SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
Form 8-K/A
AMENDMENT NO. 1
TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
June 7, 2001
-------------------------
Date of Report
(Date of earliest event reported)
DATA CRITICAL CORPORATION
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 000-27855 91-1901482
- ----------------------------- --------------------- -------------------
(State or Other (Commission File No.) (IRS Employer
Jurisdiction of Incorporation) Identification No.)
19820 North Creek Parkway, Suite 100
Bothell, Washington 98011
- --------------------------------------------------------------------------------
(Address of principal executive offices, including Zip Code)
(425) 482-7000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Item 2. Acquisition or Disposition of Assets
This Form 8-K/A Amendment No. 1 to Data Critical Corporation's current
report on Form 8-K dated June 7, 2000 relates to Data Critical's acquisition of
VitalCom Inc. pursuant to an Agreement and Plan of Merger by and among Data
Critical, Viper Acquisition Corp., a Delaware corporation and wholly owned
subsidiary of Data Critical, and VitalCom. The purpose of this amendment is to
provide the financial statements of VitalCom required by Item 7(a) of Form 8-K
and the audited pro forma financial information required by Item 7(b) of Form 8-
K, which financial information was excluded from the original filing on in
reliance upon Items 7(a)(4) and 7(b)(2) of Form 8-K.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
VITALCOM INC.
ANNUAL FINANCIAL STATEMENTS
Page
Independent Auditors' Report of Deloitte & Touche LLP................................ 3
Balance Sheets as of December 31, 1999 and 2000...................................... 4
Statements of Operations for the years ended December 31, 1998, 1999 and 2000........ 5
Statements of Stockholders' Equity for the years ended December 31, 1998, 1999
and 2000............................................................................. 6
Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000........ 7
Notes to Financial Statements........................................................ 8
INTERIM FINANCIAL STATEMENTS
Statements of Operations for the period beginning January 1, 2001 ended June 7,
2001 and the six months ended June 30, 2000.......................................... 21
Statement of Stockholders' Equity for the period beginning January 1, 2001 ended
June 7, 2001......................................................................... 22
Statements of Cash Flows for the period beginning January 1, 2001 ended June 7, 2001
and the six months ended June 30, 2000............................................... 23
Notes to Financial Statements........................................................ 24
2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of VitalCom Inc.,
We have audited the accompanying balance sheets of VitalCom Inc. (the
Company) as of December 31, 1999 and 2000 and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of VitalCom Inc. at December 31, 1999 and 2000,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 10, 2001
(Except for Note 10, for which
the date is March 12, 2001)
3
VITALCOM INC.
BALANCE SHEETS
December 31,
-----------
1999 2000
---- ----
ASSETS
------
Current assets:
Cash and cash equivalents.................................................. $ 7,107,420 $ 3,657,100
Restricted cash............................................................ -- 2,500,000
Short-term investments..................................................... 5,273,037 --
Accounts receivable, net of allowance for doubtful accounts and returns of
$346,079 and $248,551 in 1999 and 2000, respectively...................... 2,309,392 3,828,821
Inventories (Note 2)....................................................... 1,504,952 1,644,181
Prepaid expenses........................................................... 530,833 134,396
------------ ------------
Total current assets.................................................. 16,725,634 11,764,498
Property:
Machinery and equipment.................................................... 1,560,013 1,777,578
Office furniture and computer equipment.................................... 2,558,815 2,266,527
Leasehold improvements..................................................... 181,778 200,419
------------ ------------
4,300,606 4,244,524
Less accumulated amortization and depreciation............................. (2,831,090) (2,536,061)
------------ ------------
Property, net......................................................... 1,469,516 1,708,463
Other assets 68,237 75,872
Goodwill, net (Note 1).......................................................... 423,025 390,485
------------ ------------
Total assets $ 18,686,412 $ 13,939,318
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable........................................................... $ 508,322 $ 1,609,559
Accrued payroll and related costs.......................................... 959,862 999,488
Accrued warranty costs..................................................... 516,297 532,898
Accrued liabilities (Note 7)............................................... 568,336 573,395
Current portion of capital lease obligations............................... 28,796 --
------------ ------------
Total current liabilities............................................. 2,581,613 3,715,340
Commitments and contingencies (Note 4)
Stockholders' equity (Notes 6 and 8):
Common stock, including paid-in-capital, $0.0001 par value; 25,000,000
shares authorized; 8,462,453 shares issued and 8,098,903 shares
outstanding at December 31, 2000; 8,281,112 shares issued and
7,917,563 shares outstanding at December 31, 1999........................ 37,665,468 38,160,751
Note receivable for common stock sales..................................... (30,590) (30,590)
Treasury stock, at cost.................................................... (740,154) (740,154)
Accumulated deficit........................................................ (20,789,925) (27,166,029)
------------ ------------
Total stockholders' equity............................................ 16,104,799 10,223,978
------------ ------------
Total liabilities and stockholders' equity...................................... $ 18,686,412 $ 13,939,318
============ ============
See notes to financial statements.
4
VITALCOM INC.
STATEMENTS OF OPERATIONS
For the Years ended December 31,
--------------------------------------------------------
1998 1999 2000
----------- ----------- -----------
Revenues.............................................. $20,858,926 $16,289,617 $17,202,482
Cost of revenues...................................... 9,561,471 7,588,487 8,513,194
----------- ----------- -----------
Gross profit.......................................... 11,297,455 8,701,130 8,689,288
Operating expenses:
Sales and marketing.............................. 6,793,879 6,128,233 6,061,432
Research and development......................... 4,697,750 5,729,148 7,220,144
General and administrative....................... 2,158,558 2,357,687 2,227,032
----------- ----------- -----------
Total operating expenses.................... 13,650,187 14,215,068 15,508,608
----------- ----------- -----------
Operating loss........................................ (2,352,732) (5,513,938) (6,819,320)
Other income, net..................................... 889,621 758,555 479,216
----------- ----------- -----------
Loss before provision for income taxes................ (1,463,111) (4,755,383) (6,340,104)
Provision for income taxes............................ 25,200 36,000 36,000
----------- ----------- -----------
Net loss.............................................. $(1,488,311) $(4,791,383) $(6,376,104)
=========== =========== ===========
Net loss per basic and diluted common share........... $ (0.18) $ (0.60) $ (0.79)
=========== =========== ===========
Weighted average basic and diluted common shares...... 8,148,085 8,045,998 8,020,263
=========== =========== ===========
See notes to financial statements.
5
VITALCOM INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1999 and 2000
Note
Common Stock Treasury Stock Receivable Total
------------ -------------- For Common Accumulated Stockholders'
Shares Amount Shares Amount Stock Sales Deficit Equity
------ ------ ------ ------ ----------- ------- ------
Balances, January 1, 1998........... 8,038,547 $37,226,125 $(194,960) $(14,510,231) $ 22,520,934
Stock options exercised............. 28,250 24,549 24,549
Note receivable for common stock
sales.......................... 10,000 30,600 (30,600)
Cash collections on note
receivable....................... 10 10
Cancellation of note receivable
for common stock................. (40,000) (194,960) 194,960
Stock issued pursuant to
employee stock purchase plan..... 52,703 145,264 145,264
Stock issued pursuant to 401(k)
plan employer match.............. 73,471 259,985 259,985
Net loss............................ (1,488,311) (1,488,311)
--------- ----------- -------- --------- --------- ------------ ------------
Balances, December 31, 1998......... 8,162,971 37,491,563 (30,590) (15,998,542) 21,462,431
Stock options exercised............. 16,750 14,639 14,639
Acquisition of treasury stock....... (363,550) (740,154) (740,154)
Stock issued pursuant to
employee stock purchase plan..... 74,334 88,240 88,240
Stock issued pursuant to 401(k)
plan employer match.............. 27,057 71,026 71,026
Net loss............................ (4,791,383) (4,791,383)
--------- ----------- -------- --------- --------- ------------ ------------
Balances, December 31, 1999......... 8,281,112 37,665,468 (363,550) (740,154) (30,590) (20,789,925) 16,104,799
Stock options exercised............. 101,320 336,489 336,489
Compensation costs related to
stock options issued to
non-employee..................... 33,760 33,760
Stock issued pursuant to
employee stock purchase plan..... 80,021 125,034 125,034
Net loss............................ (6,376,104) (6,376,104)
--------- ----------- -------- --------- --------- ------------ ------------
Balances, December 31, 2000......... 8,462,453 $38,160,751 (363,550) $(740,154) $ (30,590) $(27,166,029) $ 10,223,978
========= =========== ======== ========= ========= ============ ============
See notes to financial statements.
6
VITALCOM INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
-------------------------------------------------
1998 1999 2000
----------- ----------- -----------
Cash flows used in operating activities:
Net loss...................................................... $(1,488,311) $(4,791,383) $(6,376,104)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.............................. 735,338 693,027 681,239
Provision for doubtful accounts and sales returns.......... 79,934 (4,068) (97,529)
Common stock contribution to 401(k) plan................... 259,985 71,026 --
Compensation costs related to stock options to non-
employee................................................... -- -- 33,760
Loss on disposal of property............................... 1,311 7,004 38,352
Changes in operating assets and liabilities:
Accounts receivable........................................ (842,163) 2,309,971 (1,421,900)
Inventories................................................ 420,600 (113,053) (139,229)
Prepaid expenses........................................... 128,815 (390,186) 396,437
Other assets............................................... (81,959) 65,657 (7,635)
Accounts payable........................................... (155,757) 78,335 1,101,237
Accrued payroll and related costs.......................... (393,168) 154,975 39,626
Accrued warranty costs..................................... (210,797) (241,151) 16,601
Accrued liabilities........................................ (642,420) (142,919) 5,059
----------- ----------- -----------
Net cash used in operating activities...................... (2,188,592) (2,302,765) (5,730,086)
Cash flows from investing activities:
Purchases of property and equipment........................... (283,494) (481,780) (925,998)
Proceeds from sale of short-term investments.................. 630,787 96,176 5,273,037
Increase in restricted cash................................... -- -- (2,500,000)
----------- ----------- -----------
Net cash provided by (used in) investing activities........ 347,293 (385,604) 1,847,039
Cash flows from financing activities:
Repayment of capital lease obligation......................... (24,874) (27,746) (28,796)
Cash collections on note receivable........................... 10 -- --
Net proceeds from issuance of common stock.................... 169,813 102,879 461,523
Acquisition of treasury stock................................. -- (740,154) --
----------- ----------- -----------
Net cash provided by (used in) financing activities........ 144,949 (665,021) 432,727
Net decrease in cash and cash equivalents....................... (1,696,350) (3,353,390) (3,450,320)
Cash and cash equivalents, beginning of year.................... 12,157,160 10,460,810 7,107,420
----------- ----------- -----------
Cash and cash equivalents, end of year.......................... $10,460,810 $ 7,107,420 $ 3,657,100
=========== =========== ===========
Supplemental disclosures of cash flow information:
Interest paid................................................. $ 12,136 $ 4,182 $ 19,293
=========== =========== ===========
Income taxes paid............................................. $ 19,861 $ 26,365 $ 25,172
=========== =========== ===========
Supplemental schedule of noncash transactions:
Notes receivable for stock sales.............................. $ 30,600
Cancellation of note receivable for stock..................... $ 194,460
See notes to financial statements.
7
VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
1. General And Summary Of Significant Accounting Policies
General and Nature of Operations--VitalCom Inc. (the Company) provides
computer networks and related communications products that acquire, interpret
and distribute real-time patient monitoring information. The Company's computer
and radio networks acquire physiological data generated by its own proprietary
ECG monitors and other manufacturers' bedside equipment located throughout a
healthcare facility. The Company's products are sold through a direct sales
force to acute care hospitals and integrated healthcare delivery networks
("IHDNs") and on an Original Equipment Manufacturer ("OEM") basis to patient
monitoring equipment manufacturers primarily located in the United States.
Management's Plans--For the year ended December 31, 2000, the Company
incurred a net loss of $6,376,104 and experienced a significant decrease in
working capital. The Company's cost structure and operating results were
negatively impacted by both continued increases in research and development
expenses and the delay in the release of its Patient Net Wireless Network
(Patient Net) product. The Patient Net product was released during the third
quarter of 2000. The Company believes that the release of its Patient Net
product will enable the Company to improve its operating performance during
fiscal 2001. The Company plans to significantly reduce research and development
expenses in fiscal 2001, and is presently re-negotiating the terms of its line
of credit arrangement to release the restriction on cash. However, if
management is unable to execute its business plan, the Company may need to
obtain additional financing or restructure its operations. The Company believes
that existing cash resources, cash flows from operations and line of credit
facility will be sufficient to fund the Company's operations for at least the
next twelve months.
Fair Value of Financial Instruments--The Company's balance sheets include
the following financial instruments: cash and cash equivalents, restricted cash,
accounts receivable, accounts payable, and accrued liabilities. The Company
considers the carrying value of cash and cash equivalents, restricted cash,
accounts receivable, accounts payable, and accrued liabilities in the financial
statements to approximate fair value for these financial instruments because of
the relatively short period of time between origination of the instruments and
their expected realization.
Cash Equivalents--Cash equivalents include highly liquid investments
purchased with an original maturity date of three months or less. At December
31, 2000, the Company's cash equivalents were held primarily with two financial
institutions.
Restricted Cash--At December 31, 2000, the Company had $2,500,000 in
restricted cash included in a money market account pursuant to a secured lending
arrangement with Silicon Valley Bank (Note 3).
Short-Term Investments--The Company's short-term investments are classified
as available for sale. The Company's short-term investments consist of
commercial paper, money market funds and debt securities. Investments
classified as available for sale are required to be recorded at fair value and
any temporary difference between an investment's cost and its fair value is
recorded as a separate component
8
VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
of stockholders' equity. As of December 31, 1999, the fair value of
investments approximates investment cost. On December 31, 2000, the company had
no short-term investments.
Inventories--Inventories are stated at the lower of FIFO cost or market.
The Company periodically reviews inventory quantities on hand and provides for
excess and obsolete inventory based primarily on current production requirements
and forecasted product demand.
Property--Property is stated at cost. Depreciation is provided using the
straight-line method and the double declining balance method over the estimated
useful lives of the related assets, generally three to eight years. Leasehold
improvements are amortized over the lesser of the estimated useful lives of the
related improvements or the related lease term.
Long-Lived Assets--The Company accounts for the impairment and disposition
of long-lived assets in accordance with Statement of Financial Accounting
Standards No. 121 (SFAS No. 121), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed. The Company periodically
reviews the carrying value of long-lived assets based on an undiscounted cash
flow analysis to determine whether or not impairment to such value has occurred
and has determined that there was no impairment at December 31, 2000.
Goodwill--Goodwill represents the excess purchase cost over the net assets
acquired and is amortized over 20 years using the straight-line method. The
Company periodically evaluates the recoverability of goodwill based on an
undiscounted cash flow analysis related to its product sales and has determined
that there was no impairment of goodwill at December 31, 2000.
Revenue Recognition--Revenues from both Enterprise-Wide Monitoring Systems
and OEM products, which consist of both hardware and software, are recognized in
accordance with Statement of Position No. 97-2 (SOP 97-2), Software Revenue
Recognition, which was later amended in part by SOP 98-4, Deferral of the
Effective Date of a Provision of SOP 97-2, Software Recognition (SOP 98-4). As
of April 1, 1998, the Company adopted SOP 97-2, as amended by SOP 98-4. SOP 97-2
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and supercedes the guidance
contained in SOP 91-1, which the Company had previously been following. The
Company generates a portion of its revenues from licensing rights to use its
software products directly to end-users. The Company also generates revenues
from sales of hardware and third party software, and implementation, training,
and post contract support (maintenance) services performed for customers who
license its products. A typical system contract contains multiple elements of
two or more of the above items. In accordance with SOP 97-2, revenue is
allocated to each element of the contract based on vendor specific evidence of
each element's fair market value. Provided the fees are fixed and determinable
and collection is considered probable, revenue from licensing rights and sales
of hardware and third party software is recognized upon shipment. Revenue from
implementation, training and software customization services is recognized as
the corresponding services are performed. Maintenance revenue is recognized
ratably over the contractual maintenance period.
9
VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
Warranties--The Company offers warranties of various lengths depending on
the product and negotiated terms of purchase agreements with its customers. An
estimate for warranty related costs based on historical experience are recorded
at the time of sale.
Software Development Costs--Development costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
costs would be capitalized in accordance with Statement of Financial Accounting
Standards No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed. Because the Company believes that its current
process for developing software is essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized as of
December 31, 1999 or 2000.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standard No. 109 (SFAS No. 109), Accounting
for Income Taxes. This statement requires the recognition of deferred tax
assets and liabilities for the future consequences of events that have been
recognized in the Company's financial statements or tax returns. Measurement of
the deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases of
the Company's assets and liabilities result in a deferred tax asset, SFAS No.
109 requires an evaluation of the probability of being able to realize the
future benefits indicated by such asset. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion
or all of the deferred tax asset will not be realized.
Loss Per Share--Basic and diluted loss per share (EPS) is computed using
the weighted average number of common shares outstanding. Common stock
equivalents were excluded from the calculation of diluted EPS because their
effect was antidilutive.
Comprehensive Loss--In 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS
130 establishes standards for the reporting and disclosure of comprehensive
income (revenues, expenses, gains and losses) in a full set of general purpose
financial statements. For the years ended December 31, 1998, 1999, and 2000
there was no difference between comprehensive loss and net loss as reported in
the Company's financial statements.
Recent Accounting Pronouncements--Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, is effective for all fiscal years beginning after June 15, 2000.
SFAS 133, as amended, establishes accounting and reporting standards for
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS 133, certain contracts that were formerly considered derivatives may
now meet the definition of a derivative. The Company adopted SFAS 133 effective
January 1, 2001. The adoption of SFAS 133 did not have a significant impact on
the financial position, results of operations, or cash flows of the Company.
10
VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
In December 1999, Staff Accounting Bulletin No. 101 (SAB 101) was issued to
provide the Security and Exchange Commission's view in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 is effective no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. The Company has adopted this statement
during the fourth quarter of the year ended December 31, 2000. The adoption of
SAB 101 did not have a material impact on the Company's results of operations.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation. FIN 44 is an
interpretation of Accounting Principal Board's Opinion No. 25 Accounting for
Stock Issued to Employees (APB 25). Among other matters, FIN 44 clarifies the
application of APB 25 regarding the definition of employee for purposes of
applying APB 25, the criteria for determining whether a plan qualifies as non
compensatory and the accounting consequences of modifications to the terms of a
previously issued stock options or similar awards. The Company adopted the
provisions of FIN 44 in the third quarter of fiscal 2000. The adoption of FIN
44 did not have a material impact on the Company's results of operations.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles necessarily 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 these estimates.
Certain Risks and Concentrations.
Customer Concentrations--The Company's OEM revenues, which represented
57.9%, 68.6% and 52.2% of the Company's total revenues in 1998, 1999 and 2000
respectively, have historically been concentrated in a small number of OEM
customers. Approximately 46.0%, 60.9%, and 45.1% of 1998, 1999 and 2000 total
revenues, respectively, were to three customers. Accounts receivable from these
three customers accounted for 52.0%, 71.5%, and 58.7% of the Company's total
accounts receivable at December 31, 1998, 1999, and 2000, respectively. The
Company performs limited credit evaluations of its customers' financial
condition, and generally requires no collateral from its customers. The loss of
or a reduction in sales to, any such OEM customers would have a material adverse
effect on the Company's business, operating results and financial condition.
Further, sales of the Company's OEM products are dependent to a large extent
upon the Company's OEM customers selling patient monitoring devices that include
the Company's OEM products as necessary components. Any inability of such OEM
customers to sell such systems, or any election by such OEM customers not to
include the Company's products as components therein, could have a material
adverse effect on the Company's business, operating results and financial
condition.
Supplier Concentration--Certain of the Company's products utilize
components that are available in the short term only from a single or a limited
number of sources. Certain of these components, such as semiconductor devices,
have been available only on an allocation basis in the past
11
VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
and could be in scarce supply again in the future. Any inability to obtain
components in the amounts needed on a timely basis or at commercially reasonable
prices could result in delays in product introductions or interruption in
product shipments or increases in product costs, which could have a material
adverse effect on the Company's business, operating results and financial
condition until alternative sources could be developed or design and
manufacturing changes could be completed. Any such design or manufacturing
changes or increased costs could result in delayed shipments and significant
expenses in a particular quarter and therefore could materially adversely affect
operating results for any such quarter or other period.
Reclassifications--Certain reclassifications have been made to the 1999 and
1998 financial statements to conform to the 2000 presentation.
2. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist of the following at December 31:
1999 2000
---- ----
Raw materials................................................... $ 903,294 $1,187,185
Work-in-process................................................. 20,047 81,514
Finished goods.................................................. 581,611 375,482
---------- ----------
$1,504,952 $1,644,181
========== ==========
3. Revolving Line Of Credit
During the year ended December 31, 2000, the Company had a secured lending
arrangement (the "Agreement") with Silicon Valley Bank, providing for a $5.0
million revolving line of credit agreement bearing interest at the bank's prime
(9.5% at December 31, 2000) plus 0.5%. The bank does not have a security
interest in any of the Company's assets until the Company is borrowing under the
line of credit. In March 2001, the Company and the bank entered into a letter of
commitment to extend the Agreement for 60 days. The extension to the Agreement
included restrictive financial covenants that required the Company to maintain
minimum liquidity levels, a $2.5 million restriction on cash and total
liabilities to tangible net worth ratios, as well as specified annual and
quarterly net loss (after taxes) amounts. At December 31, 2000, there were no
borrowings outstanding under the Agreement and the Company was in compliance
with all covenants under the agreement, except for a profitability covenant for
which they have received a waiver. The Company has $5.0 million of cash
availability under the extended terms of the Agreement.
12
VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
4. Commitments And Contingencies
The Company leases its facilities and certain equipment under non-
cancelable operating leases expiring at various dates through 2005.
Future minimum lease payments under noncancelable operating leases are as
follows:
Operating
Lease
Year ending December 31:
2001................................................................................ $ 473,418
2002................................................................................ 615,312
2003................................................................................ 610,618
2004................................................................................ 621,588
2005................................................................................ 310,794
Thereafter.......................................................................... --
----------
$2,631,730
==========
The Company's rent expense was $349,832, $375,543, and $492,898 for the
years ended December 31, 1998, 1999 and 2000, respectively.
The Company, in the normal course of business, is subject to various legal
matters. Although it is too early to determine the ultimate outcome, in the
opinion of management, the resolution of these matters will not have a material
adverse effect on the financial statements of the Company.
5. Segment Reporting
Utilizing the management approach, the Company has broken down its business
based upon sales through its two distribution channels. The Company does not
allocate operating expenses to these segments, nor does it allocate specific
assets to these segments. Therefore, segment information reported includes only
net sales, cost of sales and gross profit.
13
VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
Selected information regarding the Company's product sectors is as follows:
Enterprise-Wide
OEM Monitoring
Products Products Total
-------- --------------- -----
Year ended December 31, 1998
Net Sales.................................................. $12,071,380 $8,787,546 $20,858,926
Cost of Sales.............................................. 6,052,828 3,508,643 9,561,471
----------- ---------- -----------
Gross Profit............................................... $ 6,018,552 $5,278,903 $11,297,455
=========== ========== ===========
Year ended December 31, 1999
Net Sales.................................................. $11,144,445 $5,145,172 $16,289,617
Cost of Sales.............................................. 5,545,323 2,043,164 7,588,487
----------- ---------- -----------
Gross Profit............................................... $ 5,599,122 $3,102,008 $ 8,701,130
=========== ========== ===========
Year ended December 31, 2000
Net Sales.................................................. $ 8,980,769 $8,221,713 $17,202,482
Cost of Sales.............................................. 4,539,826 3,973,368 8,513,194
----------- ---------- -----------
Gross Profit............................................... $ 4,440,943 $4,248,345 $ 8,689,288
=========== ========== ===========
6. Stockholders' Equity
During the year ended December 31, 1998, the Company issued 52,703 shares
of its common stock under its Employee Stock Purchase Plan for net proceeds of
$145,264; 73,471 shares of its common stock issued under the VitalCom Employee
Stock 401(k) and Profit Sharing Plan for the employer match valued at $259,985
and 28,250 shares of its common stock for exercises of stock options under the
1993 Stock Option Plan for net proceeds of $24,549. During the year ended
December 31, 1998, the Company also cancelled 40,000 shares of its common stock
that were issued during 1997 under interest bearing, non-recourse notes for
$194,960. The cancellations were due to the purchasers' forfeiting their right
to purchase the shares. In addition, the Company also issued 10,000 shares of
its common stock, under an interest-bearing, nonrecourse note in the amount of
$30,600 and received net proceeds of $10 during 1998.
During the year ended December 31, 1999, the Company issued 74,334 shares
of its common stock under its Employee Stock Purchase Plan for net proceeds of
$88,240; 27,057 shares of its common stock issued under the VitalCom Employee
Stock 401(k) and Profit Sharing Plan for the employer match valued at $71,026
and 16,750 shares of its common stock for exercises of stock options under the
1993 Stock Option Plan for net proceeds of $14,639.
In April 1999, the Company implemented a stock repurchase program whereby
up to 800,000 shares of its Common Stock could be purchased in the open market
from time to time. In October 1999 the Company terminated its stock repurchase
program. The Company repurchased 363,550 shares of Common Stock at a total
aggregate price of $740,154.
During the year ended December 31, 2000, the Company issued 80,021 shares
of its common stock under its Employee Stock Purchase Plan for net proceeds of
$125,034 and 101,320 shares of its
14
VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
common stock for exercises of stock options under its 1993 and 1996 Stock
Option Plans for net proceeds of $336,489. The Company also recorded
compensation cost of $33,760 for stock options granted to a non-employee in
exchange for services performed. This cost was calculated using the Black
Scholes-option-pricing model using the following assumptions; expected
volatility of 247%, risk free interest rate of 6%, no dividend yield and
expected life of 10 years.
7. 401(K) And Profit Sharing Plan
The Company has a 401(k) and Profit Sharing Plan (Plan) which covers
substantially all of its employees. Effective July 1, 1993, the Company amended
its profit-sharing plan to include a 401(k) provision. The 401(k) provisions in
the Plan allow eligible employees to contribute up to 15% of their income on a
tax-deferred basis, subject to IRS discrimination and maximum dollar deferral
rules. The Company, at its sole election, may make matching contributions to
the Plan. The Board of Directors approved a discretionary employer matching
contribution of $0.50 for each $1.00 the employee contributes on the first 12%
of compensation deposited as elective contributions, subject to 401(k) Plan
limitations and IRS regulations, for calendar years 1998, 1999, and 2000. The
Company's matching contributions vest to employees at 25% per year for each full
year of continuous service. The Company's 401(k) matching expense was $356,006,
$336,116, and $303,265 for the years ended December 31, 1998, 1999 and 2000,
respectively. For the year ended December 31, 2000 the Company's employer
matching contribution was made in the Company's treasury stock after the end of
2000. For the year ended December 31, 1999 the Company's employer matching
contribution was made in cash. For the year ended December 31, 1998 the
Company's employer matching contribution was made in the Company's common stock
at the end of each calendar quarter (Note 6).
The 401(k) and Profit Sharing Plan provides for an annual discretionary
contribution to a self-directed employee trust in an amount to be determined by
the Board of Directors, but limited to the amount allowable for income tax
purposes. The Company's discretionary contributions vest to the employees at
10% per year for the first four years and 20% per year for years five through
seven for each full year of continuous service, and are allocated based on
employee compensation. The Company had no profit-sharing expense for the years
ended December 31, 1998, 1999 and 2000.
8. Stock Based Compensation Plans
At December 31, 2000 the Company had three stock option plans and an
employee stock purchase plan, which are described below. The Company accounts
for these plans in accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations (APB 25). In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation. As permitted by SFAS 123, the Company
has chosen to continue to account for its stock-based compensation plans under
APB 25 and provide the expanded disclosures specified in SFAS 123. No
compensation expense has been recognized for its stock-based compensation plans.
15
VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
Had compensation costs for the stock-based compensation plans been
determined for the stock option plans and employee stock purchase plan using the
provisions of SFAS 123, the Company's net loss and loss per share would have
been increased to the pro forma amounts indicated below:
1998 1999 2000
----- ---- ----
Net loss.................................... As reported $(1,488,311) $(4,791,383) $(6,376,104)
Pro forma (2,728,095) (6,253,899) (7,975,048)
Net loss per basic and diluted share........ As reported $ (0.18) $ (0.60) $ (0.79)
Pro forma $ (0.33) $ (0.78) $ (0.99)
For purposes of estimating the compensation cost of the Company's option
grants and employee stock purchase plan in accordance with SFAS 123, the fair
value of each option grant is estimated on the date of grant using the Black-
Scholes option-pricing model with the following assumptions used for grants in
the years 1998, 1999 and 2000, respectively: expected volatility of 80%, 120%,
and 247%; risk free interest rates of 6.25% in 1998, 6.33% in 1999, and 6.0% in
2000; no dividend yield; and expected lives of 10 years for the 1993 Stock
Option Plan and the 1996 Stock Option Plan.
In November 1998, the Company's Board of Directors approved a proposal
allowing the Company's employees and officers to surrender for cancellation any
existing stock option grants and have a new stock option issued for the
equivalent number of shares with one half at a new exercise price of $3.00 per
share and the other half at a new exercise price of $4.00 per share. The new
options vest over the Company's standard four year vesting period, with the
vesting period starting six months later than the vesting commencement date of
the surrendered option. A total of 447,763 options were cancelled with exercise
prices ranging from $4.00 to $6.00 per share.
The Company has reserved an aggregate of 100,000 shares of Common Stock for
issuance under its 1996 Stock Option Plan (the "1996 Plan") to permit employees
and consultants to the Company to participate in ownership of the Company. The
1996 Plan was adopted by the Board of Directors in October 1996. The 1996 Plan
is administered by a committee consisting of two or more non-employee directors
of the Company. Each option agreement includes a provision requiring the
optionee to consent to the terms of the 1996 Plan. The Option Plan provides for
the grant of nonqualified options.
16
VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
The following table summarizes activity under the 1993 Option Plan and 1996
Option Plan, as amended.
Weighted Weighted
Average Number of Average
Number of Exercise Options Exercise
Shares Price Per Share Price Exercisable Price
------ ------------------- ----- ----------- -----
Balance, January 1, 1998................. 1,674,178 $0.60-$15.75 $4.74 301,692 $5.09
Granted.................................. 1,642,970 2.63- 4.44 3.66
Exercised.............................. (28,250) 0.60- 1.41 0.87
Canceled............................... (1,800,801) 1.28- 6.00 4.60
----------
Balance, December 31, 1998............... 1,488,097 0.60- 4.00 3.46 343,774 3.46
Granted.................................. 424,040 1.50- 3.00 2.29
Exercised.............................. (16,750) 0.60- 1.28 0.87
Canceled............................... (215,271) 0.60- 5.72 3.73
----------
Balance, December 31, 1999............... 1,680,116 0.60- 6.00 3.18 601,094 3.42
Granted.................................. 352,675 1.63- 2.47 2.13
Exercised.............................. (101,320) 1.50- 4.00 3.32
Canceled............................... (275,845) 1.50- 6.00 2.74
----------
Balance, December 31, 2000............... 1,655,626 $0.60-$ 4.75 $3.02 858,449 $3.30
==========
At December 31, 2000, 770,259 options were available for grant under the
1993 Option Plan and 1996 Option Plan.
The weighted average fair market value of each option granted under the
1993 Stock Option Plan and the 1996 Stock Option Plan in 1998, 1999 and 2000 was
$3.49, $1.81 and $1.97, respectively.
The following table summarizes information about stock options outstanding
under the 1993 Option Plan and the 1996 Option Plan at December 31, 2000:
Options Outstanding Options Exercisable
----------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------ ----------- ---- ----- ------------ -----
$0.60-$2.00............................... 366,827 8.4 years $1.84 84,386 $1.66
$2.38-$2.63............................... 140,713 9.6 years 2.46 438 2.63
$3.00-$4.75............................... 1,148,086 7.3 years 3.47 773,625 3.48
--------- -------
1,655,626 7.7 years $3.02 858,449 $3.30
========= =======
The Company has reserved an aggregate of 450,000 shares of Common Stock for
issuance under its 1996 Employee Stock Purchase Plan (the "ESPP"). The ESPP was
adopted by the Board of Directors in January 1996 and approved by the Company's
stockholders prior to the consummation of the Company's initial public offering
in February 1996. The ESPP is intended to qualify under Section 423
17
VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
of the Internal Revenue Code of 1986, as amended, and permits eligible employees
of the Company to purchase Common Stock through payroll deductions of up to 10%
of their compensation provided that no employee may purchase more than $25,000
worth of stock in any calendar year. The ESPP was implemented by an offering
period commencing on February 14, 1996 and ending on the last business day in
the period ending October 31, 1996. Each subsequent offering period (an
"Offering Period") commences on the day following the end of the prior Offering
Period and has a duration of six months. The price of Common Stock purchased
under the ESPP is 85% of the lower of the fair market value of the Common Stock
on the first or last day of each offering period. The ESPP will expire in the
year 2006. In the years ended December 31, 1998, 1999 and 2000 the Company
issued 52,703, 74,334, and 80,021 shares of Common Stock, respectively under the
ESPP for $145,264, $88,240, and $125,034, respectively. At December 31, 2000,
$24,476 had been withheld from employee earnings for stock purchases under the
ESPP.
The Company has reserved an aggregate of 60,000 shares of Common Stock for
issuance under its 1996 Director Option Plan (the "Director Plan"). The
Director Plan was adopted by the Board of Directors in February 1996. The
Director Plan provides for the grant of an option to purchase a number of shares
of Common Stock (the "First Option") to be determined by the incumbent Board of
Directors to each non-employee director who first becomes a non-employee
director after the effective date of the Director Plan. Annually, each outside
director shall automatically be granted an option to purchase 4,000 shares (a
"Subsequent Option"), provided he or she is then a non-employee director and, as
of such date, he or she shall have served on the Board for at least the
preceding six months. Each non-employee director will be eligible to receive a
Subsequent Option, regardless of whether such non-employee director was eligible
to receive a First Option. First Options and each Subsequent Option will have a
term of ten years. One-quarter of the shares subject to a First Option will
vest one year after their date of grant and an additional one-quarter will vest
at the end of each year thereafter, provided that the optionee continues to
serve as a director on such dates. Similarly, one-quarter of the shares subject
to a Subsequent Option will vest one year after the date of the option grant and
an additional one-quarter will vest at the end of each year thereafter, provided
that the optionee continues to serve as a director on such date. The exercise
prices of the First Option and each Subsequent Option will be 100% of the fair
market value per share of the Company's Common Stock on the date of the grant of
the option. At December 31, 1998, 1999 and 2000 there were no options
outstanding and 60,000 shares were available for issuance.
9. Income Taxes
The Company accounts for income taxes under the provisions of SFAS No.
109--Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are established for temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at tax
rates expected to be in effect when such assets or liabilities are realized or
settled.
18
VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
The provision for income taxes is as follows:
For the Year Ended December 31,
---------------------------------------------------
1998 1999 2000
----------- ----------- -----------
Current:
Federal............................................................. $ -- $ -- $ --
State............................................................... 25,200 36,000 36,000
----------- ----------- -----------
25,200 36,000 36,000
----------- ----------- -----------
Deferred:
Federal............................................................. (804,805) (1,496,320) (1,850,117)
State............................................................... (304,624) (221,938) (248,039)
----------- ----------- -----------
(1,109,429) (1,718,258) (2,098,156)
----------- ----------- -----------
Change in valuation allowance......................................... 1,109,429 1,718,258 2,098,156
----------- ----------- -----------
$ 25,200 $ 36,000 $ 36,000
=========== =========== ===========
A reconciliation of the provision for income taxes to the amount of income
tax expense that would result from applying the federal statutory rate (35%) to
loss before provision for income taxes is as follows:
For the Year Ended December 31,
----------------------------------
1998 1999 2000
------ ------ ------
Income tax expense at statutory rate.......................................... (35.0)% (35.0)% (35.0)%
State tax expense, net of federal benefit..................................... 1.1 0.5 3.5
Research and development credits.............................................. -- -- --
Change in valuation allowance................................................. 32.5 34.3 29.2
Other......................................................................... 3.1 1.0 2.9
------ ------ ------
1.7 % 0.8 % 0.6 %
====== ====== ======
19
VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
Deferred tax assets and liabilities at December 31 are as follows:
1998 1999 2000
----------- ----------- -----------
Current:
Accrued compensation and related costs................ $ 161,281 $ 108,255 $ 144,020
Warranty reserves..................................... 324,491 259,887 228,294
Sales returns and bad debt allowance.................. 127,298 148,260 106,479
Inventory reserves.................................... 294,622 272,685 290,833
Other................................................. (331,465) 69,309 54,675
----------- ----------- -----------
576,227 858,396 824,301
Long-term:
Amortization and depreciation......................... (170,558) (115,200) (110,637)
Net operating loss carryforward....................... 2,591,947 4,358,387 6,587,997
Tax credit carryforward............................... 1,244,799 1,185,273 1,252,975
Deferred state taxes and other........................ -- (326,183) (495,808)
----------- ----------- -----------
3,666,188 5,102,277 7,234,527
----------- ----------- -----------
Valuation allowance................................... (4,242,415) (5,960,673) (8,058,828)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
As of December 31, 2000, a valuation allowance of $8,058,828 has been
provided based upon the Company's assessment of the future realizability of
certain deferred tax assets, as it is more likely than not that sufficient
taxable income will not be generated to realize these temporary differences.
At December 31, 2000, the Company had federal and state net operating loss
carry forwards of approximately $17,000,000 and $8,000,000, respectively, which
begin to expire in the years 2013 and 2002, respectively. At December 31, 2000,
the Company had tax credit carry forwards for federal and state purposes of
approximately $645,000 and $610,000, respectively, which will begin to expire in
the years 2011 and 2012, respectively.
10. Subsequent Event
On March 12, 2001, the Company entered into a definitive agreement to merge
with a wholly owned subsidiary of Data Critical Corporation, a leading provider
of wireless patient monitoring systems. Under the merger agreement, VitalCom
will become a wholly owned subsidiary of Data Critical, and VitalCom's
shareholders will receive 0.62 shares of Data Critical common stock for each
share of VitalCom common stock held. This exchange ratio is fixed, and will not
be adjusted to reflect any increase or decrease in the market value of Data
Critical's common stock, that may occur between the date on which the merger
agreement was signed and the effective date of the merger. Consummation of the
merger is conditioned on approval by the respective stockholders of both
companies, as well as certain other events. However, certain of VitalCom's
stockholders, who hold an aggregate of approximately 61% of the Company's
outstanding common stock, have entered into voting agreements with Data
Critical. Under these voting agreements they have agreed to vote in favor of the
proposed merger. These stockholders have also granted Data Critical irrevocable
proxies to vote their shares in favor of the merger. The Company believes the
proposed merger, if completed, will integrate the technologies of two hospital
wireless market leaders and will result in a broader alarm notification and
networking portfolio of products for the combined companies and their partners
and customers.
20
VITALCOM INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Period
January 1, 2001 - For the Six Months Ended
June 7, 2001 June 30, 2000
-------------------------- ------------------------
(Unaudited) (Unaudited)
Revenue $ 8,480,068 $ 7,192,089
Cost of revenue 4,508,973 3,334,384
-------------------------- -----------------------
Gross margin 3,971,095 3,857,705
-------------------------- -----------------------
Operating expenses:
Research and development 2,590,162 3,799,065
Sales and marketing 2,469,198 3,232,186
General and administrative 1,898,806 1,069,467
-------------------------- -----------------------
Total operating expenses 6,958,166 8,100,718
Operating Loss (2,987,071) (4,243,013)
Other income, net 87,963 298,480
-------------------------- -----------------------
Loss before provision from income taxes $ (2,899,108) $ (3,944,533)
Provision for income taxes 15,000 18,000
-------------------------- -----------------------
Net loss attributable to common stock $ (2,914,108) $ (3,962,533)
========================== =======================
Per share data-basic and diluted:
Basic and diluted net loss per share $ (0.35) $ (0.50)
========================== =======================
Weighted average shares used to calculate basic and diluted
loss per common share 8,232,756 7,960,900
========================== =======================
21
VITALCOM INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except per share amounts)
(Unaudited)
Common Stock and
Additional Paid-in
Capital Note Receivable
------------------------ Treasury for Common Accumulated Stockholders'
Shares Amount Stock Stock Sales Deficit Equity
---------- ------------ ---------- ---------------- ------------- ------------
Balance, December 31, 2000 8,462,453 $ 38,160,751 $(740,154) $(30,590) $(27,166,029) $10,223,978
Common stock options cancelled - (33,760) - - - (33,760)
Common stock issued pursuant to ESPP 64,514 57,578 - - - 57,578
Common stock issued pursuant to
employee 401(k) plan - - 342,820 - - 342,820
Net loss - - - - (2,914,108) (2,914,108)
---------- ------------ --------- -------- ------------ -----------
Balance, June 7, 2001 8,526,967 $ 38,184,569 $(397,334) $(30,590) $(30,080,137) $ 7,676,508
========= ============ ========= ======== ============ ===========
22
VITALCOM INC.
STATEMENTS OF CASH FLOWS
(In thousands)
For the Period For the Six
January 1, 2001 - Months Ended
June 7, 2001 June 30, 2000
-------------------------- -----------------------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net loss $ (2,914,108) $ (3,962,533)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 671,654 286,944
Loss on disposal of assets 3,464 -
Changes in assets and liabilities:
Accounts receivable (596,836) (750,047)
Inventories (752,583) 72,012
Prepaid expenses and other current assets (18,442) 230,594
Accounts payable (559,278) 248,363
Accrued payroll and related costs (455,331) (146,248)
Accrued warranty costs (161,657) (58,178)
Income taxes payable 5,448 (81,825)
Accrued liabilities 290,668 278,797
-------------------------- -----------------------
Net cash used in operating activities (4,486,981) (3,882,121)
-------------------------- -----------------------
Cash Flows From Investing Activities:
Proceeds from sale of short-term investments 5,273,037
Purchases of property and equipment (53,355) (516,876)
(Increase) decrease in other assets (10,039)
-------------------------- -----------------------
Net cash used in provided by investing activities (53,355) 4,746,122
-------------------------- -----------------------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock, net 366,639 165,673
Restricted cash for compensated balance on line of credit 2,500,000 (2,513,535)
Payment on notes payable and capital leases (5,302)
-------------------------- -----------------------
Net cash provided by financing activities 2,866,639 (2,353,164)
-------------------------- -----------------------
Net decrease in cash (1,673,697) (1,489,163)
Cash at beginning of period 3,657,100 7,107,420
-------------------------- ----------------------
Cash at end of period $ 1,983,403 $ 5,618,257
========================== =======================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 6,282 $ 6,926
Income taxes paid $ 6,366 $ 10,360
23
VITALCOM INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The interim condensed financial statements included herein have been prepared
by the Company without audit pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC") for the purposes of compliance
with its reporting obligation under Regulation S-X Rule 3-05.
Certain information and footnote disclosures, normally included in the
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been condensed or omitted
pursuant to such SEC rules and regulations; nevertheless, the management of the
Company believes that the disclosures herein are adequate to make the
information presented not misleading.
On June 7, 2001 Data Critical acquired VitalCom Inc., a leading provider of
wireless patient monitoring systems, pursuant to an Agreement and Plan of Merger
by and among Data Critical, VitalCom and Viper Acquisition Corp., a wholly owned
subsidiary of Data Critical. Pursuant to the merger agreement, Viper Acquisition
Corp. merged with and into VitalCom and VitalCom survived the merger as a wholly
owned subsidiary of Data Critical. At the effective time of the merger, each
outstanding share of VitalCom common stock was exchanged for 0.62 shares of the
Data Critical common stock, which resulted in the issuance of 5,165,167 shares
of Data Critical common stock. In addition, Data Critical assumed outstanding
employee options to purchase VitalCom common stock with the exercise price and
number of shares subject to such options appropriately adjusted to reflect the
common stock exchange ratio.
These condensed financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 2000 and filed with the SEC. In the opinion of
management, the condensed financial statements included herein reflect all
normal, recurring adjustments necessary to present fairly the financial position
of the Company as of June 7, 2001 and the results of its operations and its cash
flows for the period ended June 7, 2001 and June 30, 2000. The results of
operations for the interim periods are not necessarily indicative of the results
of operations for the full year.
2. Summary of Significant Accounting Principles
Use of Estimates
The preparation of financial statements in accordance 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
Inventories are stated at the lower of cost (first-in, first-out method or
market and consist of the following at:
June 7, June 30,
2001 2000
------------- --------------
(In thousands) (In thousands)
Purchased components.............................. $ 1,857 $ 1,320
Work in progress.................................. 462 99
Finished goods.................................... 1,033 544
Reserve for obsolescence.......................... (1,012) (530)
------------- --------------
$ 2,340 $ 1,433
============= ==============
3. Net Loss Per Share
Net loss per share is computed by dividing net loss by the weighted average
number of common and common equivalent shares outstanding. For the periods ended
June 7, 2001 and June 30, 2000, the diluted weighted average shares were equal
to the basic weighted average shares due to the anti-dilutive effect the
conversion of options would have given the Company's net loss for the period.
24
(b) Unaudited Pro Forma Financial Information.
UNAUDITED PRO FORMA CONDENSED COMBINING
FINANCIAL STATEMENTS
The following unaudited pro forma condensed combining financial information
gives effect to the merger using the purchase method of accounting, after giving
effect to the pro forma adjustments described in the accompanying notes. You
should read these unaudited pro forma consolidated financial statements and
accompanying notes in conjunction with the historical financial statements of
Data Critical and VitalCom and the related notes and other financial information
pertaining to Data Critical and VitalCom, including the Data Critical's
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and VitalCom's "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in each company's annual report on
Form 10-K for the year ended December 31, 2000 and its quarterly report on Form
10-Q for the quarter ended March 31, 2001. In addition, you should refer to the
financial statements and related notes and other financial information,
including the section "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Data Critical's quarterly report on Form
10-Q for the quarter ended June 30, 2001.
The unaudited pro forma condensed combining statement of operations for the
year ended December 31, 2000 is presented to give effect to the acquisitions of
Elixis Corporation, which was acquired by Data Critical on April 3, 2000, and
Paceart Associates, L.P., which was acquired by Data Critical on September 11,
2000 and to the acquisition of VitalCom by Data Critical as if all of these
transactions had occurred on January 1, 2000. These acquisitions were all
accounted for under the purchase method of accounting.
The unaudited pro forma condensed combining balance sheet as of December
31, 2000 is not required to be presented as a part of this Form 8-K/A as the
transaction is already reflected in Data Critical's quarterly report on Form 10-
Q for the quarter ended June 30, 2001.
The unaudited pro forma condensed combining financial statements are not
necessarily indicative of what Data Critical's results of operations or
financial position would have been had the VitalCom merger and the acquisitions
of Elixis and Paceart occurred on January 1, 2000, nor are they necessarily
indicative of Data Critical's results of operations or financial position as of
any future date or for any future period.
25
UNAUDITED PRO FORMA CONDENSED COMBINING
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2000
(in thousands, except per share data)
Pro Forma
Data Critical VitalCom Adjustments Pro Forma
------------- --------------- --------------- ---------------
Revenue $ 21,214 $17,202 (503)(a) $ 37,913
Cost of revenue..................................... 8,763 8,513 (252)(a) 17,024
-------- ------- ------- --------
12,451 8,689 (251) 20,889
Acquired in-process R&D............................. 2,800 2,800
Research and development............................ 5,930 7,220 (226)(b) 12,924
Sales and marketing................................. 9,403 6,061 (109)(b) 15,355
General and administrative.......................... 8,824 2,227 (161)(b) 10,890
Depreciation and amortization....................... 2,809 -- 496 (b)
1,029 (c) 4,334
-------- ------- ------- --------
Loss from operations.............................. (17,315) (6,819) (1,280) (25,414)
Interest income (expense)........................... 1,689 479 -- 2,168
-------- ------- ------- --------
Loss before provision for income taxes.............. (15,626) (6,340) (1,280) (23,246)
Provision for income taxes.......................... -- 36 -- 36
-------- ------- ------- --------
$(15,626) $(6,376) $(1,280) $(23,282)
======== ======= ======= ========
Basic and diluted loss per share.................... $ (1.31) $ (0.79)
======== =======
Pro forma net loss per share........................ $ (1.36)
========
Shares used in calculating per share data........... 11,912 8,020 (2,855)(d) 17,077
======== ======= ======= ========
26
UNAUDITED PRO FORMA CONDENSED COMBINING
STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2001
(in thousands, except per share data)
Pro Forma
Data Critical VitalCom Adjustments Pro Forma
----------------- -------------- --------------- --------------
Revenue $ 10,573 $ 8,480 (503)(a) $ 18,550
Cost of revenue.................................... 4,958 4,509 (252)(a) 9,215
-------- ------- ------- --------
5,615 3,971 (251) 9,335
Research and development........................... 3,349 2,590 (96)(b) 5,843
Sales and marketing................................ 2,950 2,469 (51)(b) 5,368
General and administrative......................... 4,004 1,899 (13)(b) 5,890
Depreciation and amortization...................... 1,684 -- 160 (b)
-- -- 514 (c) 2,358
Restructuring...................................... 3,450 -- -- 3,450
-------- ------- ------- --------
Loss from operations............................. (9,822) (2,987) (765) (13,574)
Loss on investments................................ (3,250) -- -- (3,250)
Interest income (expense).......................... 353 88 -- 441
-------- ------- ------- --------
Loss before provision for income taxes............. (12,719) (2,899) (765) (16,383)
Provision for income taxes......................... -- 15 -- 15
-------- ------- ------- --------
$(12,719) $(2,914) $ (765) $(16,398)
======== ======= ======= ========
Basic and diluted loss per share................... $(1.01) $(0.36)
======== =======
Pro forma net loss per share....................... $ (1.30)
========
Shares used in calculating per share data.......... 12,578 8,181 (8,181)(e) 12,578
======== ======= ======= ========
27
UNAUDITED PRO FORMA CONDENSED COMBINING
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2000
(in thousands, except per share data)
Historical
-------------------------------------- Pro Forma
Data Critical Elixis Paceart Adjustments Pro Forma
------------- ------ ------- ----------- ---------
Revenue $ 17,834 $ 50 $3,330 -- $ 21,214
Cost of revenue................................ 7,654 17 1,092 -- 8,763
-------- ----- ------ ---------- --------
10,180 33 2,238 -- 12,451
Acquired in-process R&D........................ 2,800 2,800
Research and development....................... 5,615 293 159 (137)(f) 5,930
Sales and marketing............................ 8,438 242 723 -- 9,403
General and administrative..................... 7,198 317 1,338 (29)(f) 8,824
Depreciation and amortization.................. 1,805 -- -- 166 (f)
838 (g) 2,809
-------- ----- ------ ------------- --------
Loss from operations...................... (15,676) (819) 18 (838) (17,315)
Interest income (expense)...................... 1,689 (8) 29 (21)(h) 1,689
-------- ----- ------ ------------- --------
Loss before provision for income taxes......... $(13,987) $(827) $ 47 $(859) $(15,626)
======== ===== ====== ============= ========
Basic and diluted loss per share............... $ (1.20)
========
Pro forma net loss per share................... $ (1.31)
========
Shares used in calculating per share data...... 11,650 262 (i) 11,912
======== ============= ========
28
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINING FINANCIAL STATEMENTS
On June 7, 2001 Data Critical acquired VitalCom Inc., a leading provider of
wireless patient monitoring systems pursuant to an Agreement and Plan of Merger
dated March 12, 2001. At the effective time of the merger each share of
VitalCom common stock was exchanged for 0.62 shares of Data Critical common
stock.
The calculation of purchase price and allocation to the net assets of
VitalCom were determined as follows and are used for illustrative pro forma
purposes only:
Calculation of Purchase Price:
Number of shares issued............................................................................... 5,165,167
Share price of Data Critical common stock on the day of the merger announcement....................... $ 2.125
-----------
Fair value of common stock to be issued............................................................... $10,975,980
Fair value of VitalCom options assumed by Data Critical............................................... 1,542,837
Assumed liabilities................................................................................... 502,950
Merger costs.......................................................................................... 2,051,545
-----------
Purchase price........................................................................................ $15,073,312
===========
Allocation of Purchase Price:
Net book value of VitalCom's net assets............................................................... $ 7,676,508
Developed technology.................................................................................. 3,000,000
Assembled workforce................................................................................... 820,000
Costs in excess of net assets acquired................................................................ 776,804
In process research and development................................................................... 2,800,000
-----------
$15,073,312
===========
The allocation of the purchase price of VitalCom is final and reflects
valuation of VitalCom's assets and liabilities at their estimated fair market
values determined as of the date of the acquisition through an independent
appraisal which includes appraisals of patents, trademarks and trade names, and
other analyses.
(a) To record the reduction of VitalCom revenue and cost of revenue for
consistency with Data Critical revenue recognition policies.
(b) To reclassify VitalCom depreciation of fixed assets and amortization of
goodwill for consistency with Data Critical presentation.
(c) To record amortization of goodwill and other intangibles related to the
merger.
29
Purchase Annual
Price Amortization Amortization
Allocation Period (Years) Expense
---------- --------------- -------------
Book value of net assets acquired..................... $ 7,676 -- --
Product technology.................................... 3,000 5 $ 600
Assembled workforce................................... 820 3 274
Costs in excess of net assets acquired................ 777 5 155
Acquired in process research and development.......... 2,800 -- --
------- ------
$15,073 $1,029
------- ------
(d) To reflect the issuance of 5,165,167 shares of Data Critical common
stock to VitalCom stockholders as if the merger occurred on January 1, 2000 and
to eliminate the weighted average VitalCom shares outstanding.
(e) To eliminate the weighted average VitalCom shares outstanding as the
shares issued in connection with the acquisition are reflected in the shares
used in calculating per share data.
(f) To reclassify Elixis and Paceart depreciation of fixed assets and
amortization of goodwill for consistency with Data Critical presentation.
(g) To record amortization of the goodwill and other intangibles over seven
and ten years for the Data Critical acquisitions of Elixis and Paceart, as if
they occurred January 1, 2000.
(h) To record the reduction of interest income and/or increase in interest
expense.
(i) To reflect the issuance of approximately 210,000 and 300,000 shares of
Data Critical common stock to the Elixis and Paceart stockholders, respectively,
as if the acquisitions occurred January 1, 2000 weighted through the date of
acquisition by Data Critical and, for the dilutive calculation, to eliminate
Data Critical's common stock equivalents due to the pro forma net loss.
(c) Exhibits
2.1 Agreement and Plan of Merger, by and among Data
Critical Corporation, Viper Acquisition Corp. and
VitalCom Inc., dated March 12, 2001 (incorporated by
reference to Exhibit 2.1 to Data Critical's current
report on Form 8-K filed on March 27, 2001)
23.1 Consent of Deloitte and Touche LLP, independent
auditors
99.1 Press Release of Data Critical Corporation dated
June 7, 2001 (incorporated by reference to Exhibit 99.1
to Data Critical's current report on Form 8-K filed on
March 27, 2001)
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DATA CRITICAL CORPORATION
Dated: August 21, 2001 By: /s/ Michael E. Singer
______________________________________
Michael E. Singer
Executive Vice President and
Chief Financial Officer
31
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
2.1 Agreement and Plan of Merger, by and among Data Critical
Corporation, Viper Acquisition Corp. and VitalCom Inc., dated
March 12, 2001 (incorporated by reference to Exhibit 2.1 to
Data Critical's current report on Form 8-K filed on March 27,
2001)
23.1 Consent of Deloitte and Touche LLP, independent auditors
99.1 Press Release of Data Critical Corporation dated June 7, 2001
(incorporated by reference to Exhibit 99.1 to Data Critical's
current report on Form 8-K filed on March 27, 2001)