<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-27855
----------------
DATA CRITICAL CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 91-1901482
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
19820 North Creek Parkway, Suite 100
Bothell, Washington 98011
(Address of principal executive offices)
(425) 482-7000
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [_]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: 12,361,661 shares of
common stock, $.001 par value, at August 11, 2000.
--------------------------------------------------------------------------------
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<PAGE>
DATA CRITICAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.............................. 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................... 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................. 29
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...................... 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 30
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DATA CRITICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents........................... $ 33,976 $ 35,926
Accounts receivable, net of allowance of $149 and
$273, respectively................................. 2,223 3,857
Inventories, net.................................... 863 1,214
Prepaid expenses and other.......................... 377 371
-------- --------
Total current assets.............................. 37,439 41,368
Note receivable from officer.......................... 45 45
Investment in and advances to unconsolidated
affiliate............................................ 215 218
Property, equipment and software, net................. 1,492 2,365
Other assets, net..................................... 1,860 3,382
-------- --------
Total assets...................................... $ 41,051 $ 47,378
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current portion of notes payable and capital
leases............................................. 268 142
Accounts payable.................................... 1,224 1,844
Deferred revenues................................... 1,304 1,467
Other current liabilities........................... 1,521 2,607
-------- --------
Total current liabilities......................... 4,317 6,060
Notes payable and capital leases, net of current
portion.............................................. 1,169 197
-------- --------
Total liabilities................................. 5,486 6,257
-------- --------
Commitments and contingencies
Stockholders' Equity
Undesignated preferred stock, $0.01 par value;
3,000,000 authorized, 0 issued and outstanding,
respectively....................................... -- --
Common stock and additional paid-in capital, $.001
per value, 25,000,000 shares authorized; 10,564,789
and 12,138,440 shares issued and outstanding,
respectively....................................... 61,912 74,517
Deferred compensation............................... (1,327) (1,259)
Accumulated deficit................................. (25,020) (32,137)
-------- --------
Total stockholders' equity........................ 35,565 41,121
-------- --------
Total liabilities, and stockholders' equity....... $ 41,051 $ 47,378
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE>
DATA CRITICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Six
For the Three Months Months
Ended June 30, Ended June 30,
---------------------- ----------------
1999 2000 1999 2000
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
Revenue............................. $ 1,827 $ 4,616 $ 3,585 $ 8,321
Cost of revenue..................... 757 1,723 1,417 3,195
---------- ---------- ------- -------
Gross margin...................... 1,070 2,893 2,168 5,126
---------- ---------- ------- -------
Operating expenses:
Acquired in-process research and
development...................... -- 2,800 -- 2,800
Research and development.......... 527 1,724 1,078 3,199
Sales and marketing............... 924 2,140 1,997 3,665
General and administrative........ 894 1,829 1,620 3,360
---------- ---------- ------- -------
Total operating expenses........ 2,345 8,493 4,695 13,024
---------- ---------- ------- -------
Loss from operations............ (1,275) (5,600) (2,527) (7,897)
Interest income (expense), net...... 11 505 6 781
---------- ---------- ------- -------
Net loss............................ (1,286) (5,095) (2,521) (7,116)
========== ========== ======= =======
Preferred stock dividends and
accretion of mandatory redemption
obligations........................ 354 -- 708 --
---------- ---------- ------- -------
Net loss attributable to common
stock.............................. $ (1,640) $ (5,095) $(3,229) $(7,116)
========== ========== ======= =======
Basic and diluted loss per common
share.............................. $ (1.15) $ (0.45) $ (2.30) $ (0.65)
========== ========== ======= =======
Weighted average shares used to
calculate basic and diluted loss
per common share................... 1,404 11,228 1,403 10,906
========== ========== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DATA CRITICAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock and
Additional Paid-in
Capital
------------------ Deferred Accumulated Stockholders'
Shares Amount Compensation Deficit Equity
---------- ------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1999................... 10,564,789 $61,912 $(1,327) $(25,020) $35,565
Common stock options
and warrants
exercised............ 132,890 77 -- -- 77
Common stock issued
and stock purchase
option, net.......... 1,270,770 9,907 -- -- 9,907
Common stock issued
for acquisition of
Elixis Corporation... 209,991 2,441 -- -- 2,441
Deferred stock
compensation......... -- 180 (180) -- --
Amortization of
deferred stock
compensation......... -- -- 248 -- 248
Net loss.............. -- -- -- (7,116) (7,116)
---------- ------- ------- -------- -------
Balance, June 30, 2000.. 12,138,440 $74,517 $(1,259) $(32,136) $41,122
========== ======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
DATA CRITICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six
Months
Ended June 30,
----------------
1999 2000
------- -------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss................................................... $(2,521) $(7,117)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 151 721
Amortization of deferred stock compensation.............. -- 248
Acquired in-process research and development............. -- 2,800
Issuance of warrants for consulting services............. 1 --
Non cash interest charge................................. -- 186
Changes in assets and liabilities:
Accounts receivable.................................... (747) (1,507)
Inventories............................................ (96) (348)
Prepaid expenses and other current assets.............. (240) 95
Accounts payable and other current liabilities......... 597 549
Deferred revenues...................................... 361 (291)
------- -------
Net cash used in operating activities................ (2,494) (4,664)
------- -------
Cash Flows From Investing Activities:
Loan to Elixis Corporation................................. -- (200)
Cash paid in the acquisition of Elixis Corporation, net of
cash acquired............................................. -- (85)
Purchases of property and equipment........................ (249) (812)
Other assets............................................... (5) (15)
------- -------
Net cash used in investing activities................ (254) (1,112)
------- -------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock and stock purchase
option, net............................................... -- 9,984
Proceeds from issuance of mandatorily redeemable preferred
stock, net................................................ 6,975 --
Proceeds from lines of credit.............................. 179 --
Proceeds from convertible notes............................ 539 --
Payment on lines of credit................................. -- (45)
Payment on notes payable and capital leases................ (24) (2,213)
------- -------
Net cash provided by financing activities............ 7,669 7,726
------- -------
Net increase in cash and cash equivalents.................... 4,921 1,950
Cash and cash equivalents at beginning of period............. 865 33,976
------- -------
Cash and cash equivalents at end of period................... $ 5,786 $35,926
======= =======
Supplemental disclosure of non-cash investing and financing
activity
Cash paid for interest..................................... $ 23 $ 47
Common stock issued to acquire Elixis Corporation ......... -- $ 2,441
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Basis of Presentation
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, physician 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, or FDA and therefore require pre-market approval
from the FDA prior to making sales. The first of these approvals was granted in
November 1997.
The accompanying unaudited consolidated financial statements of Data
Critical Corporation and its subsidiary, have been prepared in conformity with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed, or omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission, ("SEC"). In the opinion
of the Company's management, the statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. These consolidated financial
statements should be read in conjunction with the Company's audited
consolidated financial statements for the year ended December 31, 1999 included
in the Company's Form 10-K filed with the SEC on March 30, 2000.
2. Summary of Significant Accounting Principles
The financial statements consolidate the accounts of Data Critical
Corporation and its wholly owned subsidiary datacritical.com, inc. All
intercompany transactions have been eliminated.
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 original equipment manufacturer ("OEM's"),
revenue is recognized upon delivery. Maintenance and support revenue is
recognized over the term of the agreement.
The Company recognizes revenue from software development contracts involving
significant production, modification or customization of software, based on
performance milestones specified in the contract where these milestones fairly
reflect progress toward contract.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2").
The Company adopted SOP 97-2 beginning in fiscal 1999. SOP 97-2 has been
modified by SOP 98-4 and SOP 98-9 as it relates to certain transactions. These
standards generally require revenues earned on software arrangements involving
multiple elements such as software
7
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
products, upgrades, enhancements, post-contract customer support, installation
and training to be allocated to each element based on the relative fair values
of the elements. The fair value of an element must be based on evidence that is
specific to the vendor. Evidence of the fair value of each element is based on
the price charged when the element is sold separately or, if the element is not
being sold separately, the price for each element established by management
having relevant authority. The revenues allocated to software products,
including specified upgrades or enhancements, generally are recognized upon
delivery of the products. The revenues allocated to unspecified upgrades,
updates and other post-contract customer support generally are recognized
ratably over the term of the contract.
If evidence of the fair value for all elements of the arrangement does not
exist, all revenues from the arrangement are deferred until such evidence
exists or until all elements are delivered. Full guidelines for SOP 97-2 and
related modifications have not been issued. Once available, such guidelines
could lead to unanticipated changes in the Company's current revenue accounting
practices, and such changes could materially adversely affect the Company's
future revenues and earnings.
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.
Inventories
The Company's initial products are made up of the Company's proprietary
software applications which it integrates with hardware that is acquired from
third parties as well as hardware made by third parties to the Company's
specifications. Inventories consist primarily of the Company's hardware
product, components to make the product and other third-party equipment, all of
which is stated at the lower of cost or market, using the first-in, first-out
method.
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ --------
(In thousands)
<S> <C> <C>
Purchased components................................... $842 $1,160
Finished goods......................................... 21 54
---- ------
$863 $1,214
==== ======
</TABLE>
3. Net 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 their effect is antidilutive. Accordingly,
basic and diluted loss per share are equivalent. The Company has not made any
issuances or grants for nominal consideration as defined under SEC Staff
Accounting Bulletin 98.
8
<PAGE>
DATA CRITICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Acquisitions
On April 3, 2000, the Company acquired Elixis Corporation ("Elixis"), by
statutory merger into datacritical.com inc., a wholly-owned subsidiary of the
Company. Under the terms of the agreement the Company issued approximately
210,000 shares common stock. The Company also paid an aggregate of
approximately $110,000 to Elixis' option holders in exchange for cancellation
of all outstanding Elixis options and assumed other Elixis liabilities
amounting to approximately $1,327,000.
The acquisition was accounted for as a purchase and, accordingly, the
financial statements reflect valuation of all assets, including identifiable
intangibles at their estimated fair market values. Elixis's results of
operations from the date of acquisition are included in the accompanying
statement of operations.
<TABLE>
<CAPTION>
Purchase Price
Allocation
--------------
<S> <C>
Tangible assets............................................... $ 144
Product technology............................................ 1,100
Assembled workforce........................................... 200
In-process research & development............................. 2,800
Goodwill...................................................... 788
------
Total consideration........................................... $5,032
======
</TABLE>
The following unaudited pro forma information has been prepared assuming
Elixis had been acquired as of January 1, 1999. The pro forma information is
presented for informational purposes only and is not necessarily indicative of
what would have occurred if the acquisition had been made as of January 1,
1999. In addition, the pro forma information is not intended to be a projection
of future results.
<TABLE>
<CAPTION>
Year Ended
Pro forma information December 31,
--------------------- 1999
(In thousands, except per share amounts) ------------
<S> <C>
Revenue......................................................... $9,773
Net loss........................................................ $8,475
Loss per common share basic and diluted......................... $(2.85)
</TABLE>
5. Capital Stock
On June 5, 2000, the Company completed the sale of 1,230,770 shares of its
Common Stock to Aether Systems, Inc. pursuant to a Common Stock Purchase
Agreement dated June 2, 2000. In addition, Data Critical granted Aether a nine-
month option to purchase shares of its Common Stock worth $10 million at a
purchase price of $15.00 per share (if the Option is exercised within 135 days
of June 5, 2000) or $20.00 per share (if the Option is exercised more than 135
days after June 5, 2000). The Company raised $10 million in the sale of the
Shares, and intends to use the proceeds of the sale for general corporate
purposes, including, without limitation, for marketing expenses, appliance
provisioning, software development and business development.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
Some of the information in this document contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results of our future financial condition, or state other "forward-
looking" information. There may be events in the future, however, that we are
not accurately able to predict or over which we have no control. The risk
factors listed in this document, as well as any other cautionary language in
this document, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements. You should be aware that the occurrence of
any of the events described below or elsewhere in this document could have a
material and adverse effect on our business, results of operations and
financial condition.
You should read the following discussion and analysis in conjunction with
our Consolidated Financial Statements and Notes thereto included elsewhere in
this report. In addition to historical information, the following discussion
contains certain forward-looking statements that involve known and unknown
risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. You should read the cautionary statements made in
this report as being applicable to all related forward-looking statements
wherever they appear in this report. Our actual results could differ materially
from those discussed in the forward-looking statements. The differences could
be caused by a number of factors or combination of factors, including, but not
limited to, the "Important Factors That May Affect Our Business, Our Results of
Operations and Our Stock Price" described herein and in our Securities and
Exchange Commission filings from time to time, including our annual report on
Form 10-K for the year ended December 31, 1999.
Overview
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
Agilent Technologies, Inc., Siemens Medical Systems, Inc. and Protocol Systems,
Inc. We also sell our systems through OEM relationships with GE Marquette
Medical Systems, Inc.
Technology from the Elixis Acquisition
On April 3, 2000, pursuant to an agreement and plan of merger dated March
13, 2000, we acquired Elixis Corporation. As a result of the acquisition, we
issued 209,991 shares of our common stock in exchange for all of the issued and
outstanding capital stock of Elixis. This transaction was accounted for as a
purchase transaction including the acquisition of the Elixis technology and the
hiring of approximately 23 employees. In the second quarter of 2000, we wrote
off approximately $2.8 million of in-process research and development in
connection with the Elixis acquisition.
In connection with the acquisition, we conducted a valuation of the assets
acquired from Elixis, including core technology, assembled workforce and in-
process research and development, utilizing the following major assumptions:
the revenue and margin contribution of each technology (in-process and future
yet-to-be defined); the percentage of carryover of technology from products
under development and products scheduled for development in the future; the
expected life of the technology; anticipated module development and module
introduction schedules; revenue forecasts, including expected aggregate growth
rates for the business as a whole and expected growth rates for the internet
content provider industry; forecasted operating expenses, including selling,
general and administrative expenses, as a percentage of revenues; and a rate of
return of 50% utilized to discount to present value the cash flows associated
with the in-process technologies.
10
<PAGE>
As of the date of acquisition, we estimated that the WebCoder, renamed
WebChart, and other acquired technologies were 65%, completed. The percentage
completed pre-acquisition for this technology was based primarily on the
evaluation of three major factors: time-based data, cost-based data, and
complexity-based data.
As a part of the valuation discussed above management estimates and
assumptions were made. While we believe that the assumptions were made in good
faith and were reasonable when made, such estimates and assumptions remain
largely untested, as the technology is not yet in service and the other
products have been in service for only a limited period of time. Accordingly,
our estimates and assumptions may prove to be inaccurate, and we may not
realize the revenues, gross profit, growth rates, expense levels or other
variables set forth in such estimates and assumptions. See "Factors Affecting
Data Critical's Operating Results, Business Prospects and Market Price of
Stock--Acquisitions Involve Risks."
In April 2000, shortly after completion of the Elixis acquisition, we
estimated the cost to complete initial development and integration of this
technology to be approximately $433,000. The magnitude of development efforts
needed to complete these initial developments is periodically reviewed by us.
See "Factors Affecting Data Critical's Operating Results, Business Prospects
and Market Price of Stock--Rapid Technological Change Affects Our Business."
Significant technology development efforts are necessary before any one of
these products can successfully be completed and integrated into our wireless
communication products. The WebChart technology must be developed in a manner
compatible with the changing protocols and standards that are emerging in the
wireless-internet industry, and will be greatly influenced by emerging trends,
protocols and standards.
The direct impact of the WebChart technology on current and future results
of operations, liquidity and capital resources is not known. While we are
positioning ourselves for, and are expending considerable resources in
anticipation of, internet/wireless EMR transaction revenues, we may not be able
to timely or successfully develop the WebChart, which could harm our business.
We anticipated receiving a number of synergies as a result of the Elixis
acquisition, including gaining knowledgeable staff and acquiring products and
services at least partially developed, which together may reduce time-to-market
for subsequent wireless-internet product development and implementation. We
anticipate that any successful wireless-internet products or services will,
when generating material revenues, yield economies of scale in company-wide
selling, general and administrative expenses. However, there can be no
assurance that we will realize any of such benefits. See "Factors Affecting
Data Critical's Operating Results, Business Prospects and Market Price of
Stock--Potential Acquisitions."
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>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
1999 2000 1999 2000
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenue...................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue.............. 41.4% 37.3% 39.5% 38.4%
--------- --------- -------- --------
Gross margin............... 58.6% 62.7% 60.5% 61.6%
--------- --------- -------- --------
Operating expenses:
Acquired in-process
research and development.. 60.7% 33.7%
Research and development... 28.8% 37.4% 30.1% 38.4%
Sales and marketing........ 50.6% 46.4% 55.7% 44.0%
General and
administrative............ 48.9% 39.6% 45.2% 40.4%
--------- --------- -------- --------
Total operating
expenses................ 128.4% 123.3% 131.0% 122.9%
--------- --------- -------- --------
Loss from operations..... (69.8%) (60.7%) (70.5%) (61.3%)
Interest income.............. (0.6%) 10.9% 0.2% 9.4%
--------- --------- -------- --------
Net loss................. (70.4%) (49.7%) (70.3%) (51.9%)
--------- --------- -------- --------
</TABLE>
11
<PAGE>
Revenue. Revenue increased $2.8 million or 152.6% to $4.6 million for the
three months ended June 30, 2000 compared to $1.8 million for the comparable
period in 1999. Revenue increased $4.7 million or 132.1% to $8.3 million for
the six months ended June 30, 2000 compared to $3.6 million for the comparable
period in 1999. Of the $4.7 million increase $4.1 million was from direct and
OEM sales of our primary product StatView systems. For the six months ended
June 30, 2000 compared to the same period of 1999 our average StatView system
selling price increased 12% while associated unit sales increased 63%. The
remaining $0.6 million of increased revenue is comprised of $0.4 million from
the sale of physician products and services and approximately $0.2 million from
training and warranty obligations and services performed under various
marketing and distribution agreements.
Gross margin. Gross margin consists of revenue less cost of revenue. Cost of
revenue associated with our systems consists of purchased components, cost of
contract manufacturing, labor for assembly, quality control, customer service,
installation, and indirect overhead. Gross margin increased $1.8 million or
170.3%, for the three months ended June 30, 2000 compared to $1.1 million from
the comparable period in 1999. Gross margin increased $2.9 million to $5.1
million or 136.4% for the six months ended June 30, 2000 compared to $2.2
million from the comparable period in 1999. Gross margin as a percentage of
revenue increased to 62.7% in the second quarter of 2000 from 58.6% in the
comparable period in 1999 from a combination of our various revenue mix and
higher indirect overhead costs. Gross margin on our primary products, hospital
products, were approximately 64% offset slightly by lower margins for our
physician products and higher margin revenues from training and warranty
obligations and services performed under various marketing and distribution
agreements.
Research and development. Research and development expenses consist
primarily of personnel and related costs, travel and contract engineering
services. Research and development expenses increased $1.2 million or 227.1% to
$1.7 million for the three months ended June 30, 2000 compared to $0.5 million
for the comparable period in 1999. Research and development expenses increased
$2.1 million or 196.8% to $3.2 million for the six months ended June 30, 2000
compared to $1.1 million for the comparable period in 1999. Research and
development costs represented 37.4% of total revenues for the three months
ended June 30, 2000 and 28.8% for the comparable period in 1999. The increase
in research and development expenses as a percentage of total revenues reflects
additional expenditures associated with the company's acquisition of Physix,
Inc. in December 1999 and Elixis Corporation in April 2000, to develop and
enhance Data Critical's wireless-Internet physician products. We believe that
research and development costs will continue to increase in absolute dollars as
we expand our product offerings.
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 $1.2 million or 131.6% to $2.1 million for the three months
ended June 30, 2000 compared to $0.9 million for the comparable period in 1999.
Sales and marketing expenses increased $1.7 million or 83.5% to $3.7 million
for the six months ended June 30, 2000 compared to $2.0 million for the
comparable period in 1999. This increase was primarily due to increased sales
personnel and increased sales and marketing expenses, such as sales
commissions, trade shows and public relations. Sales and marketing expenses
represented 46.4% of total revenues in the second quarter of 2000 and 50.6% in
the second quarter of 1999. The decrease in marketing and sales expenses as a
percentage of total revenues reflects the rapid growth in our revenues. We
believe that we will need to continue to increase our sales and marketing
efforts to expand market penetration and increase acceptance of our products
and services.
General and administrative. General and administrative expenses consist
primarily of personnel and related expenses, travel, communication and
professional fees. General and administrative expenses increased $0.9 million
or 104.5% to $1.8 million the three months ended June 30, 2000 compared to $0.9
million for the comparable period in 1999. General and administrative expenses
increased $1.8 million or 107.3% to $3.4 million for the six months ended June
30, 2000 compared to $1.6 million for the comparable period in 1999. General
and administrative expenses represented approximately 39.6% of total revenues
in the second quarter of 2000 and 48.9% in the comparable period of 1999. This
increase was primarily due to increases in
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salary and bonus for existing personnel and the addition of regulatory and
office support staff to support the growth of our business. We believe that
general and administrative expenses will continue to increase as we expand
administrative staff and incur expenses associated with being a public company,
including annual and other public reporting costs, director and officer
liability insurance, investor relations programs and professional services
fees.
Operating expenses. Operating expenses increased $2.1 million or 92.8% to
$4.5 million in the second quarter of 2000 compared to $2.4 million in the
comparable period of 1999 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 122.3% in the three months ended June 30, 2000 from 133.7%
in the comparable period of 1999.
Other income (expense), net. Other income (expense), net, increased $516,000
to a net other income of $505,000 in the three month period ended June 30, 2000
from a net other expense of $11,000 in the comparable period of 1999. The net
figure is a combination of interest income and expense. The increase is
primarily due to interest income generated from proceeds of our initial public
offering in November of 1999 and proceeds from an issuance of common stock of
approximately $10 million in June 2000. We expect other income to increase
substantially in 2000 as compared to 1999 primarily due to the increase in cash
and cash equivalents and short-term investments. However, the amount of the
increase will be affected by changes in interest rates and the rate at which we
use the funds to support our growth.
Liquidity and Capital Resources
As of June 30, 2000, we had $35.9 million of cash and cash equivalents up
from $34.0 million at December 31, 1999. As of June 30, 2000 our principal
commitments consisted of obligations outstanding under capital and operating
leases. Working capital increased to $35.3 million at June 30, 2000 from $33.1
million at December 31, 1999.
Net cash used in operating activities was $4.7 million in the six months
ended June 30, 2000 and $2.5 million for the same comparable quarter in 1999.
Net cash used in operating activities for each of these periods primarily
consisted of net losses as well as changes in accounts receivable, prepaid
expenses, inventories, accounts payable and other current liabilities, net
deferred revenue, depreciation and amortization and other non-cash adjustments.
We expect that accounts receivable and inventories will continue to increase to
the extent our revenues continue to increase. Any such increases can be
expected to reduce cash and cash equivalents.
Net cash used in investing activities was $1.1 million in the six months
ended June 30, 2000 and $254,000 for the same comparable period in 1999. Net
cash used in investing activities in the six months ended June 30, 2000
consisted of $200,000 for the issuance of a note receivable to Elixis
Corporation, $85,000 in net cash paid for and acquired in connection with the
acquisition of Elixis Corporation and $814,000 for purchases of equipment and
systems.
Net cash provided by financing activities was $7.7 million for the six
months ended June 30, 2000, while net cash in the amount of $7.7 million was
provided during the same comparable period in 1999. Net cash provided by
financing activities during the first six months of 2000 consisted of net
proceeds in the amount of $10 million from the issuance of our common stock as
the result of common stock option and warrant exercises and the sale of 1.2
million shares, offset by $2.3 million in notes payable and line of credit
repayments. Net cash provided by financing activities during the comparable
period 1999 consisted of net proceeds from the sale of preferred stock in the
amount of $7.0 million, $179,000 from lines of credit, $539,000 the issuance of
convertible notes offset by payments on notes payable and capital leases in the
amount of $24,000.
From January 1, 1997 through June 30, 2000, we have invested a total of
approximately $2.8 million in fixed assets, consisting primarily of
manufacturing equipment, research and development equipment, computer
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equipment, related software, office furniture and leasehold improvements. We
expect to spend an additional $500,000 over the next 12 months for additional
fixed assets, principally a data center for hosting the physician applications,
additional production test equipment and a product content management system.
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%. As of June 30, 2000, no borrowings were
outstanding and $340,000 in standby letters of credit issued to provide
collateral for our Bothell facility lease was drawn under this line of credit.
We have 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 with an effective interest rate of 7.6%. As of June 30,
2000, $305,000 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
on November 8, 2004, which is five years after our initial public offering.
Although it is difficult for us to predict future liquidity requirements
with certainty, we believe that the net proceeds from our initial public
offering, together with the investment from Aether Systems and our other
existing liquidity sources and anticipated funds from operations, will satisfy
our cash requirements for at least the next 12 months. Thereafter, we may
require additional funds to support our working capital requirements or for
other purposes and may seek additional funds through public or private equity
or debt financings or from other sources. There can be no assurance that
additional financing will be available to us or that, if available, the
financing will be available on terms favorable to us and our stockholders.
Year 2000 Compliance
In 1998 we began working to address the possible effects of the potential
inability of computer programs to adequately process date information after
December 31, 1999 (Year 2000). We conducted a review of our products,
information technology and facilities computer systems to identify all software
that could be affected by the Year 2000 issue and developed and executed plans
to address it. These actions were completed in the fourth quarter of 1999. With
the passing of January 1, 2000, we report that no significant Year 2000
problems arose. These costs were expensed as incurred. No further significant
expenditures related to the Year 2000 issue are expected.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes methods
of accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. In June 1999,
the FASB issued Statement No. 137, Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133.
Statement No. 137 defers the effective date of Statement No. 133 for one year.
Statement No. 133 is now effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Because we currently hold no derivative
financial instruments nor currently engage in hedging activities, adoption of
SFAS No. 133 is expected to have no material impact on our financial condition
or results of operations.
In December 1999, SEC Staff Accounting Bulletin: No. 101--Revenue
Recognition in Financial Statements (SAB 101) was issued. This pronouncement
summarizes certain of the SEC Staff's views on applying generally accepted
accounting principles to revenue recognition. SAB 101 is required to be adopted
by the Company for the year ended December 31, 2000. The Company is currently
reviewing the requirements of SAB 101.
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In March 2000, the Financial Accounting Standards Board (FASB) released FASB
interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25", which provides
clarification of Opinion 25 for certain issues such as the determination of an
employee, the criteria for determining whether a plan qualifies as a non
compensatory plan and the accounting consequences of various modifications of
the terms of a previously fixed stock option or award. We believe that our
practices are in conformity with this guidance, and therefore interpretation
No. 44 will have no impact on the Company's financial statements.
In March 2000, the EITF reached a consensus on EITF Issue 00-3. This
consensus indicates that a software element covered by AICPA Statement of
Position ("SOP 97-2") is only present in a software hosting arrangement if the
customer has the contractual right to take possession of the software at any
time during the hosting period without significant penalty and it is feasible
for the customer to either run the software on its own hardware or contract
with another party unrelated to the vendor to host the software. Therefore, SOP
97-2 only applies to hosting arrangements in which the customer has such an
option. Arrangements that do not give the customer such an option are service
contracts and are outside the scope of SOP 97-2. The Task Force observed that
hosting arrangements that are service arrangements may include multiple
elements that affect how revenue should be attributed. The Company recognizes
revenue related to software hosting as service is provided, therefore this
consensus is not expected to have any material effect on the Company's results
of operations or its financial position.
Important Factors That May Affect Our Business, Results of Operations and Our
Stock Price
You should carefully consider the risks described below, together with all
of the other information included in this quarterly report on Form 10-Q and the
information incorporated by reference herein. If we do not effectively address
the risks we face, our business will suffer and we may never achieve or sustain
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
This quarterly report on Form 10-Q also contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward looking statements as a result
of factors that are described below and elsewhere in this quarterly report on
Form 10-Q.
If our potential customers in the healthcare industry are not willing to adopt
our products and services, our growth and revenue will be limited.
Our business model depends on our ability both to sell our products and
services to hospitals, physicians and other healthcare providers and to
generate usage by a large number of these customers. Healthcare industry
participants may not accept the transmission of critical data through networked
medical monitoring equipment and the internet as readily as we anticipate. We
believe that the complex nature of time-critical data transmission has and may
continue to hinder the development and acceptance of communications solutions
similar to ours by the healthcare industry. Conversion from traditional methods
of communication may not occur as rapidly as we expect. Even if acceptance or
conversion does occur, healthcare industry participants may use alternative
products and services offered by others.
We believe that we must gain significant market share in the healthcare
industry with our products and services before competitors introduce
alternative products or systems with features and benefits similar to ours. Our
business model is based on our belief that the value and market appeal of our
solution will grow as the number of participants and scope of data transmitted
increase. We may not achieve the critical mass of users that is necessary to
become successful. Any significant shortfall in the number of users of our
systems would reduce our growth and revenue.
Failure to achieve broad acceptance of our products and services by
physicians and other healthcare stakeholders would also severely limit our
ability to implement our internet-based business model. Achieving market
acceptance for our products and services will require substantial marketing
efforts and the expenditure
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of significant financial and other resources to create awareness and demand by
physicians and healthcare consumers. Use of our products and services requires
physicians to integrate our products and services into their office work flow
and to adopt different behavior patterns and new methods of conducting business
and exchanging information. Physicians may not choose to use our products and
services.
We cannot assure you 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. We have incurred net losses of $8.6 million from
inception through December 31, 1997, $5.8 million in 1998, $6.8 million in 1999
and $7.1 million through June 30, 2000. As of June 30, 2000, we had an
accumulated deficit of $27.0 million. We expect to continue to incur net losses
for at least the next nine to twelve months, although this timeframe could be
longer. We anticipate continuing to incur significant sales and marketing,
product development and general and administrative expenses and, as a result,
we will need to generate significantly higher revenue to achieve and sustain
profitability.
Our success is highly dependent on sales, marketing and development alliances
with a small number of strategic partners; if these strategic partners
terminate their relationships with us, our competitive position and revenue
would suffer.
We depend on our alliances with strategic partners to generate increased
acceptance of our systems. To date, we have established only a limited number
of strategic alliances, and these alliances are in the early stages of
development. We currently maintain co-marketing partnerships with Agilent
Technologies, Inc., (formerly a division of Hewlett-Packard Company), Protocol
Systems, Inc., Siemens Medical Systems, Inc., Medical Data Electronics, Inc.,
Zymed, Inc. and Datascope Corp., 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. A substantial portion of our
revenue during 1998, 1999 and the first 6 months of 2000 was derived from the
sale of systems marketed or distributed through Agilent Technologies, Inc. and
GE Marquette Medical Systems, Inc. Either of these companies may decide to
discontinue their distribution, marketing or original equipment manufacturing
relationships with us, including as a result of proposed corporate
reorganizations. Our agreements with these companies may be cancelled on short-
term notice. If either company limits or discontinues marketing or selling our
systems, our revenue would fall short of our expectations.
If any of these strategic alliances are terminated or if we fail to
establish additional alliances, we may not be able to execute our business
model and the growth of our business could possibly be hurt significantly. We
may not experience increased use of our systems even if we establish and
maintain these strategic alliances.
We expect to commit substantial resources to marketing, development and
operations expenses; if we are unable to generate increasing revenue in excess
of these commitments, we will not be able to achieve profitability.
We anticipate that our expenses will increase substantially for at least the
next 12 months as we increase our sales and marketing activities, further
develop our technology, broaden our system offerings, expand our distribution
channels and potentially pursue acquisitions. If we fail to significantly
increase our revenue as we implement our system development and distribution
strategies, we will not be able to achieve profitability. In addition, we may
not experience any revenue growth in the future, and our revenue could
decrease. Our efforts to expand our sales and marketing activities, system
offerings, and direct and indirect distribution channels and our efforts to
pursue strategic alliances may not succeed or may prove more expensive than we
currently anticipate. As a result, we cannot predict our future profitability
with any degree of certainty.
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Our quarterly financial results are likely to fluctuate and are not a good
indication of our future performance because our revenue is heavily dependent
on the timing of customer installations of our systems and our sales mix by
distribution channel.
Our revenue in any quarter depends significantly on the timing of systems
shipped and installations completed. Any unexpected delays or cancellations of
shipments or installations at the end of a quarter could substantially reduce
revenue in that quarter, hurt our revenue and impair our business in future
periods. Because we do not know when, or if, our potential customers will place
orders, finalize contracts and permit installation, we cannot accurately
predict revenue and profitability for future quarters. In addition, the mix of
sales between distribution channels will have a significant impact on quarterly
and annual revenue and profitability because we receive higher revenue and
gross margin on direct sales, including those made through our alliances with
strategic partners, than we do on original equipment manufacturer sales.
In addition, because Data Critical only began operations in March 1996, and
because the market for our hospital and physician based systems is new and
evolving, it is very difficult to predict future financial results. We plan to
significantly increase our sales and marketing, research and development and
general and administrative expenses in 2000. Our expenses are partially based
on our expectations regarding future revenues, and are largely fixed in nature,
particularly in the short term. As a result, if our revenues in a period do not
meet our expectations, our financial results will likely suffer.
We believe that quarter-to-quarter comparisons of our financial results are
not a good indication of our future performance. It is likely that in future
quarters our revenue and earnings may be below the expectations of securities
analysts and investors and, as a result, the price of our common stock may
fall. Our revenue and earnings have varied in the past, and we expect that they
will continue to vary significantly from quarter to quarter.
We are 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.
During 1998, 1999 and the first six months of 2000 substantially all of our
revenue was derived from sales of our StatView system. Although we expect that
our MobileView ECG Stat 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 18 months. Any factors that reduce the pricing of, demand for or
market acceptance of our StatView system, including competition or
technological change, could significantly reduce our revenue.
Our Internet-based business model may not be successfully implemented and is
difficult to evaluate because it is new and unproven.
We have only recently implemented our internet-based business model, and we
do not have an operating history with this model upon which you can evaluate
our prospects. In attempting to implement our internet-based business model, we
are significantly changing our business operations, sales and implementation
practices, customer service and support operations and management focus.
Developing and marketing our internet systems to the physician and to the at-
home consumer healthcare industry will also be costly and time-consuming. Our
internet systems require that hospitals, physicians and consumers manage
information in a new and different way. In order to maximize the benefits of
our internet systems, at-home healthcare consumers must be willing to allow
sensitive personal information to be stored on our internet databases. We have
not yet fully determined how to commercialize our internet systems, and we
cannot assure you that hospitals, physicians and the at-home consumer
healthcare industry will accept these systems.
We are also facing new risks and challenges, including a lack of meaningful
historical financial data upon which to plan future budgets, the need to
develop strategic relationships and other risks described below. For each of
the last three fiscal years, all of our revenue was generated from the sale of
hospital communication systems and services and no revenue was derived from our
internet-based products and services. Our operating
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history is not indicative of our future performance under our internet-based
business model, and you should not rely upon our past performance to predict
our future performance. If we fail to develop or market our internet systems,
or if hospitals, physicians and the at-home consumer healthcare industry fails
to accept our internet systems, the future growth of our business would likely
suffer.
We have recently made acquisitions and may make additional acquisitions in the
future and we may not successfully assimilate the acquired operations or
products.
We have recently acquired the businesses of Physix and Elixis and may make
additional acquisitions in the future, although there can be no assurance that
suitable companies, products or technologies will be available for acquisition.
Acquisitions entail numerous risks, including assimilation of the operations
and products, retention of key employees, diversion of our management's
attention, and uncertainties in our ability to maintain key business
relationships the acquired entities have established. In addition, if we
undertake future acquisitions, we may issue dilutive securities, assume or
incur additional debt obligations, incur large one-time expenses, and acquire
intangible assets that would result in significant future expense. Recently the
Financial Accounting Standards Board ("FASB") issued an exposure draft which in
2001 would eliminate pooling of interests accounting for acquisitions and to
eliminate the immediate write-off of acquired in-process research and
development. The effect of these changes would be to increase the portion of
the purchase price for any future acquisitions that must be charged to our cost
of revenues and operating expenses in the periods following any such
acquisitions. Any of these events could have a material adverse effect upon our
business, operating results and financial condition.
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 industries in which we operate are characterized by rapid technological
change, changes in end user preferences and the emergence of new industry
standards and practices that could render our existing systems and proprietary
technology obsolete. Our success depends, in part, on our ability to continue
to enhance our existing systems and to develop new systems that meet the
changing needs of our customers. If we are unable to develop and introduce in a
timely manner new and enhanced systems that incorporate the latest developments
in medical equipment and wireless communications technologies, our sales will
be harmed. The pace of change in information-dependent markets, such as the
healthcare industry, is rapid and there are frequent new product introductions
and evolving industry standards. We may be unsuccessful in responding to
technological developments and changing customer needs. In addition, our
systems may become obsolete due to the adoption of new technologies or
standards by our customers or competitors. We have experienced development
delays in the past and may experience similar or more significant delays in the
future. Difficulties in system development could delay or prevent the
successful introduction or marketing of new or enhanced systems.
Our infrastructure may be unable to keep pace with, and as a result, hinder our
growth.
We have rapidly and significantly expanded our operations and expect this
expansion to continue. Our revenue grew from $471,000 in 1997 to $4.1 million
in 1998 to $9.5 million in 1999. During 1999, we 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.
We expect to face increasing daily operational challenges as our business
continues to grow, and we may fail to properly manage our growth, and as a
result, could face reduced revenue and earnings.
We may not be able to effectively compete in the market for hospital-based
wireless data communications and may be forced to reduce prices, leading to
decreased revenue.
Many companies selling products using traditional methods of patient
monitoring, including direct patient oversight and monitoring through wired
systems and voice communications, are well positioned to compete
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with us in our hospital-based systems business. 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.
If our customers experience system defects, delays in transmission or security
breaches with our systems, 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 or
a well-publicized compromise of internet security, could cause loss of revenue
and market share, damage our reputation and result in liability to us. In
addition, our systems may be vulnerable to computer viruses, programming
errors, attacks by third parties or similar disruptive problems. Furthermore,
patient care could suffer and we could be liable if our systems fail to deliver
correct information in a timely manner. Our contracts attempt to limit our
liability arising from our errors; however, these provisions may not be
enforceable and may not protect us from future liability. While we have general
liability and product liability insurance, including coverage for errors and
omissions, we may not be able to maintain this insurance on reasonable terms in
the future. In addition, our insurance may not be sufficient to cover large
claims, and our insurer could disclaim coverage on claims. If we are liable for
an uninsured or underinsured claim, or if our premiums increase significantly,
our growth and earnings could be harmed.
Our failure to successfully enhance current products and services could
adversely affect the implementation of our internet-based business model.
Failure to enhance our product and service offerings to add functionality in
areas such as interfacing with the products of our strategic partners could
make it more difficult for us to implement our internet-based business model.
Developing, integrating, enhancing and customizing our products and services
will be expensive and time consuming.
Intense competition in the internet healthcare industry may hinder sales of our
internet systems.
The internet healthcare industry is intensely competitive and subject to
fragmentation, high growth and rapid technological change. We may face
significant competition from traditional healthcare information system vendors
and internet healthcare companies as they expand their product offerings. Many
of these companies have significantly greater financial resources, well-
established brand names and large installed customer bases. We may be unable to
compete unsuccessfully against these organizations.
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Failure to continue to expand and adapt our network infrastructure to
accommodate increased use by our customers could make it difficult to
successfully implement our internet-based business model.
To successfully implement our internet-based business model, we must
continue to expand and adapt our network infrastructure to accommodate
additional users, increased transaction volumes and changing customer
requirements. Our infrastructure may not accommodate increased use while
maintaining acceptable overall performance. To date, we have processed a
limited number and variety of internet-based transactions. In addition, our
internet products and services have only been used by a limited number of
physicians and healthcare consumers. An unexpectedly large increase in the
volume or pace of traffic on our web site, the number of physicians using our
internet products or our other internet-based products and services, or orders
placed by customers may require us to expand and further upgrade our
technology. This expansion and adaptation would be expensive and will divert
our attention from other activities.
Our sales are dependent on third party single-source and limited-source
suppliers; this dependency reduces our control over the manufacturing process
of our systems, which could reduce our revenue and earnings.
We use third party manufacturers to purchase necessary components and to
manufacture and test key parts of our systems, including the StatView receiver
and the AlarmView transmitter. Certain components, including the bitmap
display, are presently only available from a single source. Other parts and
components that we rely on are available from limited sources. Our reliance
upon these single or limited-source suppliers and third party manufacturers
involves risks and uncertainties, including the possibility of a shortage or
discontinuation of key components and reduced control over delivery schedules,
manufacturing capability, quality and cost. Any reduced availability of these
components or key parts, when needed, could delay the delivery of complete
systems, result in the delayed payment or cancellation of orders by our
customers and cause our revenue and earnings to decline.
If we lose members of our senior management team, we may not be able to
successfully manage our business or achieve our objectives and our competitive
position and growth would suffer.
Our success will depend significantly on the continued contributions of our
senior management team, many of whom would be difficult to replace. In
particular, we believe that our future success depends on Dr. David Albert,
Chief Scientist and Chairman of the Board; Jeffrey Brown, President and Chief
Executive Officer and Michael Singer, Chief Financial Officer. We maintain key
person life insurance on the life of Jeffrey Brown in the amount of $1.0
million.
We may not be able to hire and retain the personnel necessary to support our
expanding business, which could threaten our future growth.
We believe our future success will depend in large part on our ability to
identify, attract and retain engineering, sales and marketing, and customer
service and support personnel. Because of the complexity of our systems and
technologies, we are substantially dependent upon the continued service of our
existing engineering personnel as well as future hiring of engineers with high
levels of experience in designing complex systems like ours. In addition,
although we have recently expanded our direct sales force and plan to hire
additional sales personnel, we need to substantially expand our sales
operations and marketing efforts, both domestically and internationally, in
order to increase market awareness and sales of our systems. Our systems
require a sophisticated sales effort targeted at several people within the
information technology departments of our prospective customers.
Furthermore, we currently have a small customer service and support
organization and will need to increase our staff to support new customers and
the expanding needs of existing customers. Hiring personnel is highly
competitive in our industry due to the limited number of people available with
the necessary technical skills. We face intense competition for this personnel,
and we cannot assure you that we will be able to hire and retain them in
sufficient numbers.
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Federal and state legislation and regulation affecting the healthcare industry
could severely restrict our ability to operate our business.
We are subject to federal and state legislation and regulation affecting the
healthcare industry. Existing and new laws and regulations applicable to the
healthcare industry could have a material adverse effect on our ability to
operate our business. The federal and state governments extensively regulate
the confidentiality and release of patient records. Additional legislation
governing the distribution of medical records and health information has been
proposed at both the federal and state level. It may be expensive to implement
security or other measures designed to comply with any new legislation.
Moreover, we may be restricted or prevented from delivering patient records or
health information electronically.
Other legislation currently being considered at the federal level could also
negatively affect our business. For example, the Health Insurance Portability
and Accountability Act of 1996 mandates the use of standard transactions and
identifiers, prescribed security measures and other provisions within two years
after the adoption of final regulations by the Department of Health and Human
Services. Because we intend to market some of our services as meeting these
regulatory requirements, our success will also depend on other healthcare
participants complying with these regulations.
A federal law commonly known as the Medicare/Medicaid anti-kickback law, and
several similar state laws, prohibit payments that are intended to induce
physicians or others to acquire, arrange for or recommend the acquisition of
healthcare products or services. Another federal law, commonly known as the
Stark law, prohibits physicians from referring Medicare and Medicaid patients
for designated health services to entities with which they have a financial
relationship, unless that relationship qualifies for an explicit exception to
the referral ban. The application and interpretation of these laws are complex
and difficult to predict and could constrain our financial and marketing
relationships or our ability to obtain pharmaceutical company sponsorship for
our products.
State restrictions on the practice of medicine may negatively affect our
activities.
Any finding in a state that we are not in compliance with its laws could
require us to restructure our services, which could adversely affect our
revenues or share price. The laws in some states prohibit some business
entities, such as Data Critical, from practicing medicine. This is commonly
referred to as the prohibition against the "corporate practice of medicine."
These laws generally prohibit us from employing physicians to practice medicine
or from directly furnishing medical care to patients. Each state requires
licensure for the practice of medicine within that state, and some states
consider the receipt of an electronic transmission of selected healthcare
information in that state to be the practice of medicine. Some states have
similar prohibitions on corporate practice and licensure requirements for other
regulated health care professions (for example, nurse practitioners or
pharmacists). These laws restrict our activities and the extent to which we can
provide medical advice to consumers, physicians and others. If challenged, our
activities may not be found to be in compliance with these laws. We are also
expanding internationally, and may face similar restrictions on our activities
outside the United States.
The internet is subject to many legal uncertainties and potential government
regulations that may decrease demand for our systems, increase our cost of
doing business or otherwise have a material adverse effect on our financial
results or prospects.
Our internet business model is subject to evolving government regulation of
the internet. Existing as well as new laws and regulations could severely
restrict our ability to operate our business. Any new law or regulation
pertaining to the internet, or the application or interpretation of existing
laws, could decrease demand for our internet systems, increase our cost of
doing business or otherwise have a material adverse effect on our financial
results and prospects.
Laws and regulations may be adopted in the future that address internet-
related issues, including online content, user privacy, pricing and quality of
products and services. For example, although it was held
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unconstitutional, in part, the Communications Decency Act of 1996 prohibited
the transmission over the internet of various types of information and content.
In addition, several telecommunications carriers are seeking to have
telecommunications over the internet regulated by the Federal Communications
Commission in the same manner as other telecommunications services. Because the
growing popularity and use of the internet has burdened the existing
telecommunications infrastructure in many areas, local exchange carriers have
petitioned the FCC to regulate internet service providers in a manner similar
to long distance telephone carriers and to impose access fees on the internet
service providers.
The United States or foreign nations may adopt legislation aimed at
protecting internet users' privacy. This legislation could increase our cost of
doing business and negatively affect our financial results. For example, the
Federal Trade Commission started enforcing requirements under the Children's
Online Privacy Protection Act in April 2000. The act applies to the online
collection of personal information from children under 13, and imposes
significant compliance burdens and potential penalties on operators of web
sites that collect covered information. Moreover, it may take years to
determine the extent to which existing laws governing issues like property
ownership, libel, negligence and personal privacy are applicable to the
internet. Currently, U.S. privacy law consists of disparate state and federal
statutes regulating specific industries that collect personal data. Most of
them predate and therefore do not specifically address online activities.
However, European nations are now implementing a European Union Data Privacy
Directive regulating the transmission and storage of personal information and
data. In addition, a number of comprehensive legislative and regulatory privacy
proposals are now under consideration by federal, state and local governments
in the United States. In some cases, such as the European Directive, these
comprehensive privacy proposals include special rules that provide added
protections for sensitive information, including information about health and
medical conditions.
The applicability to the internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is also uncertain and may take years to resolve. Demand for
our internet-based systems may be affected by additional regulation of the
internet in these areas.
State and federal laws that protect individual health information may limit our
plans to collect, use and disclose that information.
If we fail to comply with current or future laws or regulations governing
the collection, dissemination, use and confidentiality of patient health
information, this failure could have a material adverse effect on our business,
operating results and financial condition.
Consumers sometimes enter private health information about themselves or
their family members when using our services. Physicians or other health care
professionals who use our products will directly enter health information about
their patients, including information that constitutes a medical record under
applicable law, that we will store on our computer systems. Also, our systems
record use patterns when consumers access our databases that may reveal health-
related information or other private information about the user. Numerous
federal and state laws and regulations, the common law, and contractual
obligations govern collection, dissemination, use and confidentiality of
patient-identifiable health information, including:
. state privacy and confidentiality laws;
. our contracts with customers and partners;
. state laws regulating health care professionals, such as physicians,
pharmacists and nurse practitioners;
. Medicaid laws;
. the Health Insurance Portability and Accountability Act of 1996 and
related rules proposed by the Health Care Financing Administration; and
. Health Care Financing Administration standards for internet transmission
of health data.
The U.S. Congress has been considering proposed legislation that would
establish a new federal standard for protection and use of health information.
In addition, the laws of other countries also govern the use of and
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disclosure of health information. Any failure by us or our personnel or
partners to comply with any of these legal and other requirements could result
in material liability. Although we have systems in place for safeguarding
patient health information from unauthorized disclosure, these systems may not
preclude successful claims against us for violation of applicable law or other
requirements. Other third-party sites or links that consumers access through
our web sites also may not maintain systems to safeguard this health
information, or may circumvent systems we put in place to protect the
information from disclosure. In some cases, we may place our content on
computers that are under the physical control of others, which may increase the
risk of an inappropriate disclosure of health information. For example, we
currently contract out the hosting of our websites to third parties. In
addition, future laws or changes in current laws may necessitate costly
adaptations to our systems.
In 2000, the Department of Health and Human Service expects to finalize
proposed regulations at the federal level authorized under the Health Insurance
Portability and Accountability Act of 1996. These proposed regulations will
establish a new federal standard for privacy of health information. We believe
that these regulations, which will not be effective until two years from
finalization, will directly regulate some aspects of our business. Achieving
compliance with these regulations could cost us significant amounts or delay or
prevent implementation of our business model, and any noncompliance by us could
result in civil and criminal penalties. In addition, development of related
federal and state regulations and policies on confidentiality of health
information could negatively affect our business.
We intend to develop medical information systems and market research
services that we will use to collect, analyze and report aggregate medical
care, medical research, outcomes and financial data pertaining to items such as
prescribing patterns and usage habits. Some states have enacted legislation
regulating the aggregation of health information and the manipulation, use and
ownership of that aggregated data, even when this data does not reveal the
patient's identity. Because this area of the law is rapidly changing, our
collection, analysis and reporting of aggregate healthcare data maintained in
our database may not at all times and in all respects comply with laws or
regulations governing the ownership, collection and use of this data. Future
laws or changes in current laws governing the ownership, collection and use of
aggregate healthcare data may necessitate costly adaptations to our systems or
limit our ability to use this data.
We may experience substantial delays or difficulties in obtaining required
governmental approvals; failure to obtain governmental approvals would hinder
our ability to provide our existing systems or introduce future systems and
could reduce our sales.
As a manufacturer of wireless telecommunications systems, we are regulated
under the Communications Act of 1934, as amended, the Telecommunications Act of
1996 and Federal Communications Commission regulations, as well as the
applicable laws and regulations of the various states administered by state
public service commissions. Regulatory requirements affecting our operations
may change. Any changes may hurt our business by hindering our ability to
compete with other wireless telecommunications product manufacturers, to
continue providing our existing systems or to introduce future systems or
system enhancements. Our systems are also considered medical devices and are
regulated by the FDA. Before we can market our systems, we must obtain
pre-market notification clearance under Section 510(k) of the Federal Food,
Drug, and Cosmetic Act. In addition, material changes to our systems may also
require FDA review and clearance prior to marketing or sale in the U.S. The
process of obtaining 510(k) clearance can be expensive and time-consuming, and
may require the submission of extensive supporting data. If the 510(k) process
is extended for a considerable length of time for any of our new systems, the
commencement of commercial sales of our new systems will be delayed
substantially or indefinitely.
Because we are a provider of healthcare related systems, extensive and
frequently changing federal regulations govern the licensing, conduct of
operations, and other aspects of our business. Federal certification and
licensing programs establish standards for day-to-day operation of our research
and manufacturing facilities. Regulatory agencies verify our compliance with
these standards through periodic inspections. Although we have been found to be
in compliance with all these standards to date, our facilities may not pass
future inspections conducted to ensure compliance with federal or any other
applicable licensing or certification laws.
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<PAGE>
We must also comply with extensive federal and state regulation relating to
the confidentiality and release of patient medical records. New legislation
governing the distribution of medical records has been proposed at both the
federal and state levels. It may be costly to implement security or other
measures designed to comply with any new legislation. Moreover, we may be
restricted or prevented from delivering patient records electronically. We
cannot assure you that we will not be required to incur significant costs to
comply with current or future laws or that we will not be materially hurt by
the cost of the compliance.
Furthermore, we may expand sales of our systems to international markets. An
expansion would require us to comply with a wide variety of foreign laws and
practices, tariffs and other trade barriers. If we fail to obtain the necessary
regulatory approvals in foreign markets on a timely basis, our revenue could be
materially reduced.
FDA and FTC regulations on advertising and promotional activities may be
burdensome and may negatively affect our ability to provide some applications
or services, which could lead to higher than anticipated costs or lower than
anticipated revenue.
Complying with Food and Drug Administration and Federal Trade Commission
regulations may be time consuming, burdensome and expensive and could
negatively affect our ability to continue providing some of our internet
systems, or to introduce new internet systems in a timely manner. This may
result in higher than anticipated costs or lower than anticipated revenues.
Any current or future regulatory requirements that the FDA or the FTC impose
on us or our advertisers and sponsors could harm us by:
. making it harder to persuade pharmaceutical, biotechnology and medical
device companies to advertise or promote their products on our web sites,
or to sponsor programs that we offer to healthcare professionals and the
public;
. restricting our ability to continue to provide some of our services or
content, or to introduce new services or content in a timely manner; or
. making it more expensive and time-consuming to comply with new
requirements.
As a consequence of these harms, we might lose advertising or sponsorship
revenue, spend significant amounts of our limited resources on regulatory
experts in the area of FDA or FTC compliance, or receive adverse publicity that
negatively affects share value. In addition to existing FDA and FTC regulation
of advertising and promotion by pharmaceutical, biotechnology and medical
device companies, our business faces a potential risk of increased FDA and FTC
regulation of these activities in an online context.
Changes in existing FDA regulatory requirements or policies, or our failure to
comply with current or future requirements or adoption of new requirements
could increase the cost of our internet-based business model and cause our
revenue to decline.
We face potential FDA regulation of software that we develop for use on our
website. Some computer applications and software are considered medical devices
and are subject to regulation by the FDA. If FDA regulations were applicable to
any of our products and services, complying with those regulations would be
time consuming, burdensome and expensive and could delay or prevent
introduction of new products or services.
While the FDA's policies regarding the regulation of software are evolving,
based on the FDA's informal policy statements regarding the scope of its
regulation of stand-alone software, we do not believe that our current internet
systems are subject to FDA regulation as medical devices because they do not
meet the statutory definition of a device. However, the FDA may take the view
that some of our current or future internet systems do in fact meet the
definition of a medical device and, therefore, are subject to regulation, or
the FDA may change its policies or regulations with respect to regulation of
software or internet technologies. Also, we may expand our internet system
offerings into areas that subject us to FDA regulation. If the FDA
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<PAGE>
finds that our software is subject to regulation as a medical device, the
applicable regulatory controls could include both premarket and postmarket
requirements and the FDA might require us to:
. obtain premarket clearance or approval of the medical device software
from the FDA, which might include the conduct of supporting clinical
trials or other studies;
. register ourselves as a medical device manufacturer and to list our
devices with the FDA;
. create our software in compliance with the FDA design and manufacturing
standards;
. permit the FDA to inspect our facilities and records; and
. make periodic reports to the FDA.
Political, economic and regulatory changes and consolidation in the healthcare
industry could force us to make costly modifications as to how we price and
sell our systems.
The healthcare industry is highly regulated and is influenced by changing
political, economic and regulatory factors. These factors affect the purchasing
practices and operation of healthcare organizations. Changes in current
healthcare financing and reimbursement systems could cause us to make unplanned
modifications to our systems or result in delays or cancellations of orders.
Federal and state legislatures have periodically considered programs to reform
or amend the U.S. healthcare system at both the federal and state level. These
programs may contain proposals to increase governmental involvement in
healthcare, lower reimbursement rates or otherwise change the environment in
which healthcare industry participants operate. Healthcare industry
participants may respond by reducing or postponing investment decisions,
including investments in our systems. We do not know what effect these
proposals would have on our business. Many healthcare providers are
consolidating to create integrated healthcare delivery systems with greater
market power. These providers may try to use their market power to negotiate
price reductions for our systems. If we are forced to reduce our prices, our
revenue and earnings would be harmed. As the healthcare industry consolidates,
competition for customers will become more intense.
Our activities may expose us to malpractice and other liability inherent in
healthcare delivery.
We may be exposed to malpractice or other liability against which we may not
be adequately insured, resulting in a decline in our financial results. Our
systems provide data for use by physicians, consumers and other healthcare
participants. This data may be obtained from our physician customers, strategic
partners, other third parties or, with patient consent, from the aggregation of
patient health records. Claims for injuries relating to the use of this data
may be made in the future. Also, patients who file lawsuits against doctors
often name as defendants all persons or companies with any relationship to the
doctors. As a result, patients may file lawsuits against us based on treatment
provided by physicians who use our systems. In addition, a court or government
agency may take the position that our delivery of health information directly,
including through licensed physicians, or delivery of information by a third-
party site that a consumer accesses through our web sites, exposes us to
malpractice or other personal injury liability for wrongful delivery of
healthcare services or erroneous health information. The amount of insurance we
maintain with insurance carriers may not be sufficient to cover all of the
losses we might incur from these claims and legal actions. In addition,
insurance for some risks is difficult, impossible or too costly to obtain and,
as a result, we may not be able to purchase insurance for some types of risks.
We may fail to protect our proprietary technology and to maintain access to the
proprietary information of third parties that support our competitive position;
as a result, our growth may be hurt.
Our owned and licensed intellectual property is important to our business.
We could have intellectual property infringement claims asserted against us as
the number of our competitors grows and the functionality of our systems
overlaps with competitive offerings. These claims, even if not meritorious,
could be expensive and divert our attention from our core business operations.
If we become liable to third parties for infringement of their intellectual
property rights, we could be required to pay substantial damages and to develop
alternative non-infringing technology, obtain a license or cease selling the
systems that contain the infringing intellectual
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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.
Our international expansion plans involve risks.
A key component of our strategy is expanding our operations into
international markets. To date, we have limited experience in developing and
distribution channels for our systems and we may not be able to successfully
execute our business model in these markets. Our success in these markets will
be directly linked to the success of our business partners in such activities.
If our business partners fail to successfully establish operations and sales
and marketing efforts in these markets, our business could suffer.
In addition, we face a number of risks inherent in doing business in
international markets, including, among others:
. unexpected changes in regulatory requirements;
. potentially adverse tax consequences;
. export controls relating to encryption technology;
. tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
. changing economic conditions;
. exposures to different legal standards (particularly with respect to
intellectual property and distribution of information over the internet);
. burdens of complying with a variety of foreign laws;
. fluctuations in currency exchange rates; and
. seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world.
If any of these risks occur, our business could suffer.
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 our initial public offering and
subsequent equity issuances combined with our current cash resources and credit
facilities, will be sufficient to meet our capital requirements for at least
the next 12 months. However, we may need to raise additional capital at an
earlier time to support expansion, develop new or enhanced systems, respond to
competitive pressures, acquire complementary businesses or technologies or take
advantage of other unanticipated opportunities. In addition, we have from time
to time failed to comply with covenants required by our working capital line of
credit and subordinated debt facility agreements. Both of our lenders have
granted us waivers for this noncompliance, but if we are unable to comply with
these covenants in the future, and if our lenders do not waive our
noncompliance, we may need to raise additional capital sooner than anticipated
through the sale of debt or equity securities or by entering into strategic
alliances or other arrangements. If we are unable to raise additional capital
on reasonable terms and in a timely fashion, our financial position will
decline. Furthermore, any additional issuance of equity securities will dilute
your investment.
Trading in our shares may be affected by extreme price fluctuations, and you
could experience difficulties selling your shares.
The trading price of our common stock may be volatile. The stock market in
general, and the market for technology companies in particular, has experienced
extreme volatility that often has been unrelated to the
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operating performance of particular companies. These broad market and industry
fluctuations may decrease the trading price of our common stock, regardless of
our actual operating performance, and may make it difficult for you to resell
your shares at or above the initial offering price.
Significant fluctuations in the market price of our common stock could result
in securities class action claims against us, which could seriously harm our
cash position.
Securities class action claims have been brought against companies in the
past where volatility of the market price of that company's securities has
taken place. This kind of litigation could be very costly and could divert our
management's attention and resources. Any negative determination in this
litigation could also subject us to significant liabilities, any or all of
which could seriously harm our cash position.
State laws, our certificate of incorporation and our shareholder rights plan
may inhibit potential acquisition bids that could be beneficial for
stockholders.
Delaware law and Washington law may inhibit potential acquisition proposals.
We are restricted by the anti-takeover provisions of the Delaware General
Corporation Law, which regulates corporate acquisitions. Delaware law prevents
us from engaging in a business combination with any interested stockholder for
three years following the date that the stockholder became an interested
stockholder.
For purposes of Delaware law, a business combination includes a merger or
consolidation or the sale of more than 10% of our assets. In general, Delaware
law defines an interested stockholder as any entity or person beneficially
owning 15% or more of the outstanding voting stock of a corporation and any
entity or person affiliated with or controlling or controlled by the entity or
person. Under Delaware law, a Delaware corporation may opt out of the
antitakeover provisions. We do not intend to opt out of these antitakeover
provisions of Delaware law. The laws of Washington, where our principal
executive offices are located, also impose restrictions on some transactions
between foreign corporations and significant stockholders. Chapter 23B.19 of
the Washington Business Corporation Act prohibits a target corporation, with
exceptions, from engaging in significant business transactions with an
acquiring person for a period of five years after the acquisition, unless the
transaction or acquisition of the shares is approved by a majority of the
members of the target corporation's board of directors prior to the time of
acquisition. A corporation may not "opt out" of this statute and, therefore, we
anticipate this statute will apply to us. Depending upon whether we meet the
definition of a target corporation, Chapter 23B.19 of the WBCA may have the
effect of delaying, deferring or preventing a change in control of us.
In addition, we have adopted provisions in our certificate of incorporation
that may discourage potential acquisition proposals and delay or prevent a
change in control of our company. These provisions include the following:
. our board of directors may issue up to three million shares of preferred
stock and determine the applicable powers, preferences and rights and the
qualifications, limitations or restrictions of the stock, including
voting rights, without any vote or further action by stockholders;
. our directors are elected to staggered three-year terms;
. stockholders cannot call special meetings;
. the nomination of a director or the taking of certain actions requires
advance notice; and
. stockholders cannot take action by written consent.
In accordance with the above-described provisions, our board of directors
adopted a shareholder rights plan on June 14, 2000 pursuant to which each
holder of our common stock received a dividend of one right per share of common
stock held by such holder for the purchase of 1/1000th of a share of our Series
A Participating Preferred Stock for a price of $75.00 (as adjusted for stock
adjustments, the "Exercise Price"). The rights will become exercisable on the
earliest of (i) 10 days after a public announcement that a person has acquired
20% or more of the outstanding shares of our common stock or (ii) the close of
business 10 days after the
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commencement of a, or public announcement of a, tender offer for our common
stock which would result in a person owning 20% or more of our common stock.
Upon any person so acquiring 20% or more of our common stock (other than in a
transaction approved by the board of directors), the rights would further
entitle the holders (other than the acquiring holder) to acquire (by paying the
then current Exercise Price) shares of our common stock having a market value
equal to twice the then current Exercise Price. If after the rights become
exercisable, we are subsequently acquired by another company or person, the
rights entitle the holder to acquire shares of the common stock of the
acquiring entity (by payment of the Exercise Price) again having a market value
of twice then current Exercise Price. At any time prior to their becoming
exercisable, the rights may be redeemed the board of directors. The rights plan
has been filed as an exhibit to our Registration Statement dated July 12, 2000
and should be referred to for the complete terms and conditions of the plan and
the rights.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of any
interest expense we must pay with respect to outstanding debt instruments. The
risk associated with fluctuating interest expense is limited, however, to the
exposure related to those debt instruments and credit facilities which are tied
to market rates. We do not plan to use derivative financial instruments in our
investment portfolio. We plan to protect the safety and preserve the value of
our invested principal funds by limiting default risk, market risk and
investment risk. We plan to mitigate default risk by investing in low-risk
securities. At June 30, 2000 we had an investment portfolio of money market
funds, commercial securities and U.S. Government securities, including those
classified as short-term investments, of $31.0 million. We have assessed our
vulnerability to certain market risks, including interest rate risk associated
with financial instruments included in cash and cash equivalents. Due to the
short-term nature of these investments and our investment policies and
procedures, we believe that the risk associated with interest rate fluctuations
related to these financial instruments does not pose a material risk to the
Company.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation that arises in the
normal course of our business operations. As of the date of this filing, we are
not party to any litigation that we believe could adversely affect our business
relationship and our financial results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to the Rights Plan dated June 15, 2000 between the Company and
ChaseMellon Shareholder Services, L.L.C., on July 21, 2000 the Company issued a
dividend to its common stockholders of approximately [12,239,433] rights (one
right for each outstanding share of common stock) to purchase 1/1000 of a share
of the Company's Series A Participating Preferred Stock at a price of $75.00
(subject to adjustment) for each 1/1000 of such share.
On November 8, 1999, our registration statement on Form S-1, file number
333-78059, became effective. The offering has terminated as a result of all of
the shares offered being sold. The aggregate price of the shares offered and
sold was $40.3 million. After accounting for approximately $2.8 million in
underwriting discounts and commissions and $932,000 in other expenses, we
received proceeds of $36.5 million.
On June 5, 2000, the Company completed the sale of 1,230,770 shares of its
Common Stock to Aether Systems, Inc. pursuant to a Common Stock Purchase
Agreement dated June 2, 2000. In addition, Data Critical granted Aether a nine-
month option to purchase shares of its Common Stock worth $10 million at a
purchase price of $15.00 per share (if the Option is exercised within 135 days
of June 5, 2000) or $20.00 per share (if the Option is exercised more than 135
days after June 5, 2000). The Company raised $10 million in the sale of the
Shares, and intends to use the proceeds of the sale for general corporate
purposes, including, without limitation, for marketing expenses, appliance
provisioning, software development and business development.
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ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
3.1(A) Amended and Restated Certificate of Incorporation of Data Critical.
3.2(A) Amended and Restated Bylaws of Data Critical.
3.3 Certificate of Designations of Rights, Preferences and Privileges of
Series A Participating Preferred Stock of Data Critical Corporation.
4.1(A) Amended and Restated Registration Rights Agreement dated February
22, 1995, as amended.
4.2(A) 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.
4.3(A) Form of Common Stock Purchase Warrant issued in connection with the
bridge loan financings.
4.4(A) Common Stock Purchase Warrant dated July 10, 1996 issued by Data
Critical in favor of Nomadics, Inc.
4.5(A) Common Stock Purchase Warrant dated July 10, 1996 issued by Data
Critical in favor of Colin Cumming.
4.6(C) Registration Rights Agreement, dated as of June 2, 2000, by and
between Data Critical Corporation and Aether Systems, Inc.
4.7(D) Rights Agreement, dated as of June 15, 2000, between Data Critical
Corporation and ChaseMellon Shareholder Services, L.L.C.
10.1(B) Amendment to Employment Agreement dated February 24, 2000 between
Data Critical and Michael E. Singer.
10.2(B)** Second Amendment to Distribution and License Agreement dated January
19, 2000 between Data Critical and GE Marquette Medical Systems,
Inc.
10.3(C) Common Stock Purchase Agreement, dated as of June 2, 2000, by and
between Data Critical Corporation and Aether Systems, Inc.
10.4(C) Option Agreement, dated as of June 5, 2000, by and between Data
Critical Corporation and Aether Systems, Inc.
27.1 Financial Data Schedule
</TABLE>
--------
** Registrant has sought confidential treatment pursuant to Rule 406 for
portions of the referenced exhibit.
(A) Incorporated herein by reference to the Company's Registration
Statement on Form S-1, as amended (File No. 333-78059) filed with the
Commission on May 7, 1999.
(B) Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
(C) Incorporated herein by reference to the Company's Current Report on
Form 8-K filed on June 22, 2000.
(D) Incorporated herein by reference to the Company's Registration
Statement on Form 8-A filed July 12, 2000.
(b) Reports on Form 8-K.
On April 18, 2000 we filed a Current Report on Form 8-K reporting our April
3, 2000 acquisition of Elixis Corporation.
On June 22, 2000 we filed a Current Report on Form 8-K reporting our June 2,
2000 sale of 1,230,770 shares of Common Stock to Aether Systems, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report be signed on its behalf by the
undersigned thereunto duly authorized.
DATA CRITICAL CORPORATION
(Registrant)
Date: August 14, 2000
/s/ Michael E. Singer
By: _________________________________
Michael E. Singer
Vice President and Chief Financial
Officer
(Authorized Officer and
Principal Financial Officer)
31
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
3.1(A) Amended and Restated Certificate of Incorporation of Data Critical.
3.2(A) Amended and Restated Bylaws of Data Critical.
3.3 Certificate of Designations of Rights, Preferences and Privileges of
Series A Participating Preferred Stock of Data Critical Corporation.
4.1(A) Amended and Restated Registration Rights Agreement dated February
22, 1995, as amended.
4.2(A) 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.
4.3(A) Form of Common Stock Purchase Warrant issued in connection with the
bridge loan financings.
4.4(A) Common Stock Purchase Warrant dated July 10, 1996 issued by Data
Critical in favor of Nomadics, Inc.
4.5(A) Common Stock Purchase Warrant dated July 10, 1996 issued by Data
Critical in favor of Colin Cumming.
4.6(C) Registration Rights Agreement, dated as of June 2, 2000, by and
between Data Critical Corporation and Aether Systems, Inc.
4.7(D) Rights Agreement, dated as of June 15, 2000, between Data Critical
Corporation and ChaseMellon Shareholder Services, L.L.C.
10.1(B) Amendment to Employment Agreement dated February 24, 2000 between
Data Critical and Michael E. Singer.
10.2(B)** Second Amendment to Distribution and License Agreement dated January
19, 2000 between Data Critical and GE Marquette Medical Systems,
Inc.
10.3(C) Common Stock Purchase Agreement, dated as of June 2, 2000, by and
between Data Critical Corporation and Aether Systems, Inc.
10.4(C) Option Agreement, dated as of June 5, 2000, by and between Data
Critical Corporation and Aether Systems, Inc.
27.1 Financial Data Schedule
</TABLE>
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** Registrant has sought confidential treatment pursuant to Rule 406 for
portions of the referenced exhibit.
(A) Incorporated herein by reference to the Company's Registration
Statement on Form S-1, as amended (File No. 333-78059) filed with the
Commission on May 7, 1999.
(B) Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
(C) Incorporated herein by reference to the Company's Current Report on
Form 8-K filed on June 22, 2000.
(D) Incorporated herein by reference to the Company's Registration
Statement on Form 8-A filed July 12, 2000.
32
