S., and to a lesser extent in Canada and Europe. We
believe that such groups would benefit from using the StatView and AlarmView
systems,
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<PAGE>
by reducing costs and increasing productivity. Our target markets also include
aggregators of individual physicians such as large medical groups, independent
practice associations, physician practice management companies and other large
organized physician entities. We also target physicians who practice outreach
telemedicine. Additionally, we believe that specialist physicians with patients
who require immediate medical attention upon sudden change in medical status,
such as cardiologists, nephrologists, obstetricians and gynecologists, would
benefit from using our 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
cardiology-related physicians
DataView in
the U.S.
- ---------------------------------------------------------------------------
At-home Consumers Internet ECG More than 58 million
people with cardiovascular
disease in the U.S.
</TABLE>
Our systems are being used in more than 100 hospitals in over 30 states. Our
current customers include:
. Baylor University Medical . Montefiore Medical Center -
Center in Dallas, TX Einstein Division in New York, NY
. Duke University Medical Center . Memorial Sloan Kettering Cancer
in Durham, NC Center in New York, NY
. Heartland Hospital in St. . Mt. Sinai School of Medicine in New
Joseph, MO York, NY
. Kaiser Foundation Hospital in . Northwest Hospital in Seattle, WA
San Francisco, CA
. St. Mary's Hospital in Pueblo, CO
. The Mayo Clinic in Scottsdale,
AZ
Sales, Marketing and Customer Support
We market and sell our systems both through direct marketing and sales
programs and through OEM relationships with our strategic partners. We
currently have 15 sales territories in two regions supported by four telephone
direct sales account managers. In addition, our strategic partners provide
field sales people who actively sell and market our StatView and/or MobileView
systems to their respective accounts. We carefully select our strategic
partners and work closely with them throughout their sales process to increase
our revenue potential. We maintain direct co-marketing relationships with
several of our partners, which allow us more control and flexibility over the
sales and marketing process of our systems.
We also directly target physicians and large medical groups for MobileView
and nurses and nursing professional associations for StatView. We maintain an
extensive, online database of all U.S. hospitals that is updated quarterly.
This database is a key source of sales information covering capital
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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 are subject to 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, such as direct patient oversight, monitoring through wired systems
and voice communications. If we are successful in establishing a need for our
systems, we expect that additional entrants will be drawn into our market. In
addition, there is the possibility that one or more of our strategic partners
or other medical equipment manufacturers may decide to develop products that
directly compete with our systems. We may have difficulty competing with these
potential competitors because many of them may have longer operating histories,
significantly greater resources, better name recognition and a larger installed
base of products and technologies.
Our systems compete on the basis of cost-efficiency, enhanced mobility,
features, functionality and price. We believe we compete favorably with regard
to each of these factors. To maintain and improve our competitive position, we
must:
. continue to prove the benefits of our systems;
. develop new and improved technologies;
. market to hospitals, healthcare professionals and consumers; 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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<PAGE>
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our systems or may independently develop
technologies that are substantially equivalent to ours. We cannot be certain
that our patent application will be allowed or that our existing patents will
be held valid and enforceable by a court if we desire to enforce them. In
addition, employees or other parties may breach confidentiality agreements or
other contracts we have entered, and we may not be able to effectively enforce
our rights in the event of such breaches.
Government Regulation
Federal Communications Commission
In the U.S., we are subject to various FCC rules and regulations. The FCC
requires that wireless access devices meet various standards, including safety
standards with respect to human exposure to electromagnetic radiation and basic
signal leakage. The FCC has approved our radio frequency system components. In
addition, we currently hold an FCC license on 26 frequencies in the UHF
spectrum.
We are also subject to regulation under the Telecommunications Act of 1996
and other federal, state and international laws and regulations. Additional
laws and regulations may also be adopted with respect to wireless
communications networks covering issues such as user privacy and quality of
products and services. The adoption of any additional laws or regulations, or
our failure to comply with existing laws and regulations, may impede the growth
of wireless communications networks, decrease the demand for our systems and
have a material adverse effect on our business, financial condition and results
of operations.
Food and Drug Administration
The FDA is responsible for assuring the safety and effectiveness of medical
devices under the Federal Food, Drug and Cosmetic Act. Our StatView, MobileView
and AlarmView systems are subject to regulation by the FDA because they have
been defined as medical devices used in the diagnosis and treatment of disease.
Under FDA regulations, medical devices are classified into one of three
classes on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness: Class I, Class II and Class
III. Class I requires only general controls such as labeling, pre-market
notification and adherence to good manufacturing practices. Class II requires
general and specific controls such as performance standards and post-market
surveillance. Class III requires pre-market approval by the FDA. The FDA has
classified our StatView system as a Class III product. MobileView is currently
classified as a Class II product, grandfathered under the Hewlett-Packard
PalmVue classification. We submitted our AlarmView system for FDA approval as a
Class III product during August 1999.
Before we can market systems that are classified as Class III products, we
must obtain pre-market notification clearance under Section 510(k) of the
Federal Food, Drug, and Cosmetic Act. In addition, material changes to our
systems may also be subject to FDA review and clearance prior to marketing or
sale in the U.S. The FDA will typically grant 510(k) clearance if we can
establish that our device is "substantially equivalent" to a legally marketed
Class I or II medical device or to a Class III device for which the FDA has not
yet required the submission of a pre-market approval application.
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<PAGE>
The process of obtaining 510(k) clearance can be expensive and time-
consuming, and may require the submission of extensive supporting data. If we
fail to obtain 510(k) clearance for any of our new or modified systems, or if
the 510(k) process is extended for a considerable length of time, the
commencement of commercial sales of these systems will be delayed substantially
or indefinitely.
Healthcare Regulations
As a provider of healthcare related systems, we are also subject to
extensive and frequently changing federal regulations that govern the
licensing, conduct of operations and other aspects of our business. Federal
certification and licensing programs establish standards for day-to-day
operation of our research and manufacturing facilities. Regulatory agencies
verify our compliance with such standards through periodic inspections and
required participation in proficiency testing programs. Although we have been
found to be in compliance with all 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 subject to
substantial regulation by state governments. These state laws and regulations
govern both the disclosure and the use of confidential patient medical record
information. Although compliance with these laws and regulations is at present
principally the responsibility of the hospital, physician or other healthcare
provider, regulations governing patient confidentiality rights are evolving
rapidly. Additional legislation governing the dissemination of medical record
information has been proposed at both the state and federal level. This
legislation may require holders of confidential patient information to
implement security measures that could require substantial expenditures.
Changes to state or federal laws could materially restrict the ability of
healthcare providers to transmit information from patient records using our
systems.
Employees
As of 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.
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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. In addition,
Mr. Harlow is a faculty advisor and instructor at the Marshall School of
Business at the University of Southern California, Los Angeles. Mr. Harlow
earned both a B.S. in
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accounting from Oregon State University and an M.B.A. from Albers School of
Business at Seattle University. Mr. Harlow also serves as a director of
Prevention Concepts Incorporated, a private ultrasound cardiac risk analysis
company.
Craig S. Kairis joined Data Critical as Vice President of Business
Development in February 1995 and became Vice President of Sales in July 1999.
Prior to joining Data Critical, he served as director of sales at McCaw
Wireless Data, from January 1994 until February 1995. Prior to his role at
McCaw, Mr. Kairis served in sales, marketing, channel development and systems
integration positions at IBM from July 1980 until December 1993. Mr. Kairis
holds a B.A. degree in business from the University of Washington.
Michael E. Singer has served as Vice President and Chief Financial Officer
of Data Critical since June 1999. Prior to joining Data Critical, from 1992 to
1999 Mr. Singer was an investment banker focusing on mergers & acquisitions and
corporate financings for health care companies. During that period of time, Mr.
Singer served as a principal at Banc of America/NationsBanc Montgomery
Sercuities from 1998 to 1999, vice president at Alex, Brown & Sons from 1997 to
1998 and vice president at Wolfensohn & Co., Incorporated from 1992 to 1997.
From 1990 to 1992, Mr. Singer worked at Union Bank of Switzerland in Zurich,
Switzerland in global corporate and institutional banking, and in 1986 at the
Commission of the European Communities in Brussels, Belgium. Mr. Singer holds a
Ph.D. degree from the London School of Economics, a M.A. degree from the
Maxwell School of Public Affairs, Syracuse University and a B.A. degree from
Washington and Lee University.
Robert W. Benson joined Data Critical as Chief Financial Officer in July
1997 and became Vice President and Chief Information Officer in June 1999.
Prior to joining Data Critical, he served as executive vice president and chief
financial officer of Stellar One Corp., a digital telecommunications equipment
and software developer, from 1994 until 1997. Prior to his role at Stellar One
Corp., Mr. Benson was chief financial officer at Special Devices, Inc., a
manufacturer of pyrotechnic devices for the automotive and aerospace
industries, from 1991 until 1994. Mr. Benson holds a B.S. degree in accounting
from California State University.
Richard L. Earnest has served as a director of Data Critical since May 1997.
Since December 1998, Mr. Earnest has been the mayor of the city of Del Mar,
California. From 1995 to 1997, Mr. Earnest served as chief executive officer of
Tudor Publishing Company, a private educational software company. From 1993 to
1995, Mr. Earnest was chief executive officer at Demax Software, Inc., a VAX
and UNIX security products company. From 1991 to 1993, Mr. Earnest was the
chief executive officer at AdvantEDGE Systems Group, a software re-engineering
company. From 1989 to 1991, Mr. Earnest was chief executive officer at
Peregrine Systems. From 1983 to 1989, he was the president at VM Software, Inc.
Mr. Earnest is a director of Security Dynamics Technologies Inc., a computer
network security products company, and also serves as a director on the board
of various private companies.
Ronald H. Kase has served as a director of Data Critical since March 1998.
Since January 1991, Mr. Kase has been employed by New Enterprise Associates, a
venture capital investment firm, and became a general partner in May 1995. Mr.
Kase 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 healthcare companies.
George M. Middlemas has served as a director of Data Critical since February
1995. Since 1991, Mr. Middlemas has been a managing general partner of Apex
Investment Partners, a Chicago-based
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venture capital firm that focuses on telecommunications, information technology
and software investments. Mr. Middlemas earned an M.B.A. from Harvard
University and is a certified public accountant. Mr. Middlemas is a director of
Security Dynamics Technologies Inc., a computer network security products
company, and Tut Systems, Inc., a telecommunications products company, and also
serves as a director on the board of various private companies.
David B. Swedlow has served as a director of Data Critical since July 1998.
Dr. Swedlow founded and has been a principal of The Swedlow Group, a medical
technologies consulting firm, since April 1998. From 1987 to April 1998, Dr.
Swedlow was Senior Vice President of Medical Affairs and Technology Development
at Nellcor Puritan Bennett. Dr. Swedlow earned a B.S. from the Massachusetts
Institute of Technology and an M.D. from Harvard Medical School.
Board of Directors
We currently have authorized seven directors. Our board of directors
currently has one vacancy. The executive officers serve at the discretion of
the board of directors. There are no family relationships among any of our
directors or executive officers.
Our board of directors will be divided into three classes effective upon the
closing of this offering. The class I directors, Jeffrey S. Brown, Richard L.
Earnest and one director to be named to fill an existing vacancy, will serve an
initial term until the 2000 annual meeting of stockholders, the class II
directors, David B. Swedlow and George M. Middlemas, will serve an initial term
until the 2001 annual meeting of stockholders, and the class III directors,
David E. Albert and Ronald H. Kase, will serve an initial term until the 2002
annual meeting of stockholders. Each class will be elected for three-year terms
following its respective initial term.
Director Compensation
Directors are not compensated for their services. We reimburse directors for
reasonable travel expenses relating to their attendance at each meeting. Non-
employee directors are eligible to participate in the 1999 Directors' Stock
Option Plan. Directors who are employees are eligible to participate in our
1999 Stock Option Plan and our 1999 Employee Stock Purchase Plan. Under our
1994 Stock Option Plan, Mr. Brown was granted an option to purchase 208,832
shares of common stock at an exercise price of $0.80 per share in September
1994, an option to purchase 41,167 shares of common stock at an exercise price
of $1.60 per share in November 1997 and an option to purchase 75,000 shares of
common stock at an exercise price of $2.40 per share in May 1998. Mr. Earnest
was granted an option to purchase 12,500 shares of common stock under our 1994
Stock Option Plan at $0.80 per share in May 1997. Mr. Middlemas was granted an
option to purchase 12,500 shares of common stock under our 1994 Stock Option
Plan at an exercise price of $1.60 per share in February 1998. Mr. Kase was
granted an option to purchase 12,500 shares of common stock under our 1994
Stock Option Plan at an exercise price of $1.60 per share in March 1998.
Mr. Swedlow was granted an option to purchase 3,125 shares of common stock
under our 1994 Stock Option Plan at an exercise price of $2.40 per share in
July 1998 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.
Committees of the Board of Directors
In April 1995, the board of directors established the audit committee and in
December 1994, the board of directors established the compensation committee.
The audit committee reviews our annual
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<PAGE>
audit and meets with our independent auditors to review our internal controls
and financial management practices. The audit committee currently consists of
Messrs. Earnest, Middlemas and Swedlow. The compensation committee recommends
to the board of directors compensation for our executive officers and
administers our stock purchase and stock option plans. The compensation
committee currently consists of Messrs. Earnest, Kase and Middlemas.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between the board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past.
Executive Compensation
The following table lists the compensation received for services rendered to
Data Critical for the fiscal year ending December 31, 1998 by our chief
executive officer and each of the other four most highly compensated executive
officers, each of whose aggregate compensation during our last fiscal year
exceeded $100,000. Throughout the rest of the prospectus, we will refer to the
following officers as our named executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual
Compensation Securities
---------------- Underlying
Name and Principal Position(s) Salary Bonus Options
<S> <C> <C> <C>
David E. Albert, M.D. ........................... $121,042 $25,000 --
Chief Scientist and Chairman of the Board
Jeffrey S. Brown................................. 180,000 40,000 75,000
President and Chief Executive Officer
Bradley R. Harlow................................ 141,875 12,731 75,000
Vice President of Business Development and
General Manager, International
Craig S. Kairis.................................. 111,458 5,000 32,500
Vice President of Sales
Robert W. Benson................................. 119,583 23,000 --
Vice President and Chief Information Officer
</TABLE>
- --------
This table excludes perquisites and other personal benefits which did not
exceed the lesser of $50,000 or 10% of the total annual compensation of such
officers.
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<PAGE>
Stock Option Grants
The following table provides summary information regarding stock options
granted to the named executive officers during the year ended December 31,
1998, and consists of options granted under our 1994 Stock Option Plan. 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 assumed initial
public offering price of $12.00 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.
Option Grants in 1998
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------------------------------------- Value at Assumed
Number of Percent of Annual 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 $1,086,390 $1,573,845
Bradley R. Harlow....... 75,000 23.6 2.40 9/28/05 1,086,390 1,573,845
Craig S. Kairis......... 32,500 10.2 2.40 9/28/05 470,769 682,000
Robert W. Benson........ -- -- -- -- -- --
</TABLE>
Option Exercises and Holdings
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by each of the named
executive officers as of December 31, 1998. No options were exercised by the
named executive officers during the year ended December 31, 1998.
1998 Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
December 31, 1998 December 31, 1998
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
David E. Albert, M.D....... -- -- -- --
Jeffrey S. Brown........... 219,123 105,876 $2,445,955 $1,041,110
Bradley R. Harlow.......... 18,750 131,250 210,000 1,350,000
Craig S. Kairis............ 21,250 41,250 238,000 410,000
Robert W. Benson........... 15,625 46,875 175,000 525,000
</TABLE>
Value is determined by subtracting the exercise price from the proposed
initial public offering price of the common stock, multiplied by the number of
shares underlying the options.
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<PAGE>
Employment Agreements
None of our named executive officers has an employment agreement with Data
Critical.
In June 1999, we entered into an employment agreement with Michael Singer,
our Chief Financial Officer, for a period of five years. Until June 2000, we
may terminate the agreement only for cause. Thereafter, we may terminate the
agreement without cause upon 30 days' prior written notice. Mr. Singer may
terminate the agreement at any time without cause upon 30 days' prior written
notice. The agreement provides for an annual base salary of $160,000, with
increases and 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 such
excess options shall be treated as nonstatutory stock options. If not
terminated earlier, the 1999 Stock Plan will terminate in May 2009.
The 1999 Stock Plan is administered by the compensation committee of the
board of directors. The administrator determines the terms of options granted
under the 1999 Stock Plan, including the number of shares subject to the
option, exercise price, term and exercisability of the options. The exercise
price of all incentive stock options granted under the 1999 Stock Plan must be
at least equal to the fair market value of the common stock of Data Critical on
the date of grant. The exercise price of any incentive stock option or
nonstatutory stock option granted to an option holder who owns shares
representing more than 10% of the total combined voting power of all classes of
outstanding capital stock of Data Critical must equal at least 110% of the fair
market value of the common stock on the date of grant. The exercise price of
all nonstatutory stock options must equal at least 85% of the fair market value
of the common stock on the date of grant if required by applicable law. Payment
of the exercise price may be made in cash or other consideration as determined
by the administrator.
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Options granted under the 1999 Stock Plan generally become exercisable at
the rate of 25% of the total number of shares subject to the options 12 months
after the date of grant, and 25% of the total number of shares subject to the
options every 12 months thereafter.
In the event of the sale of all or substantially all of the assets of Data
Critical, or the merger of Data Critical with another corporation, each option
will be accelerated so that 50% of the unvested shares covered by each option,
up to a maximum of 50% of all unvested shares covered by all options held by
the option holder, shall become fully vested. The administrator has the
authority to amend or terminate the 1999 Stock Plan as long as such action does
not adversely affect any outstanding option and provided that stockholder
approval shall be required for an amendment to increase the number of shares
subject to the 1999 Stock Plan, to change the designation of the class of
persons eligible to be granted options, or to change the limitation on grants
to individual employees.
1994 Stock Option Plan.
Our 1994 Stock Option Plan was adopted by the board of directors and
approved by the stockholders in December 1994. 950,000 shares of common stock
have been reserved for issuance under the 1994 Stock Plan. As of 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 subject to the option, exercise price,
term and exercisability. The term of options may not exceed seven years, or
five years in the case of an incentive stock option granted to a 10%
stockholder. Options granted under the 1994 Stock Plan generally become
exercisable at the rate of 25% of the total number of shares subject to the
options 12 months after the vesting commencement date, and 25% of the total
number of shares subject to the options every 12 months thereafter.
In the event of the sale of all or substantially all of our assets, or the
merger of Data Critical with another corporation, then each option may be
assumed or an equivalent option substituted by the successor corporation. The
administrator may instead elect to accelerate the exercisability of each option
in its discretion. The administrator has the authority to amend or terminate
the 1994 Stock Plan as long as such action does not adversely affect any
outstanding option. Stockholder approval is required for an amendment to
increase the number of shares subject to the 1994 Stock Plan, to change the
designation of the class of persons eligible to be granted options, or to
change the limitation on grants to individual employees.
1999 Directors' Stock Option Plan.
1999 Directors' Stock Option Plan was adopted by the board of directors and
approved by the stockholders in May 1999. 100,000 shares of common stock have
been reserved for issuance under
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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
such conflicts will be addressed by having any interested director abstain from
both deliberations and voting regarding matters in which such director has a
personal interest.
The Directors' Plan provides that each person who is or becomes a non-
employee director of Data Critical will be granted a nonstatutory stock option
to purchase 15,000 shares of common stock on the later of the date on which the
option holder first becomes a non-employee director of Data Critical or the
date of the closing of this offering. Thereafter, on the date of our annual
stockholders' meeting each year, each non-employee director of Data Critical
will be granted an additional option to purchase 5,000 shares of common stock
if, on such date, he or she has served on our board of directors for at least
six months.
The Directors' Plan sets neither a maximum nor a minimum number of shares
for which options may be granted to any one non-employee director, but does
specify the number of shares that may be included in any grant and the method
of making a grant. No option granted under the Directors' Plan is transferable
by the option holder other than by will or the laws of descent or distribution
or pursuant to a qualified domestic relations order, and each option is
exercisable, during the lifetime of the option holder, only by such option
holder. The Directors' Plan provides that each option shall be fully vested and
exercisable on the date of grant. If a non-employee director ceases to serve as
a director for any reason other than death or disability, he or she may, but
only within 90 days after the date he or she ceases to be a director of Data
Critical, exercise options granted under the Directors' Plan. If he or she does
not exercise such option within such 90 day period, such option shall
terminate. The exercise price of all stock options granted under the Directors'
Plan shall be equal to the fair market value of a share of our common stock on
the date of grant of the option. Options granted under the Directors' Plan have
a term of ten years.
Upon a change in control of Data Critical, each non-employee director shall
have either a reasonable time within which to exercise their options prior to
the effectiveness of such change in control, at the end of which time the
option shall terminate, or the right to exercise the option, or receive a
substitute option with comparable terms, as to an equivalent number of shares
of stock of the corporation succeeding Data Critical in the change in control.
The board of directors may amend or terminate the Directors' Plan but must
obtain stockholder consent if required by any applicable law. If not terminated
earlier, the Directors' Plan will have a term of ten years.
1999 Employee Stock Purchase Plan.
Data Critical's 1999 Employee Stock Purchase Plan was adopted by the board
of directors and approved by the stockholders in May 1999. 100,000 shares plus
an annual increase in each of the next five years equal to the lesser of
150,000 shares or one percent of the outstanding shares of common stock on the
last day of the preceding fiscal year of common stock have been reserved for
issuance under the Purchase Plan. As of 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
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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
such subsidiary for at least 20 hours per week and more than five months per
year. The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not be less than 1% and not more than
20% of an employee's compensation, at a price equal to the lower of 85% of the
fair market value of Data Critical's common stock at the beginning of each
offering period or at the end of each purchase period. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with Data
Critical. If not terminated earlier, the Purchase Plan will have a term of 20
years.
The Purchase Plan provides that in the event of a merger of Data Critical
with or into another corporation or a sale of all or substantially all of Data
Critical's assets, each right to purchase stock under the Purchase Plan will be
assumed or an equivalent right substituted by the successor corporation unless
the board of directors shortens the offering period so that employees' rights
to purchase stock under the Purchase Plan are exercised prior to the merger or
sale of assets. The board of directors has the power to amend or terminate the
Purchase Plan as long as that action does not adversely affect any outstanding
rights to purchase stock under the Purchase Plan.
401(k) Plan
Data Critical provides a tax-qualified employee savings and retirement plan,
commonly known as a 401(k) plan, which covers our eligible employees. Pursuant
to the 401(k) plan, employees may elect to reduce their current annual
compensation up to the lesser of 15% or the statutorily prescribed limit, which
is $10,000 in calendar year 1999, and have the amount of the reduction
contributed to the 401(k) plan. The 401(k) plan is intended to qualify under
Sections 401(a) and 401(k) of the Internal Revenue Code, so that contributions
by our employees to the 401(k) plan, and income earned on plan contributions,
are not taxable to employees until withdrawn from the 401(k) plan, and so that
contributions will be deductible by Data Critical when made. The trustee of the
401(k) plan invests the assets of the 401(k) plan in the various investment
options as directed by the participants.
Limitation of Liability and Indemnification Matters
As permitted by the Delaware General Corporation Law, our restated
certificate of incorporation limits the personal liability of its officers and
directors to the maximum extent permitted by Delaware law for breach or alleged
breach of their fiduciary duties. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except for liability for:
. any breach of the director's duty of loyalty to Data Critical or its
stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions or other distributions; and
. any transaction from which a director derives an improper personal
benefit.
53
<PAGE>
In addition, our bylaws provide that Data Critical is required to indemnify
its officers and directors to the fullest extent permitted by law, including in
those circumstances in which indemnification would otherwise be discretionary.
Data Critical is required to advance expenses to its officers and directors as
incurred in connection with proceedings against them for which they may be
indemnified. Data Critical has entered into indemnification agreements with its
officers and directors containing provisions that are in some respects broader
than the specific indemnification provisions contained in Delaware law. The
indemnification agreements require Data Critical to indemnify such officers and
directors against liabilities that may arise by reason of their status or
service as officers and directors, other than liabilities arising from willful
misconduct of a culpable nature, to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance if available on reasonable terms.
Data Critical has also obtained directors' and officers' liability insurance.
At present, Data Critical is not aware of any pending or threatened
litigation or proceeding involving a director, officer, employee or agent of
Data Critical in which indemnification would be required or permitted. Data
Critical is not aware of any threatened litigation or proceeding that might
result in a claim for such indemnification. Data Critical believes that its
charter provisions and indemnification agreements are necessary to attract and
retain qualified persons as directors and officers.
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 pursuant to a note in the principal amount of $50,000 with an
interest rate of 8.0% per annum, due July 10, 2000. The outstanding principal
due under this note is convertible at our election into up to a 3.6% equity
interest in Nomadics at any time prior to July 10, 2000. The largest aggregate
amount outstanding under the loan during fiscal year 1998 was $59,878, and the
amount outstanding as of 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.
Pursuant to the bridge loan agreement, common stock purchase warrants were
granted to the lenders which permit the lenders to purchase an aggregate of
198,792 shares of common stock at an exercise price of $1.60 per share at any
time on or before November 1, 2002. In March 1998, all lenders holding bridge
notes issued by Data Critical under the bridge loan agreement tendered them as
payment for the purchase of 530,119 shares of Series D preferred stock at a
price of $4.00 per share. Apex Investment Fund II, L.P. loaned us $302,208,
which converted into 75,552 shares of Series D preferred stock, and received a
warrant to purchase 28,332 shares of common stock. Kimberlin Family Partners,
L.P. loaned us $1,000,000, which converted into 250,000 shares of Series D
preferred stock, and received a warrant to purchase 93,750 shares of common
stock.
From March to June of 1998, Data Critical sold an aggregate of 2,296,734
shares of its Series D preferred stock for $4.00 per share. Apex Investment
Fund II, L.P., purchased 75,552 shares, New Enterprises Associates VII, L.P.,
NEA Presidents Fund, L.P. and NEA Ventures 1998, L.P. purchased 1,075,000,
18,750 and 1,250 shares, respectively and Ronald L. Kase, one of our directors
is a general partner of each. Kimberlin Family Partners, L.P. purchased 250,000
shares. Acacia Ventures Partners, L.P. and South Pointe Venture Partners, L.P.
purchased 451,250 and 48,750 shares, respectively, and together beneficially
own more than five percent of our common stock. Mr. Middlemas, individually,
purchased 6,250 shares. Michael Singer, our Chief Financial Officer, purchased
12,500 shares.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table summarizes information regarding the beneficial
ownership of our common stock as of 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 pursuant to applicable community property laws, we believe each
stockholder identified in the table possesses sole voting and investment power
with respect to all shares of common stock beneficially owned by such
stockholder and all shares subject to options and warrants listed below. The
number of shares subject to options and warrants listed below includes only
those shares subject to 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
Subject to 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
Subject to 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 hereby, 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. Subject to preferences that
may be applicable to any outstanding preferred stock, holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared by
the board of directors out of funds legally available for that purpose. In the
event of a liquidation, dissolution or winding up of Data Critical, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to the prior distribution rights of any
outstanding preferred stock. The common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions available to the common stock. The outstanding shares of common
stock are, and the shares of common stock to be issued upon completion of this
offering will be, fully paid and non-assessable.
Preferred Stock
Upon the closing of this offering, all outstanding shares of preferred stock
will be converted into 4,904,689 shares of common stock and automatically
retired. Thereafter, the board of directors has the authority, without further
action by the stockholders, to issue up to 3,000,000 shares of preferred stock,
$0.001 par value, in one or more series, to fix the number of shares
constituting any series and to designate the rights, preferences and privileges
of each series. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of Data Critical without
further action by the stockholders and may also adversely affect the voting
power of the holders of common stock. The issuance of preferred stock could
have the effect of decreasing the market price of the common stock. Data
Critical currently has no plans to issue any shares of preferred stock.
Warrants
As of 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
There is a purchase option outstanding to purchase 105,000 shares of Series
D preferred stock at an exercise price of $5.00 per share issued to a
commercial lender in connection with a debt facility. This option expires upon
the earlier of our initial public offering or the merger, consolidation or sale
of substantially all of our assets.
Registration Rights
Following the closing of this offering, the holders of 5,293,752 shares of
common stock and warrants to purchase 371,471 shares of common stock will have
rights to register those shares under the Securities Act. These rights are
provided under the terms of an agreement between Data Critical and the holders
of the registrable securities. Subject to limitations specified in the
agreement, the holders of at least 40% of the registrable securities then
outstanding may require, on two occasions beginning 120 days after the date of
this offering, that Data Critical use its best efforts to register the
registrable securities for public resale if Form S-3 is not available. If Data
Critical registers any of its common stock either for its own account or for
the account of other security holders, the holders of registrable securities
are entitled to include their shares of common stock in such registration,
subject to the ability of the underwriters to limit the number of shares
included in the offering. The holders of registrable securities then
outstanding may also require Data Critical to register all or a portion of
their registrable securities on Form S-3 when use of such form becomes
available to us, provided that the proposed aggregate selling price net of any
underwriters' discounts or commissions is at least $250,000. 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 Law and Data Critical Charter and Bylaw Provisions
Provisions of Delaware law and our charter documents could make the
acquisition of Data Critical or the removal of incumbent officers and directors
more difficult. These provisions may discourage certain types of takeover
practices and encourage persons seeking to acquire control of Data Critical to
negotiate first. Data Critical believes that the benefits of protecting our
ability to negotiate with a proponent of an unsolicited business combination
proposal outweigh the disadvantages of potentially discouraging such proposals
because negotiation of such proposals could result in terms more favorable to
our stockholders.
Data Critical is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, the statute prohibits a publicly-held
Delaware corporation from engaging in a business combination with an interested
stockholder for a period of three years after the date that the person became
an interested stockholder unless the business combination or the transaction in
which the person became an interested stockholder is approved in a prescribed
manner. Generally, a business combination includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the stockholder.
Generally, an interested stockholder is a person who, together with affiliates
and associates, owns, or within three years prior, did own, 15% or more of the
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>
Our board of directors, without stockholder approval, has the authority
under our certificate of incorporation to issue preferred stock with rights
superior to the rights of the holders of common stock. As a result, preferred
stock could be issued quickly and easily, could adversely affect the rights of
holders of common stock and could be issued with terms calculated to delay or
prevent a change of control or make removal of management more difficult. Our
certificate of incorporation provides that stockholder action can be taken only
at an annual or special meeting of stockholders and may not be taken by written
consent. Our certificate of incorporation also requires that business
combinations--including a merger, share exchange or other disposition of a
substantial part of our assets--be approved by either the holders of two-thirds
of the outstanding shares or by a majority of disinterested directors, in which
case the affirmative vote required shall be the holders of a majority of the
outstanding shares. In addition, our board of directors will be staggered in
three classes effective upon the closing of this offering. See "Management--
Board of Directors". As a result, only one class of directors will be elected
at each annual stockholder meeting, with the other classes continuing for the
remainder of their terms. The bylaws provide that special meetings of
stockholders can be called only by the board of directors, the Chairman of the
Board or the President. Moreover, the business permitted to be conducted at any
special meeting of stockholders is limited to the business stated in the
special meeting notice. The bylaws set forth an advance notice procedure for
the nomination of candidates for election as directors and for business to be
brought before a meeting of stockholders. These provisions in our certificate
of incorporation and bylaws may have the effect of delaying or preventing
changes in control of Data Critical.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Service LLC. The transfer agent's address is 520 Pike Street, Suite
1220, Seattle, WA 98101, and telephone number is (206) 674-3030.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 9,833,619 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, such as Rule 144.
In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares for at least one year, including an "affiliate," is
entitled to sell, within any three-month period, a number of "restricted"
shares that does not exceed the greater of one percent (1%) of the then
outstanding shares of common stock, or 98,336 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 such sale. Sales under
Rule 144 are subject to manner of sale limitations, notice requirements and the
availability of current public information about the issuer. Rule 144(k)
provides that a person who is not deemed an "affiliate" and who has
beneficially owned shares for at least two years is entitled to sell such
shares at any time under Rule 144 without regard to the limitations described
above. We estimate that 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 such shares.
Any employee, officer, director, advisor or consultant who purchased his or
her shares pursuant to a written compensatory plan or contract is entitled to
rely on the resale provision of Rule 701, which permits non-affiliates to sell
their Rule 701 shares without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this prospectus.
As of 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 subject to outstanding
options, thus permitting the resale of such shares in the public market without
restriction under the Securities Act, other than restrictions applicable to
affiliates.
As of September 30, 1999, there were also outstanding warrants and a
purchase option to purchase an aggregate of 488,971 shares of common stock,
which are all presently exercisable. The warrants have a weighted-average
exercise price of $2.95 per share.
We have granted registration rights to many of our stockholders. As of the
date of this prospectus, 5,293,752 of the outstanding shares of common stock
are entitled to these registration rights. These registration rights also
extend to another 371,471 shares not yet issued, for example, shares issuable
upon the exercise of warrants.
61
<PAGE>
We, our executive officers and directors, and many of our stockholders have
agreed that, subject to limited exceptions in which the transferee agrees to
the same restriction, for a period 180 days from the date of this prospectus,
neither we nor they will, without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock, regardless of whether any of these transactions are to be settled
by the delivery of common stock, or such other securities, in cash or
otherwise.
In addition, during the same period, we have agreed not to file any
registration statement with respect to, and each of our executive officers,
directors and stockholders entitled to registration rights has agreed not to
make any demand for, or exercise any right with respect to, the registration of
any shares of our common stock or any securities convertible into or
exercisable or exchangeable for common stock without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation. The lock-up agreements
by persons other than us cover an aggregate of 6,048,471 shares, and an
additional 1,596,746 shares issuable upon exercise of outstanding options and
warrants. Of the 315,727 outstanding shares and shares issuable upon exercise
of outstanding options and warrants not subject to lock-up agreements, only
236,957 of such 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
such stockholders, or the availability of shares for sale, will have on the
market price of the common stock prevailing from time to time. Sales of
substantial amounts of common stock by existing stockholders could adversely
affect prevailing market prices.
62
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated the
date of this prospectus, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, U.S. Bancorp Piper
Jaffray, Warburg Dillon Read LLC and DLJdirect Inc., have severally agreed to
purchase from us the number of shares of common stock set forth opposite their
names below.
<TABLE>
<CAPTION>
Number
Underwriters of Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation..............
U.S. Bancorp Piper Jaffray.......................................
Warburg Dillon Read LLC..........................................
DLJdirect Inc. ..................................................
---------
Total.......................................................... 3,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
included in the offering are subject to approval of certain legal matters by
their counsel and to certain other conditions. The underwriters are obligated
to purchase and accept delivery of all the shares, other than those covered by
the over-allotment option described below, if they purchase any of the shares.
The underwriters propose to initially offer some of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and some of the shares to certain dealers at the
public offering price less a concession not in excess of $ per share. The
underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share on sales to certain other dealers. After the initial
offering of the shares to the public, the representatives may change the public
offering price and such concessions. The underwriters do not intend to confirm
sales to any accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with the offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of common stock.
<TABLE>
<CAPTION>
Paid by Data Critical
-------------------------
No Exercise Full Exercise
<S> <C> <C>
Per share.......................................... $ $
Total.............................................. $ $
</TABLE>
We will pay the offering expenses, estimated to be $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 such option solely to cover over-allotments, if any,
made in connection with the offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to
certain conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
63
<PAGE>
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments that the underwriters may be required to make in respect
of any of those liabilities.
Our common stock has been approved for quotation on the NASDAQ National
Market under the symbol DCCA.
Prior to the offering, there has been no established trading market for our
common stock. The initial public offering price for our shares of common stock
offered hereby will be determined by negotiation among us and the
representatives of the underwriters. The factors to be considered in
determining the initial public offering price include the history of and the
prospects for the industry in which we compete, our past and present
operations, our historical results of operations, the prospects for future
earnings, the recent market prices of securities of generally comparable
companies and the general condition of the securities markets at the time of
the offering.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of our common
stock included in the offering in any jurisdiction where action for that
purpose is required. The shares included in the offering may not be offered or
sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisement in connection with the offer and sale of any such
shares be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons who receive this prospectus are
advised to inform themselves about and to observe any restrictions relating to
the offering of the common stock and the distribution of this prospectus. This
prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of common stock included in the offering in any jurisdiction where that
would not be permitted or legal.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 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 such persons purchase such
reserved shares. Any reserved shares that are not orally confirmed for
purchased within one day of the pricing of the offering will be offered by the
underwriters to the general public on the same terms as the other shares
offered hereby.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of our common stock.
Specifically, the underwriters may overallot the offering, creating a syndicate
short position. The underwriters may bid for and purchase shares of our common
stock in the open market to cover such syndicate short position or to stabilize
the price of the common stock. In addition, the underwriting syndicate may
reclaim selling concessions from syndicate members if Donaldson, Lufkin &
Jenrette Securities Corporation repurchases previously distributed common stock
in syndicate covering transactions, in stabilizing transactions or otherwise or
if Donaldson, Lufkin & Jenrette Securities Corporation receives a report that
indicates that the clients of such syndicate members have "flipped" the common
stock. These activities may stabilize or maintain the market price of our
common stock above independent market levels. The underwriters are not required
to engage in these activities, and may end any of these activities at any time.
64
<PAGE>
LEGAL MATTERS
The validity of the common stock in this offering will be passed upon for
Data Critical by Venture Law Group, A Professional Corporation, Kirkland,
Washington. Craig E. Sherman, a director of Venture Law Group, is the Secretary
of Data Critical. Legal matters in connection with this offering will be passed
upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. As of the date of this prospectus, certain
directors of Venture Law Group and an investment partnership affiliated with
Venture Law Group own an aggregate of 2,500 shares of Data Critical's Series D
preferred stock, which shares will convert into 2,500 shares of Data Critical's
common stock upon the completion of this offering.
EXPERTS
The audited financial statements included in this prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission for the common stock in this offering. This prospectus does
not contain all of the information set forth in the registration statement and
its exhibits and schedules. For further information on Data Critical and the
common stock offered hereby, you should refer to the registration statement and
to its exhibits and schedules. Statements made in this prospectus concerning
the contents of any document referred to herein are not necessarily complete.
For each such document filed as an exhibit to the registration statement, you
should refer to the exhibit for a more complete description of the matter
involved. The registration statement and the attached exhibits and schedules
may be inspected without charge at the public reference facilities maintained
by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the SEC located at Seven World Trade Center, 13th Floor,
New York, NY 10048, and the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of the
registration statement may be obtained from the SEC's offices upon payment of
certain fees prescribed by the SEC. The SEC maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of
this website is http://www.sec.gov.
65
<PAGE>
DATA CRITICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants.................................. F-2
Balance Sheets at December 31, 1997 and 1998, and 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> <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) (719)
Other assets.................. (83) (9) (14) (5) (79)
-------- -------- -------- ------- -------
Net cash (used in)
provided by investing
activities............... (1,532) 1,563 (394) (254) (798)
-------- -------- -------- ------- -------
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
and capital leases........... -- 94 200 -- 1,809
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 2,395
-------- -------- -------- ------- -------
Net increase 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
======== ======== ======== ======= =======
Supplemental disclosure of
noncash financing activities:
Conversion of notes payable to
mandatorily redeemable
preferred stock.............. $ 400 $ -- $ 2,120 $ 2,120 $ --
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Amounts and disclosures 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 be subject to a number of risks
similar to other companies in a comparable stage of development including:
reliance on key personnel; successful marketing of its products; competition
from other companies with greater technical, financial, management and
marketing resources; successful development of new products and the enhancement
of existing products; and the ability to secure adequate financing to support
future growth, if and when required.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity when
purchased of 90 days or less to be cash equivalents. Cash and cash equivalents
consist of cash on deposit with banks and money market investments.
Inventories
The Company's initial medical product is made up of the Company's
proprietary software applications which it integrates with hardware that is
acquired from third parties as well as hardware made by third parties to the
Company's specifications. Inventories consist primarily of the Company's
hardware product, components to make such product and other third-party
equipment, all of which is stated at the lower of cost or market, using the
first-in, first-out method.
Property, Equipment and Software
Property, equipment and software are stated at historical cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally three to five
years. Ordinary repairs and maintenance and purchases of less than $500 are
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 such 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 Hewlett-Packard
Company (HP) pursuant to a 1994 license agreement which provided HP exclusive
distribution rights to a specific implementation of the Company's medical
wireless data technology. In September 1997, the 1994 license agreement between
the Company and HP was terminated by mutual agreement thus allowing the Company
to sell directly to HP customers. 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 with respect to trade accounts receivables as most of these
receivables are with healthcare institutions or with distributors to healthcare
institutions. To mitigate this risk, the Company has a credit policy under
which it verifies the creditworthiness of its customers.
Financial Instruments
The Company enters into various types of financial instruments in the normal
course of business and in raising capital. Fair values of cash, trade
receivables, notes receivable and notes payable all approximate market value.
The fair value of mandatorily redeemable preferred stock at December 31, 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 such adjustments are of a normal, recurring
nature. Results of operations for interim periods presented herein are not
necessarily indicative of results of operations for the entire year.
Unaudited Pro Forma Amounts
If the offering contemplated by this prospectus is completed, all of the
mandatorily redeemable preferred stock outstanding as of the closing date will
automatically be converted into an aggregate of 4,904,689 shares of common
stock. The unaudited pro forma balance sheet at 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 such costs. The implementation of SOP 98-1 is not expected to
have a material impact on the Company's financial position or results of
operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial
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, subject to 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
subject to certain conditions, and these advances are limited to $500,000 or
more per advance and are payable at 11.0% interest only for the first 12 months
and in equal monthly principal and interest payments for the following 24
months. 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 has indicated its intent to exercise this option prior to completion
of our initial public offering.
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.
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 subject to 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 such 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>
- --------
(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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[LOGO OF DATA CRITICAL]
3,500,000 Shares of Common Stock
----------------
PROSPECTUS
----------------
Donaldson, Lufkin & Jenrette
U.S. Bancorp Piper Jaffray
Warburg Dillon Reed LLC
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Data
Critical have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers that
effect transactions in these shares of common stock may be required to deliver
a prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Data Critical in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fee and the Nasdaq National
Market listing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
<S> <C>
SEC registration fee.............................................. $ 14,546
NASD filing fee................................................... 5,232
Nasdaq National Market listing fee................................ 75,625
Printing and engraving expenses................................... 200,000
Legal fees and expenses........................................... 300,000
Accounting fees and expenses...................................... 200,000
Blue Sky qualification fees and expenses.......................... 10,000
Transfer agent and registrar fees................................. 10,000
Miscellaneous fees and expenses................................... 84,597
--------
Total........................................................... $900,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's board of directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article IX of our Certificate of
Incorporation (Exhibit 3.2 hereto) and Article VI of our Bylaws (Exhibit 3.3
hereto) provide for indemnification of our directors, officers, employees and
other agents to the maximum extent permitted by Delaware Law. In addition, we
have entered into Indemnification Agreements (Exhibit 10.22 hereto) with its
officers and directors. The Underwriting Agreement (Exhibit 1.1) also provides
for cross-indemnification among Data Critical and the Underwriters with respect
to certain matters, including matters arising under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
Since March 31, 1996, Data Critical has issued and sold the following
securities:
1. On April 4, 1996, Data Critical issued 15,625 shares of its Series B
preferred stock to Elizabeth M. Riley in exchange for services rendered by
Mazza & Riley.
2. From September 27, 1996 to November 1, 1996, Data Critical issued
1,187,809 shares of its Series C preferred stock to 38 accredited investors
for an aggregate cash consideration of $3,800,988.80.
II-1
<PAGE>
3. From March 11, 1998 to May 29, 1998, Data Critical issued 2,296,734
shares of its Series D preferred stock to 39 accredited investors for an
aggregate cash consideration of $9,186,936.
4. Since inception Data Critical has issued and sold 21,434 shares of
common stock to employees at prices ranging from $0.80 to $3.20 per share,
in cash, upon exercise of stock options pursuant to the 1994 stock option
plan.
5. On July 10, 1996, Data Critical issued warrants to purchase 99,682
shares of its common stock with an exercise price of $3.20 per share to two
holders in part consideration for entering into a product development
agreement with Data Critical; on October 18, 1996, Data Critical issued
warrants to purchase 54,888 shares of its common stock with an exercise
price of $0.80 per share to six accredited investors in partial
consideration for the Series C preferred stock financing; and on November
4, 1997, Data Critical issued warrants to purchase 198,798 shares of common
stock with an exercise price of $1.60 per share to 15 accredited investors
in partial consideration for providing a bridge loan to Data Critical.
6. On April 27, 1999, Data Critical issued a warrant to purchase
12,500 shares of its Series D preferred stock with an exercise price of
$4.00 per share to one holder in partial consideration for financing an
equipment lease to Data Critical.
7. On April 27, 1999, Data Critical granted a purchase option to convert
up to $525,000 of the outstanding principal on a subordinated loan into
105,000 shares of Series D preferred stock at a price of $5.00 per share at
the lender's option.
8. On August 10, 1999, Data Critical issued to Michael Singer 7,500
shares of its common stock in connection with his employment agreement.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) or Regulation
D, or other applicable exemption of such Securities Act as transactions by an
issuer not involving any public offering. In addition, certain issuances
described in Item 4 were deemed exempt from registration under the Securities
Act in reliance upon Rule 701 promulgated under the Securities Act. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationships with Data Critical,
to information about Data Critical.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
<C> <S>
1.1 Form of Underwriting Agreement dated , .
3.1* Amended and Restated Certificate of Incorporation of Data Critical.
3.2* Amended and Restated Certificate of Incorporation of Data Critical
(proposed).
3.3* Amended and Restated Bylaws of Data Critical.
4.1 Specimen Stock Certificate.
4.2* Amended and Restated Registration Rights Agreement dated February 22,
1995, as amended.
4.3* Warrant Agreement dated April 13, 1995 between Data Critical and
Spencer Trask Securities Incorporated with Form of Common Stock
Purchase Warrant issued in connection with the Series B and Series C
Preferred Stock financings.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number Description
<C> <S>
4.4* Form of Common Stock Purchase Warrant issued in connection with the
bridge loan financing.
4.5* Common Stock Purchase Warrant dated July 10, 1996 issued by Data
Critical in favor of Nomadics, Inc.
4.6* Common Stock Purchase Warrant dated July 10, 1996 issued by Data
Critical in favor of Colin Cumming.
4.7* Warrant Agreement to purchase shares of Series D Preferred Stock dated
April 27, 1999 issued by Data Critical in favor of Comdisco, Inc.
5.1 Opinion of Venture Law Group regarding the legality of the common stock
being registered.
10.1+* Termination and Patent License Agreement dated September 16, 1997
between Data Critical and Hewlett-Packard Company.
10.2+* Distribution and License Agreement dated January 23, 1997 between Data
Critical and Marquette Medical Systems, Inc.
10.3+* Addendum to Marquette Distribution and License Agreement dated
September 14, 1998 between Data Critical and Marquette Medical
Systems, Inc.
10.4* Subordinated Loan and Security Agreement dated April 27, 1999 between
Data Critical and Comdisco, Inc.
10.5* Master Lease Agreement dated April 27, 1999 between Data Critical and
Comdisco, Inc.
10.6* Business Loan Agreement dated April 10, 1997 between Data Critical and
Silicon Valley Bank.
10.7* Loan Modification Agreement dated June 17, 1997 between Data Critical
and Silicon Valley Bank.
10.8* Loan Modification Agreement dated October 15, 1997 between Data
Critical and Silicon Valley Bank.
10.9* Loan Modification Agreement dated April 14, 1998 between Data Critical
and Silicon Valley Bank.
10.10* Loan Modification Agreement dated May 8, 1998 between Data Critical and
Silicon Valley Bank.
10.11* Loan Modification Agreement dated September 1, 1998 between Data
Critical and Silicon Valley Bank.
10.12* Loan Modification Agreement dated February 12, 1999 between Data
Critical and Silicon Valley Bank.
10.13* Loan Modification Agreement dated March 26,1999 between Data Critical
and Silicon Valley Bank.
10.14* Loan Modification Agreement dated May 6, 1999 between Data Critical and
Silicon Valley Bank.
10.15 Loan Modification Agreement dated October 12, 1999 between Data
Critical and Silicon Valley Bank.
10.16* Promissory Note dated April 10, 1997 between Data Critical and Silicon
Valley Bank with an original principal amount of $100,000.00.
10.17* Promissory Note dated April 10, 1997 between Data Critical and Silicon
Valley Bank with an original principal amount of $500,000.00.
10.18* Promissory Note dated April 14, 1998 between Data Critical and Silicon
Valley Bank with an original principal amount of $250,000.00.
10.19* Employment Agreement dated June 14, 1999 between Data Critical and
Michael E. Singer.
10.20* Facility Lease dated December 21, 1998 between S/I Northcreek II,
L.L.C. and Data Critical.
10.21* Amendment dated March 30, 1999 to the Facility Lease dated December 21,
1998 between S/I Northcreek II, L.L.C. and Data Critical.
10.22* Form of Indemnification Agreement between Data Critical and each of its
Officers and Directors.
10.23* 1999 Stock Option Plan (adopted May 7, 1999).
10.24* 1999 Directors' Stock Option Plan (adopted May 7, 1999).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Number Description
<C> <S>
10.25* 1999 Employee Stock Purchase Plan (adopted May 7, 1999).
10.26* 1994 Stock Option Plan (dated December 19, 1994).
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Venture Law Group (included in Exhibit 5.1)
24.1* Power of Attorney (included in signature page to Registration
Statement).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
+ Confidential treatment has been requested for the portions in the copy of
the exhibit filed with the Securities and Exchange Commission. The omitted
information has been filed separately with the Securities and Exchange
Commission pursuant to the application for confidential treatment.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth is not applicable or is shown in the financial
statements or their related notes.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Bothell, State of
Washington on October 18, 1999.
DATA CRITICAL CORPORATION
/s/ Jeffrey S. Brown
By: _________________________________
Jeffrey S. Brown
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment has been signed by the following person in the capacities and on the
date indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jeffrey S. Brown President, Chief Executive October 18, 1999
____________________________________ Officer and Director
Jeffrey S. Brown
* Vice President, Chief October 18, 1999
____________________________________ Financial Officer
Michael E. Singer
* Director October 18, 1999
____________________________________
David E. Albert, M.D.
* Director October 18, 1999
____________________________________
George M. Middlemas
* Director October 18, 1999
____________________________________
Richard Earnest
* Director October 18, 1999
____________________________________
Ronald Kase
* Director October 18, 1999
____________________________________
David B. Swedlow
</TABLE>
/s/ Jeffrey S. Brown
*By: __________________________
Jeffrey S. Brown
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
<C> <S>
1.1 Form of Underwriting Agreement dated , .
3.1* Amended and Restated Certificate of Incorporation of Data Critical.
3.2* Amended and Restated Certificate of Incorporation of Data Critical
(proposed).
3.3* Amended and Restated Bylaws of Data Critical.
4.1 Specimen Stock Certificate.
4.2* Amended and Restated Registration Rights Agreement dated February 22,
1995, as amended.
4.3* Warrant Agreement dated April 13, 1995 between Data Critical and
Spencer Trask Securities Incorporated with Form of Common Stock
Purchase Warrant issued in connection with the Series B and Series C
Preferred Stock financings.
4.4* Form of Common Stock Purchase Warrant issued in connection with the
bridge loan financing.
4.5* Common Stock Purchase Warrant dated July 10, 1996 issued by Data
Critical in favor of Nomadics, Inc.
4.6* Common Stock Purchase Warrant dated July 10, 1996 issued by Data
Critical in favor of Colin Cumming.
4.7* Warrant Agreement to purchase shares of Series D Preferred Stock dated
April 27, 1999 issued by Data Critical in favor of Comdisco, Inc.
5.1 Opinion of Venture Law Group regarding the legality of the common stock
being registered.
10.1+* Termination and Patent License Agreement dated September 16, 1997
between Data Critical and Hewlett-Packard Company.
10.2+* Distribution and License Agreement dated January 23, 1997 between Data
Critical and Marquette Medical Systems, Inc.
10.3+* Addendum to Marquette Distribution and License Agreement dated
September 14, 1998 between Data Critical and Marquette Medical
Systems, Inc.
10.4* Subordinated Loan and Security Agreement dated April 27, 1999 between
Data Critical and Comdisco, Inc.
10.5* Master Lease Agreement dated April 27, 1999 between Data Critical and
Comdisco, Inc.
10.6* Business Loan Agreement dated April 10, 1997 between Data Critical and
Silicon Valley Bank.
10.7* Loan Modification Agreement dated June 17, 1997 between Data Critical
and Silicon Valley Bank.
10.8* Loan Modification Agreement dated October 15, 1997 between Data
Critical and Silicon Valley Bank.
10.9* Loan Modification Agreement dated April 14, 1998 between Data Critical
and Silicon Valley Bank.
10.10* Loan Modification Agreement dated May 8, 1998 between Data Critical and
Silicon Valley Bank.
10.11* Loan Modification Agreement dated September 1, 1998 between Data
Critical and Silicon Valley Bank.
10.12* Loan Modification Agreement dated February 12, 1999 between Data
Critical and Silicon Valley Bank.
10.13* Loan Modification Agreement dated March 26, 1999 between Data Critical
and Silicon Valley Bank.
10.14* Loan Modification Agreement dated May 6, 1999 between Data Critical and
Silicon Valley Bank.
10.15 Loan Modification Agreement dated October 12, 1999 between Data
Critical and Silicon Valley Bank.
10.16* Promissory Note dated April 10, 1997 between Data Critical and Silicon
Valley Bank with an original principal amount of $100,000.00.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Description
<C> <S>
10.17* Promissory Note dated April 10, 1997 between Data Critical and Silicon
Valley Bank with an original principal amount of $500,000.00.
10.18* Promissory Note dated April 14, 1998 between Data Critical and Silicon
Valley Bank with an original principal amount of $250,000.00.
10.19* Employment Agreement dated June 14, 1999 between Data Critical and
Michael E. Singer.
10.20* Facility Lease dated December 21, 1998 between S/I Northcreek II,
L.L.C. and Data Critical.
10.21* Amendment dated March 30, 1999 to the Facility Lease dated December 21,
1998 between S/I Northcreek II, L.L.C. and Data Critical.
10.22* Form of Indemnification Agreement between Data Critical and each of its
Officers and Directors.
10.23* 1999 Stock Option Plan (adopted May 7, 1999).
10.24* 1999 Directors' Stock Option Plan (adopted May 7, 1999).
10.25* 1999 Employee Stock Purchase Plan (adopted May 7, 1999).
10.26* 1994 Stock Option Plan (dated December 19, 1994).
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Venture Law Group (included in Exhibit 5.1).
24.1* Power of Attorney (included in signature page to Registration
Statement).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
+ Confidential treatment has been requested for the portions in the copy of
the exhibit filed with the Securities and Exchange Commission. The omitted
information has been filed separately with the Securities and Exchange
Commission pursuant to the application for confidential treatment.
<PAGE>
EXHIBIT 1.1
3,500,000 Shares
DATA CRITICAL CORPORATION
Common Stock
UNDERWRITING AGREEMENT
----------------------
November __, 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
U.S. BANCORP PIPER JAFFRAY
WARBURG DILLON READ LLC
DLJ direct Inc.
As representatives of the
several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Data Critical Corporation, a Delaware corporation (the "Company"), proposes
to issue and sell 3,500,000 shares of its Common Stock par value $0.001 per
share (the "Firm Shares") to the several underwriters named in Schedule I hereto
(the "Underwriters"). The Company also proposes to issue and sell to the several
Underwriters not more than an additional 525,000 shares of its Common Stock par
value $0.001 per share (the "Additional Shares") if requested by the
Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional
Shares are hereinafter referred to collectively as the "Shares". The shares of
common stock of the Company to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to as the "Common Stock".
SECTION 1. Registration Statement and Prospectus. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1, including a prospectus, relating
to the Shares. The registration statement, as amended at the time it became
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Act, is hereinafter referred to as the
<PAGE>
"Registration Statement"; and the prospectus in the form first used to confirm
sales of Shares is hereinafter referred to as the "Prospectus". If the Company
has filed or is required pursuant to the terms hereof to file a registration
statement pursuant to Rule 462(b) under the Act registering additional shares of
Common Stock (a "Rule 462(b) Registration Statement"), then, unless otherwise
specified, any reference herein to the term "Registration Statement" shall be
deemed to include such Rule 462(b) Registration Statement.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On the
basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
at a price per Share of $______ (the "Purchase Price") the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to 525,000 Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares. The Underwriters may exercise their right to purchase Additional
Shares in whole or in part from time to time by giving written notice thereof to
the Company within 30 days after the date of this Agreement. You shall give any
such notice on behalf of the Underwriters and such notice shall specify the
aggregate number of Additional Shares to be purchased pursuant to such exercise
and the date for payment and delivery thereof, which date shall be a business
day (i) no earlier than two business days after such notice has been given (and,
in any event, no earlier than the Closing Date (as hereinafter defined)) and
(ii) no later than ten business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) which bears the same proportion to the total number of Additional
Shares to be purchased from the Company as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I bears to the total number of
Firm Shares.
The Company hereby agrees not to (i) 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 (ii) 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 the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, during such period (i) the Company may grant stock options
pursuant to the Company's existing stock option plan and (ii) the Company may
issue shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof. The Company also agrees
not to file any registration statement with respect to any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock for a period of 180 days after the date of the
-2-
<PAGE>
Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation. The Company shall, prior to or concurrently with the
execution of this Agreement, deliver an agreement executed by (i) each of the
directors and officers of the Company and (ii) each stockholder listed on Annex
I hereto to the effect that such person will not, during the period commencing
on the date such person signs such agreement and ending 180 days after the date
of the Prospectus, without the prior written consent of Donaldson, Lufkin &
Jenrette Corporation, (A) engage in any of the transactions described in the
first sentence of this paragraph or (B) make any demand for, or exercise any
right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock.
SECTION 3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose (i) to make a public offering of their respective portions
of the Shares as soon after the execution and delivery of this Agreement as in
your judgment is advisable and (ii) initially to offer the Shares upon the terms
set forth in the Prospectus.
The Company and the Underwriters agree that up to ________ of the Shares to
be purchased by the Underwriters (the "Reserved Shares") shall be reserved for
sale by the Underwriters to certain eligible employees and persons having
business relationships with the Company (the "Reserved Share Purchasers"), as
part of the distribution of the Shares by the Underwriters, subject to the terms
of this Agreement, the applicable rules, regulations and interpretations of the
National Association of Securities Dealers, Inc. and all other applicable laws,
rules and regulations. To the extent that such Reserved Shares are not orally
confirmed for purchase by such eligible employees and persons having business
relationships with the company by the end of the first business day after the
date of this Agreement, such Reserved Shares may be offered to the public as
part of the public offering contemplated hereby.
SECTION 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Company shall deliver the Shares, with any transfer taxes thereon duly paid by
the respective Sellers, to Donaldson, Lufkin & Jenrette Securities Corporation
through the facilities of The Depository Trust Company ("DTC"), for the
respective accounts of the several Underwriters, against payment to the Company
of the Purchase Price therefore by wire transfer of Federal or other funds
immediately available in New York City. The certificates representing the Shares
shall be made available for inspection not later than 9:30 A.M., New York City
time, on the business day prior to the Closing Date or the applicable Option
Closing Date, as the case may be, at the office of DTC or its designated
custodian (the "Designated Office"). The time and date of delivery and payment
for the Firm Shares shall be 9:00 A.M., New York City time, on November __, 1999
or such other time on the same or such other date as Donaldson, Lufkin &
Jenrette Securities Corporation and the Company shall agree in writing. The
time and date of delivery for the Firm Shares are hereinafter referred to as the
"Closing Date". The time and date of delivery and payment for any Additional
Shares to be purchased by the Underwriters shall be 9:00 A.M., New York City
time, on the date specified in the applicable exercise notice given by you
pursuant to Section 2 or such other time on the same or such other date as
Donaldson, Lufkin & Jenrette
-3-
<PAGE>
Securities Corporation and the Company shall agree in writing. The time and date
of delivery for any Additional Shares are hereinafter referred to as an "Option
Closing Date".
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 8 of this Agreement
shall be delivered at the offices of Wilson Sonsini Goodrich and Rosati, 650
Page Mill Road, Palo Alto, California 94304 and the Shares shall be delivered at
the Designated Office, all on the Closing Date or such Option Closing Date, as
the case may be.
SECTION 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you five signed copies of the Registration Statement as
first filed with the Commission and of each amendment to it, including all
exhibits, and to furnish to you and each Underwriter designated by you such
number of conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5 (d) below, not to file any further amendment to
the Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
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copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall occur
or condition shall exist as a result of which, in the opinion of counsel for the
Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of
counsel for the Underwriters, it is necessary to amend or supplement the
Prospectus to comply with applicable law, forthwith to prepare and file with the
Commission an appropriate amendment or supplement to the Prospectus so that the
statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you and
counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its stockholders as soon as
practicable an earnings statement covering the twelve-month period ending
_________, 2000 that shall satisfy the provisions of Section 11(a) of the Act,
and to advise you in writing when such statement has been so made available.
(h) During the period of three years after the date of this Agreement, to
furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company as you may reasonably request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Company's obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel and the Company's accountants in connection with the registration and
delivery of the Shares under the Act and all other fees and expenses in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to
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the transfer and delivery of the Shares to the Underwriters, including any
transfer or other taxes payable thereon, (iii) all costs of printing or
producing this Agreement and any other agreements or documents in connection
with the offering, purchase, sale or delivery of the Shares, (iv) all expenses
in connection with the registration or qualification of the Shares for offer and
sale under the securities or Blue Sky laws of the several states and all costs
of printing or producing any Preliminary and Supplemental Blue Sky Memoranda in
connection therewith (including the filing fees and fees and disbursements of
counsel for the Underwriters in connection with such registration or
qualification and memoranda relating thereto), (v) the filing fees and
disbursements of counsel for the Underwriters in connection with the review and
clearance of the offering of the Shares by the National Association of
Securities Dealers, Inc., (vi) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to the listing of the Shares on
the Nasdaq National Market, (vii) the cost of printing certificates representing
the Shares, (viii) the costs and charges of any transfer agent, registrar and/or
depositary, (ix) all costs and expenses of the Underwriters incurred in
connection with matters related to the Reserved Shares which are designated by
the Company for sale to the Reserved Share Purchasers (including any related
fees and disbursements of counsel for the Underwriters incurred in connection
therewith) and (x) all other costs and expenses incident to the performance of
the obligations of the Company hereunder for which provision is not otherwise
made in this Section.
(j) To use its best efforts to list for quotation the Shares on the Nasdaq
National Market and to maintain the listing of the Shares on the Nasdaq National
Market for a period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of this
Agreement does not cover all of the Shares, to file a Rule 462(b) Registration
Statement with the Commission registering the Shares not so covered in
compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
(m) To ensure that the Reserved Shares will be restricted as required by
the National Association of Securities Dealers, Inc. (the "NASD") or the NASD
rules from sale, transfer, assignment, pledge or hypothecation for a period of
three months following the date of this Agreement. The Underwriters will notify
the Company prior to the Closing Date as to which persons will need to be so
restricted. At the request of the Underwriters, the Company will direct the
transfer agent to place a stop transfer restriction upon such securities for
such period of time. Should the Company release, or seek to release, from such
restrictions any of the Reserved Shares, the Company agrees to reimburse the
Underwriters for any reasonable expenses (including, without limitation, legal
expense) they incur in connection with such release.
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SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 10:00 P.M.,
New York City time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (B) will comply in all material respects with the Act and (iv)
the Prospectus does not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(d) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of its jurisdiction of incorporation
and has the corporate power and authority to carry on its business as described
in the Prospectus and to own, lease and operate its properties, and is duly
qualified and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company.
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<PAGE>
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company relating to or entitling any person to purchase or otherwise to
acquire any shares of the capital stock of the Company, except as otherwise
disclosed in the Registration Statement.
(f) All the outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid, non-assessable and not
subject to any preemptive or similar rights; and the Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights.
(g) The Company has no subsidiaries.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(i) The Company is not in violation of its respective charter or by-laws
or in default in the performance of any obligation, agreement, covenant or
condition contained in any indenture, loan agreement, mortgage, lease or other
agreement or instrument that is material to the Company to which the Company is
a party or by which the Company or any of its property is bound.
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company, to which the Company is a party or by which the
Company or any of its property is bound, (iii) violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of any court
or any governmental body or agency having jurisdiction over the Company or any
of its property or (iv) result in the suspension, termination or revocation of
any Authorization (as defined below) of the Company or any other impairment of
the rights of the holder of any such Authorization.
(k) There are no legal or governmental proceedings pending or threatened
to which the Company is or could be a party or to which any of property is or
could be subject that are required to be described in the Registration Statement
or the Prospectus and are not so described; nor are there any statutes,
regulations, contracts or other documents that are required to be described in
the Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not so described or filed as required.
(l) The Company has not violated any foreign, federal, state or local law
or regulation relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), any provisions of the Employee Retirement
Income Security Act of 1974, as amended, or any provisions of the Foreign
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Corrupt Practices Act, or the rules and regulations promulgated thereunder,
except for such violations which, singly or in the aggregate, would not have a
material adverse effect on the business, prospects, financial condition or
results of operation of the Company.
(m) The Company has such permits, licenses, consents, exemptions,
franchises, authorizations and other approvals (each, an "Authorization") of,
and has made all filings with and notices to, all governmental or regulatory
authorities, including but not limited to the U.S. Food and Drug Administration
and the Federal Communications Commission, and self-regulatory organizations and
all courts and other tribunals, including, without limitation, under any
applicable Environmental Laws, as are necessary to own, lease, license and
operate its properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company. Each
such Authorization is valid and in full force and effect and the Company is in
compliance with all the terms and conditions thereof and with the rules and
regulations of the authorities and governing bodies having jurisdiction with
respect thereto; and no event has occurred (including, without limitation, the
receipt of any notice from any authority or governing body) which allows or,
after notice or lapse of time or both, would allow, revocation, suspension or
termination of any such Authorization or results or, after notice or lapse of
time or both, would result in any other impairment of the rights of the holder
of any such Authorization; and such Authorizations contain no restrictions that
are burdensome to the Company; except where such failure to be valid and in full
force and effect or to be in compliance, the occurrence of any such event or the
presence of any such restriction would not, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company.
(n) The Company owns or possesses, or can acquire on reasonable terms, all
patents, patent rights, licenses, inventions, copyrights, know-how (including
trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks and
trade names ("Intellectual Property") currently employed by it in connection
with the business now operated by them except where the failure to own or
possess or otherwise be able to acquire such intellectual property would not,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operation of the Company; and the
Company has not received any notice of infringement of or conflict with asserted
rights of others with respect to any of such intellectual property which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company.
(o) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
(p) This Agreement has been duly authorized, executed and delivered by the
Company.
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(q) Arthur Anderson LLP is an independent public accountant with respect
to the Company as required by the Act.
(r) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
on the basis stated therein at the respective dates or for the respective
periods to which they apply; such statements and related schedules and notes
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; the supporting schedules, if any, included in the Registration
Statement present fairly in accordance with generally accepted accounting
principles the information required to be stated therein; and the other
financial and statistical information and data set forth in the Registration
Statement and the Prospectus (and any amendment or supplement thereto) are, in
all material respects, accurately presented and prepared on a basis consistent
with such financial statements and the books and records of the Company.
(s) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(t) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement.
(u) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company, (ii) there
has not been any material adverse change or any development involving a
prospective material adverse change in the capital stock or in the long-term
debt of the Company and (iii) the Company has not incurred any material
liability or obligation, direct or contingent.
(v) Each certificate signed by any officer of the Company and delivered to
the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
SECTION 7. Indemnification. (a)The Company agrees to indemnify and hold
harmless each Underwriter, its directors, its officers and each person, if any,
who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") (13), from and against any and all losses, claims, damages, liabilities
and judgments (including, without limitation, any legal or other expenses
incurred in connection with investigating or defending any matter, including any
action, that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or
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alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), the Prospectus (or any amendment or
supplement thereto) or any preliminary prospectus, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages, liabilities or judgments are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished in writing to the Company by
such Underwriter through you expressly for use therein; provided, however, that
the foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter who failed to deliver a
Prospectus, as then amended or supplemented, (so long as the Prospectus and any
amendments or supplements thereto was provided by the Company to the several
Underwriters in the requisite quantity and on a timely basis to permit proper
delivery on or prior to the Closing Date) to the person asserting any losses,
claims, damages, liabilities or judgments caused by any untrue statement or
alleged untrue statement of a material fact contained in such preliminary
prospectus, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, if such material misstatement or omission or alleged
material misstatement or omission was cured in the Prospectus, as so amended or
supplemented, and such Prospectus was required by law to be delivered at or
prior to the written confirmation of sale to such person.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent
as the foregoing indemnity from the Company to such Underwriter but only with
reference to information relating to such Underwriter furnished in writing to
the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in respect
of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the
"indemnified party"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "indemnifying party") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 7(a) and 7(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 7(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there
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may be one or more legal defenses available to it which are different from or
additional to those available to the indemnifying party (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of the indemnified party). In any such case, the indemnifying party
shall not, in connection with any one action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel) for
all indemnified parties and all such fees and expenses shall e reimbursed as
they are incurred. Such firm shall be designated in writing by Donaldson, Lufkin
& Jenrette Securities Corporation, in the case of parties indemnified pursuant
to Section 7(a), and by the Company, in the case of parties indemnified pursuant
to Section 7(b). The indemnifying party shall indemnify and hold harmless the
indemnified party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i) effected
with its written consent or (ii) effected without its written consent if the
settlement is entered into more than twenty business days after the indemnifying
party shall have received a request from the indemnified party for reimbursement
for the fees and expenses of counsel (in any case where such fees and expenses
are at the expense of the indemnifying party) and, prior to the date of such
settlement, the indemnifying party shall have failed to comply with such
reimbursement request. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement or compromise of, or
consent to the entry of judgment with respect to, any pending or threatened
action in respect of which the indemnified party is or could have been a party
and indemnity or contribution may be or could have been sought hereunder by the
indemnified party, unless such settlement, compromise or judgment (i) includes
an unconditional release of the indemnified party from all liability on claims
that are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 7 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 7(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 7(d)(i) above but also the
relative fault of the Company on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Company, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
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Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(f) In connection with the offer and sale of the Reserved Shares, the
Company agrees, promptly upon a request in writing, to indemnify and hold
harmless the Underwriters from and against any and all losses, liabilities,
claims, damages and expenses incurred by them as a result of the failure of any
Reserved Share Purchaser to pay for and accept delivery of Reserved Shares
which, by the end of the first business day following the date of this
Agreement, were subject to a properly confirmed agreement to purchase.
SECTION 8. Conditions of Underwriters' Obligations. The several obligations
of the Underwriters to purchase the Firm Shares under this Agreement are subject
to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
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<PAGE>
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Jeffrey S. Brown and Michael Singer, in their capacities
as the President and Chief Executive Officer, and Chief Financial Officer of the
Company, confirming the matters set forth in Sections 6(t), 8(a) and 8(b) and
that the Company has complied with all of the agreements and satisfied all of
the conditions herein contained and required to be complied with or satisfied by
the Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company (ii) there shall not have been
any change or any development involving a prospective change in the capital
stock or in the long-term debt of the Company or any of its subsidiaries and
(iii) the Company shall not have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 8(d)(i),
8(d)(ii) or 8(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) You shall have received on the Closing Date an opinion (satisfactory
to you and counsel for the Underwriters), dated the Closing Date, of Venture Law
Group counsel for the Company, to the effect that:
(i) the Company has been duly incorporated, is validly existing as
a corporation in good standing under the laws of its jurisdiction of
incorporation and has the corporate power and authority to carry on its business
as described in the Prospectus and to own, lease and operate its properties;
(ii) the Company is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in which the
nature of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company;
(iii) all the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights;
(iv) the Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as provided by this
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or similar rights;
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<PAGE>
(v) this Agreement has been duly authorized, executed and delivered
by the Company;
(vi) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(vii) the Registration Statement has become effective under the Act,
no stop order suspending its effectiveness has been issued and no proceedings
for that purpose are, to the best of such counsel's knowledge after due inquiry,
pending before or contemplated by the Commission;
(viii) the statements under the captions "Risk Factors - Delaware law
and our certificate of incorporation could inhibit potential acquisition bids
that may be beneficial for stockholders", "Business - Litigation", "Certain
Relationships and Related Transactions", "Shares Eligible for Future Sale" and
"Description of Capital Stock" in the Prospectus and Items 14 and 15 of Part II
of the Registration Statement, insofar as such statements constitute a summary
of the legal matters, documents or proceedings referred to therein, fairly
present the information called for with respect to such legal matters, documents
and proceedings;
(ix) the Company is not in violation of its charter or by-laws and,
to such counsel's knowledge, the Company is not in default in the performance of
any obligation, agreement, covenant or condition contained in any indenture,
loan agreement, mortgage, lease or other agreement or instrument that is
material to the Company, to which the Company is a party or by which the Company
or its property is bound;
(x) the execution, delivery and performance of this Agreement by
the Company, the compliance by the Company with all the provisions hereof and
the consummation of the transactions contemplated hereby will not (A) require
any consent, approval, authorization or other order of, or qualification with,
any court or governmental body or agency (except such as may be required under
the securities or Blue Sky laws of the various states), (B) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or, to such counsel's knowledge, any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company to which the Company is a party or by which the
Company or their respective property is bound, (C) violate or conflict with any
applicable law, rule or regulation or, to such counsel's knowledge, any
judgment, order or decree of any court or any governmental body or agency having
jurisdiction over the Company or its respective property or (D) to such
counsel's knowledge, result in the suspension, termination or revocation of any
Authorization of the Company or any other impairment of the rights of the holder
of any such Authorization;
(xi) to such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened to which the Company is or could be a party or
to which any of property is or could reasonably expected to be subject that are
required to be described in the Registration Statement or the Prospectus and are
not so described, or of any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that are not
so described or filed as required;
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<PAGE>
(xii) the Company has such Authorizations of, and has made all
filings with and notices to, all governmental or regulatory authorities and
self-regulatory organizations and all courts and other tribunals, as are
necessary to own, lease, license and operate its respective properties and to
conduct its business, except where the failure to have any such Authorization
or to make any such filing or notice would not, singly or in the aggregate,
have a material adverse effect on the business, prospects, financial condition
or results of operations of the Company; to such counsel's knowledge, each such
Authorization is valid and in full force and effect and the Company is in
compliance with all the terms and conditions thereof and with the rules and
regulations of the authorities and governing bodies having jurisdiction with
respect thereto; and no event has occurred (including, without limitation, the
receipt of any notice from any authority or governing body) which allows or,
after notice or lapse of time or both, would allow, revocation, suspension or
termination of any such Authorization or results or, after notice or lapse of
time or both, would result in any other impairment of the rights of the holder
of any such Authorization; and, to such counsel's knowledge, such Authorizations
contain no restrictions that are burdensome to the Company; except where such
failure to be valid and in full force and effect or to be in compliance, the
occurrence of any such event or the presence of any such restriction would not,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company;
(xiii) the Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended;
(xiv) to such counsel's knowledge, there are no contracts, agreements
or understandings between the Company and any person granting such person the
right to require the Company to file a registration statement under the Act with
respect to any securities of the Company except as described in the Prospectus
and the Registration Statement or to require the Company to include such
securities with the Shares registered pursuant to the Registration Statement;
and
(xv) (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements and other
financial data included therein as to which no opinion need be expressed) comply
as to form in all material respects with the Act, (B) such counsel has no reason
to believe that at the time the Registration Statement became effective or on
the date of this Agreement, the Registration Statement and the prospectus
included therein (except for the financial statements and other financial data
as to which such counsel need not express any belief) contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading and
(C) such counsel has no reason to believe that the Prospectus, as amended or
supplemented, if applicable (except for the financial statements and other
financial data, as aforesaid) contains any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
The opinion of Venture Law Group described in Section 8(e) above shall be
rendered to you at the request of the Company and shall so state therein.
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<PAGE>
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters,
as to the matters referred to in Sections 8(e)(iv), 8(e)(vi), 8(e)(viii) (but
only with respect to the statements under the caption "Description of Capital
Stock" and "Underwriting") and 8(e)(xv).
In giving such opinions with respect to the matters covered by Section
8(e)(xv) Venture Law Group and Wilson Sonsini Goodrich & Rosati may state that
their opinion and belief are based upon their participation in the preparation
of the Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are without
independent check or verification except as specified.
(g) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from Arthur Andersen LLP, independent
public accountants, containing the information and statements of the type
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(h) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(i) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(j) The Company shall not have failed on or prior to the Closing Date to
perform or comply with any of the agreements herein contained and required to be
performed or complied with by the Company on or prior to the Closing Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 9. Effectiveness of Agreement and Termination. This Agreement shall
become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the
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<PAGE>
Company on any exchange or in the over-the-counter market, (iv) the enactment,
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental authority which in
your opinion materially and adversely affects, or will materially and adversely
affect, the business, prospects, financial condition or results of operations of
the Company, (v) the declaration of a banking moratorium by either federal or
New York State authorities or (vi) the taking of any action by any federal,
state or local government or agency in respect of its monetary or fiscal affairs
which in your opinion has a material adverse effect on the financial markets in
the United States.
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each non-
defaulting Underwriter shall be obligated severally, in the proportion which the
number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 9 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you
and the Company for purchase of such Firm Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter and the Company. In any such case which does
not result in termination of this Agreement, either you or the Company shall
have the right to postpone the Closing Date, but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. If, on an Option Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than one-
tenth of the aggregate number of Additional Shares to be purchased on such date,
the non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase such Additional Shares or (ii) purchase not
less than the number of Additional Shares that such non-defaulting Underwriters
would have been obligated to purchase on such date in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of any such Underwriter
under this Agreement.
SECTION 10. Miscellaneous. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (i) if to the Company, to Data Critical
Corporation, 19820 North Creek Parkway, Suite 100, Bothell, Washington, 98011
and (ii) if to any Underwriter or to you, to
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<PAGE>
you c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue,
New York, New York 10172, Attention: Syndicate Department, or in any case to
such other address as the person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the officers or directors of any
Underwriter, any person controlling any Underwriter, the Company, the officers
or directors of the Company or any person controlling the Company, (ii)
acceptance of the Shares and payment for them hereunder and (iii) termination of
this Agreement.
If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 9), the Company agrees to reimburse the several
Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) incurred by them. Notwithstanding any termination of
this Agreement, the Company shall be liable for all expenses which it has agreed
to pay pursuant to Section 5(i) hereof. The Company also agrees to reimburse the
several Underwriters, their directors and officers and any persons controlling
any of the Underwriters for any and all fees and expenses (including, without
limitation, the fees disbursements of counsel) incurred by them in connection
with enforcing their rights hereunder (including, without limitation, pursuant
to Section 7 hereof).
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Underwriters, the
Underwriters' directors and officers, any controlling persons referred to
herein, the Company's directors and the Company's officers who sign the
Registration Statement and their respective successors and assigns, all as and
to the extent provided in this Agreement, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include a purchaser of any of the Shares from any of the
several Underwriters merely because of such purchase.
This Agreement shall be governed and construed in accordance with the laws
of the State of New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
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<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
DATA CRITICAL CORPORATION
By:
-------------------------------
Title: President and Chief
Executive Officer
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
U.S. BANCORP PIPER JAFFRAY
WARBURG DILLON READ LLC
DLJ direct Inc.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By
-----------------------------
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<PAGE>
SCHEDULE I
----------
Number of Firm Shares
Underwriters to be Purchased
Donaldson, Lufkin & Jenrette Securities
Corporation
U.S. BANCORP PIPER JAFFRAY
WARBURG DILLON READ LLC
DLJ direct Inc.
Total
<PAGE>
Annex I
[Insert names of stockholders of the Company
who will be required to sign lock ups]
<PAGE>
EXHIBIT 4.1
[SPECIMEN STOCK CERTIFICATE OF DATA CRITICAL CORPORATION]
COMMON STOCK COMMON STOCK
NUMBER SHARES
DCC [LOGO OF DATA CRITICAL]
THIS CERTIFICATE IS INCORPORATED UNDER THE LAWS SEE REVERSE FOR
TRANSFERABLE IN OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
RIDGEFIELD PARK, NJ CUSIP 237622 10 5
OR NEW YORK, NY
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
$.001 PAR VALUE PER SHARE, OF
DATA CRITICAL CORPORATION
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Michael E. Singer /s/ Jeffrey S. Brown
CHIEF FINANCIAL OFFICER [CORPORATE SEAL OF PRESIDENT AND
AND ASSISTANT SECRETARY DATA CRITICAL CORPORATION] CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
DATA CRITICAL CORPORATION
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of designation, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ______________ Custodian ________________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act _____________________________________
tenants in common (State)
UNIF TRF MIN ACT -- ______________ Custodian (until age ____)
(Cust)
_________________ under Uniform Transfers
(Minor)
to Minors Act ___________________________
(State)
Additional abbreviations may also be used though not in the above list.
</TABLE>
FOR VALUE RECEIVED, _________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated __________________________
X ______________________________________________
X ______________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
October 18, 1999
Data Critical Corporation
19800 North Creek Parkway
Suite 100
Bothell, Washington 98011
Registration Statement on Form S-1 (File No. 333-78059)
-------------------------------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 333-
78059) (the "Registration Statement") filed by you, Data Critical Corporation,
with the Securities and Exchange Commission on May 7, 1999, as amended on August
5, 1999 by Amendment No. 1 to the Registration Statement, as amended on
September 15, 1999 by Amendment No. 2 to the Registration Statement and as
amended on October 18, 1999 by Amendment No. 3, in connection with the
registration under the Securities Act of 1933, as amended, of shares of your
Common Stock (the "Shares"). As your legal counsel in connection with this
transaction, we have examined the proceedings taken and we are familiar with the
proceedings proposed to be taken by you in connection with the sale and issuance
of the Shares.
It is our opinion that the Shares, when issued and sold in the manner
described in the Registration Statement, will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever it appears in the
Registration Statement and in any amendment to it.
Very truly yours,
/s/ Venture Law Group
VENTURE LAW GROUP
A Professional Corporation
CES
<PAGE>
EXHIBIT 10.15
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of October 12, 1999, by
and between Data Critical Corp. ("Borrower") and Silicon Valley Bank ("Lender").
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Lender, Borrower is indebted to Lender pursuant to,
among other documents, a Promissory Note, dated April 10, 1997, in the original
principal amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00) (the
"Line"), a Promissory Note, dated April 10, 1997, in the original principal
amount of One Hundred Thousand and 00/100 Dollars ($100,000.00) (the "Term Note
#1") and a Promissory Note, dated April 14, 1998, in the original principal
amount of Two Hundred Fifty Thousand and 00/100 Dollars ($250,000.00) (the "Term
Note #2"). The Line, Term Note #1 and Term Note #2 are hereby sometimes referred
to collectively as the "Notes." The Line has been modified pursuant to, among
other documents, a Loan Modification Agreement, dated February 12, 1999,
pursuant to which, among other things, the principal amount was increased to One
Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00). The Notes,
together with other promissory notes from Borrower to Lender, are governed by
the terms of a Business Loan Agreement, dated April 10, 1997, as such agreement
may be amended from time to time, between Borrower and Lender (the "Loan
Agreement"). Defined terms used but not otherwise defined herein shall have the
same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred to
as the "Indebtedness".
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is
secured by a Commercial Security Agreement, dated April 10, 1997, and an
Intellectual Property Security Agreement dated April 10, 1997.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness shall
be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to the Notes.
1. The principal amount of the Term Note #1 is hereby decreased to
Thirty Six Thousand Six Hundred Fifty Four and 26/100 Dollars
($36,654.26).
2. The principal amount of the Term Note #2 is hereby decreased to
One Hundred Thirty Eight Thousand Eight Hundred Thirty Nine and
51/100 Dollars ($138,839.51).
3. The interest rate to be applied to the unpaid principal balance
of the Line is hereby increased, effective as of this date, to
1.50 percentage points over the Lender's current Index.
B. Modification(s) to the Loan Agreement.
1. The paragraph entitled "Financial Covenants" is hereby amended,
in part; to provide that Borrower shall maintain, on a monthly
basis, a maximum negative Tangible Net Worth of $750,000.00; and
to permit Borrower to incur quarterly losses, provided such
losses do not exceed $1,800,000.00 through the fiscal quarter
ending September 30, 1999, decreasing to $900,000.00 for the
fiscal quarter ending December 31, 1999. Thereafter, Borrower
shall breakeven or be profitable.
<PAGE>
2. Notwithstanding anything to the contrary contained in the
paragraph entitled "Accounts Receivable and Accounts Payable,"
Borrower's next audit shall be completed no later than November
15, 1999.
3. Notwithstanding anything to the contrary contained in the
paragraph entitled "Financial Statements," Borrower's shall
deliver to Lender, as soon as possible, but in no event later
than November 20, 1999, its October 1999 financial statements
together with Compliance Certificate.
C. Waiver of Financial Covenant Defaults.
1. Lender hereby waives Borrower's existing default under the Loan
Agreement by virtue of Borrower's failure to comply with the; (i)
Adjusted Quick Ratio for the quarter ended September 30, 1999;
(ii) Tangible Net Worth covenant as of the months ended June 30,
1999 through September 30, 1999; and (iii) Profitability covenant
as of the quarters ended June 30, 1999 and September 30, 1999.
Lender's waiver of Borrower's compliance of these covenants shall
apply only to the foregoing period. Accordingly, for the month
ending October 31, 1999, Borrower shall be in compliance with the
Tangible Net Worth covenant and for the quarter ending December
31, 1999, Borrower shall be in compliance with Adjusted Quick
Ratio covenant and Profitability covenant, as amended.
Lender's agreement to waive the above-described defaults (1) in
no way shall be deemed an agreement by the Lender to waive
Borrower's compliance with the above-described covenants as of
all other dates and (2) shall not limit or impair the Lender's
right to demand strict performance of these covenants as of all
other dates and (3) shall not limit or impair the Lender's right
to demand strict performance of all other covenants as of any
date.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Lender a fee in the amount of
Seven Thousand Five Hundred and 00/100 Dollars ($7,500.00) (the "Loan Fee"),
plus all out-of-pocket expenses. Additionally, in the event Borrower is not in
compliance with the Financial Covenants for the month ending October 31, 1999,
Borrower shall pay an additional fee in the amount of Fifty Thousand and 00/100
Dollars ($50,000.00) (the "Additional Loan Fee").
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that it has no defenses against the obligations to pay any amounts
under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness,
Lender is relying upon Borrower's representations, warranties, and agreements,
as set forth in the Existing Loan Documents. Except as expressly modified
pursuant to this Loan Modification Agreement, the terms of the Existing Loan
Documents remain unchanged and in full force and effect. Lender's agreement to
modifications to the existing Indebtedness pursuant to this Loan Modification
Agreement in no way shall obligate Lender to make any future modifications to
the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a
satisfaction of the Indebtedness. It is the intention of Lender and Borrower to
retain as liable parties all makers and endorsers of Existing Loan Documents,
unless the party is expressly released by Lender in writing. No maker, endorser,
or guarantor will be released by virtue of this Loan Modification Agreement. The
terms of this paragraph apply not only to this Loan Modification Agreement, but
also to all subsequent loan modification agreements.
2
<PAGE>
8. CONDITIONS. The effectiveness of this Change in Terms Agreement is
conditioned upon Lender's receipt of the Loan Fee.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: LENDER:
DATA CRITICAL CORP. SILICON VALLEY BANK
By: /s/ Michael E. Singer By: /s/ Peter Paulsson
---------------------------- ----------------------------
Name: Michael E. Singer Name: Peter Paulsson
-------------------------- --------------------------
Title: Chief Financial Officer Title: Vice President
------------------------- -------------------------
3
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Seattle, Washington
October 15, 1999
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 3,053 1,796
<SECURITIES> 0 0
<RECEIVABLES> 1,203 1,009
<ALLOWANCES> 21 74
<INVENTORY> 281 1,017
<CURRENT-ASSETS> 4,787 4,650
<PP&E> 1,018 1,738
<DEPRECIATION> 574 768
<TOTAL-ASSETS> 5,625 6,454
<CURRENT-LIABILITIES> 2,444 4,591
<BONDS> 0 0
19,248 20,310
0 0
<COMMON> 1,321 3,102
<OTHER-SE> (17,539) (23,263)
<TOTAL-LIABILITY-AND-EQUITY> 5,625 6,454
<SALES> 4,137 5,906
<TOTAL-REVENUES> 4,137 5,906
<CGS> 1,841 2,296
<TOTAL-COSTS> 1,841 2,296
<OTHER-EXPENSES> 8,270 7,346
<LOSS-PROVISION> 16 53
<INTEREST-EXPENSE> 50 106
<INCOME-PRETAX> (5,822) (3,780)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,822) (3,780)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,822) (3,780)
<EPS-BASIC> (5.03) (3.43)
<EPS-DILUTED> (5.03) (3.43)
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