As filed with the Securities and Exchange Commission on December 3, 1998
pursuant to Rule 424(b)(3) under the Securities Act of 1933, as amended, and
relating to Registration Statement on Form SB-2, No. 333-67061, as filed with
the Securities and Exchange Commission on November 19, 1998, Registration
Statement on Form SB-2, No. 333-47361, as filed with the Securities and Exchange
Commission on February 27, 1998 and Registration Statement on Form SB-2,
No. 333-42155, as filed with the Securities and
Exchange Commission on December 19, 1997.
SUPPLEMENT NO. 1 TO PROSPECTUS
17,113,000 SHARES
LIFERATE SYSTEMS, INC.
COMMON STOCK
---------------------------------
This Supplement No. 1 is intended to Attached to this Supplement is the
update and amend that certain Company's Quarterly Report on Form
Prospectus dated November 19, 1998 10-Q containing the Company's
(the "Prospectus") of LifeRate unaudited financial statements for the
Systems, Inc., a Minnesota corporation quarter ended September 30, 1998.
(the "Company"), relating to the offer
and sale by certain selling
shareholders of the Company of
17,113,000 shares of Common Stock of
the Company.
Prospective investors should read the There have been no other substantive
Prospectus and this Supplement No. 1 changes to the Prospectus since
in their entirety. To the extent November 19, 1998.
information in this Supplement
conflicts with information in the
Prospectus, investors should read this
Supplement as controlling.
THE DATE OF THIS SUPPLEMENT NO. 1 IS NOVEMBER 30, 1998
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Quarterly Period Ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________________ to _________________
Commission File Number: 0-25530
LIFERATE SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1682994
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7210 METRO BOULEVARD
EDINA, MINNESOTA 55439
(Address of principal executive offices, including zip code.)
(612) 844-0599
(Registrant's telephone number)
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 [ ]
As of October 31, 1998, there were 13,272,000 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
LIFERATE SYSTEMS, INC.
INDEX
PART I
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets - 3
September 30, 1998 and December 31, 1997
Statements of Operations - 4
Three Months Ended September 30, 1998 and 1997 and
Nine Months Ended September 30, 1998 and 1997 and
Date of Inception to September 30, 1998.
Condensed Statements of Cash Flow - 5
Nine Months Ended September 30, 1998 and 1997 and
Date of Inception to September 30, 1998.
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 7
PART II
ITEM 1. LEGAL PROCEEDINGS 9
ITEM 2. CHANGES IN SECURITIES AND USE-OF-PROCEEDS 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
2
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Condensed Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1998 1997
---- ----
ASSETS (UNAUDITED) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 663,100 $ 764,200
Accounts receivable, less allowance of $112,500,
at September 30, 1998 and $62,850 at December 31, 1997 104,800 278,200
Prepaid expenses and other current assets 81,800 59,800
------------ ------------
Total current assets 849,700 1,102,200
Furniture and fixtures 177,600 177,600
Computer equipment 861,800 872,000
------------ ------------
1,039,400 1,049,600
Less accumulated depreciation 805,000 635,600
------------ ------------
234,400 414,000
Software development costs, net of amortization
of $30,400 at September 30, 1998 82,800 28,600
------------ ------------
Total Assets $ 1,166,900 $ 1,544,800
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and other accrued liabilities $ 302,800 $ 299,600
Other current liabilities 2,200 3,200
Current portion of long-term debt
and capitalized lease obligations 5,100 12,300
------------ ------------
Total current liabilities 310,100 315,100
Long-term debt and capital lease obligations 3,128,600 3,106,500
Deferred rent -- 4,900
Deferred revenue 117,100 172,300
Shareholders' equity (deficit):
Preferred stock, no par value:
Authorized shares - 1,000,000
Issued and outstanding shares-none in 1998 and 1997 -- --
Common stock, no par value:
Authorized shares - 75,000,000
Issued and outstanding shares - 12,487,000 at September
30, 1998 and 8,485,000 at December 31, 1997 21,993,400 20,016,400
Deficit accumulated during the development stage (24,382,300) (22,070,400)
------------ ------------
Total shareholders' equity (deficit) (2,388,900) (2,054,000)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 1,166,900 $ 1,544,800
============ ============
</TABLE>
Note: The December 31, 1997 balance sheet has been derived from the amended
December 31, 1997 audited financial statements.
3
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
JULY 18, 1990
(DATE OF
THREE MONTHS NINE MONTHS INCEPTION) TO
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 SEPTEMBER 30,
1998 1997 1998 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $ 43,300 122,500 $ 438,800 $ 366,100 $ 2,249,400
Cost of revenues 107,500 175,700 552,200 696,300 2,614,700
------------ ------------ ------------ ------------ ------------
Gross profit (64,200) (53,200) (113,400) (330,200) (365,300)
Operating Expenses:
Sales and marketing 102,300 290,200 456,800 1,055,200 6,412,300
Research and development 94,300 227,400 648,100 969,400 9,492,500
General and administrative 358,100 400,100 1,121,300 1,543,500 8,405,300
------------ ------------ ------------ ------------ ------------
Total operating expenses 554,700 917,700 2,226,200 3,568,100 24,310,100
------------ ------------ ------------ ------------ ------------
Loss from operations (618,900) (970,900) (2,339,600) (3,898,300) (24,675,400)
Interest income and other, net 12,900 4,100 58,900 28,100 460,500
Interest expense 11,600 113,600 31,200 185,300 367,400
------------ ------------ ------------ ------------ ------------
Net loss before extraordinary item (617,600) (1,080,400) (2,311,900) (4,055,500) (24,582,300)
Extraordinary item-debt restructuring -- -- -- -- 200,000
------------ ------------ ------------ ------------ ------------
Net loss $ (617,600) $ (1,080,400) $ (2.311,900) $ (4,055,500) $(24,382,300)
============ ============ ============ ============ ============
Net loss per share $ (0.05) $ (0.28) $ (0.19) $ (1.06) $ (8.95)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding 12,559,222 3,824,755 12,065,296 3,821,390 2,724,460
============ ============ ============ ============ ============
</TABLE>
See accompanying notes
4
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
JULY 18, 1990
(DATE OF
NINE MONTHS INCEPTION) TO
ENDED SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,311,900) $ (2,975,100) $(24,382,300)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 202,600 148,400 838,800
Amortization of software development costs 30,400 50,500 181,700
Amortization of discounts on long-term debt 25,100 -- 74,500
Value of stock options granted for services rendered -- 8,300 1,001,500
Value of warrants issued to note holders -- -- 43,500
Convertible subordinated note issued for services rendered -- -- 2,250,000
Writedown of software development costs to net realizable value -- -- 599,600
Stock issued for services -- -- 187,500
Stock issued for lawsuit settlement 21,100 -- 21,100
Changes in operating assets and liabilities:
Accounts receivable 173,400 (94,200) (104,800)
Prepaid and other current assets (22,000) 13,200 (76,500)
Accounts payable and other accrued liabilities 2,200 59,000 640,800
Deferred revenue (55,200) 58,700 117,100
Deferred rent (4,900) (5,900) --
------------ ------------ ------------
Net cash used in operating activities (1,939,200) (2,737,100) (18,607,500)
INVESTING ACTIVITIES
Software development costs (84,600) -- (864,100)
Purchase of furniture and equipment (23,800) (30,700) (1,016,300)
Proceeds from equipment sales 900 -- 900
------------ ------------ ------------
Net cash used in investing activities (107,500) (30,700) (1,879,500)
FINANCING ACTIVITIES
Payments on notes payable and capital lease obligations (10,300) (9,700) (436,700)
Stock subscription received -- -- 5,000
Proceeds from issuance of notes payable -- 1,017,500 2,027,700
Proceeds from issuance of common stock 1,955,900 30,900 19,554,100
------------ ------------ ------------
Net cash provided by financing activities 1,945,600 1,038,700 21,150,100
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (101,100) (1,729,100) 663,100
Cash and cash equivalents at beginning of period 764,200 2,072,000 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 663,100 $ 342,900 $ 663,100
============ ============ ============
</TABLE>
See accompanying notes
5
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
September 30, 1998
1. Organization and Description of Business
LifeRate Systems, Inc. is a development stage enterprise engaged in
marketing proprietary clinical software systems to health care
providers and payors to produce information to measure and quantify the
quality and cost of health care.
In August 1998, the Company closed its business operations due to
continuing losses from operations. The Company is continuing to service
its existing customers. It is not marketing or selling its products and
does not expect to generate any meaningful revenue. The Company is
currently winding down its business, reducing expenses, collecting
receivables and negotiating the termination or satisfaction of all its
remaining obligations. The Company has retained an investment banker to
seek a buyer for its technology and possible merger candidates.
2. Basis of Presentation, Restatement
The financial information presented as of September 30, 1998 and 1997
has been prepared from the books and records without audit. Financial
information as of December 31, 1997 is based on audited financial
statements of LifeRate Systems, Inc. but does not include all
disclosures required by generally accepted accounting principles. In
the opinion of management, all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of the
financial information for the periods indicated have been included. For
further information regarding the Company's accounting policies, refer
to the financial statements and attached notes included in the
Company's amended Form 10-KSB for the fiscal year ended December 31,
1997 as filed with the Securities and Exchange Commission.
The Company has restated previously issued financial results for the
year ended December 31, 1997. The restated financial results reflect
the correction of an error related to the extraordinary gain recognized
in a transaction recorded as a troubled debt restructuring.
3. Significant Accounting Policies
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", which was adopted by the Company beginning
January 1, 1998. SFAS No. 130 requires the disclosure of comprehensive
income and its components in the general-purpose financial statements.
The adoption by the Company of SFAS No. 130 did not have a material
effect on the Company's financial statements for the three months ended
September 30, 1998 or 1997. Total comprehensive loss for the three
months ended September 30, 1998 and 1997 was $(617,600) and
$(1,080,400), respectively. Total comprehensive loss for the nine
months ended September 30, 1998 and 1997 was $(2,311,900) and
$(4,055,500), respectively.
In October 1997, the American Institute of Certified Public Accountants
approved Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"), which supersedes Statement of Position 91-1, "Software
Revenue Recognition". SOP 97-2 was effective for transactions entered
into in the first quarter of 1998. The adoption of the standards in SOP
97-2 did not have a significant impact on the Company's financial
statements.
6
<PAGE>
4. Reclassified
Certain prior year amounts have been reclassified to conform to the
current year presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS
Statements included in this Quarterly Report on Form 10-QSB that are not
historical or current facts are "forward-looking statements" made pursuant to
the safe harbor provision of the Private Securities Litigation Act of 1995 and
are subject to certain risks and uncertainties that could cause actual results
to differ materially. For a detailed description of these risks and
uncertainties, see "Managements' Discussion and Analysis - Certain Factors" in
Item 6 in the Company's Amended Form 10-KSB for the year ended December 31,
1997.
INTRODUCTION
LifeRate Systems, Inc. is a development stage company founded in 1990 to develop
a computer system that could help physicians respond to the fee discount demands
from managed care organizations. Since 1990, the Company has been developing a
set of software-based information products designed to enable healthcare
providers to evaluate and demonstrate the quality and cost effectiveness of the
medical care they deliver. The Company had been marketing these software
products since late 1995. After eight years of continuing losses from
operations, the Company ceased its business operations in August 1998. The
Company's Chief Executive Officer resigned, and the Company reduced staff to
three full-time and one part-time employees. Although the Company is continuing
to service its existing customers, it is not marketing or selling its products.
Accordingly, the Company does not expect to generate any meaningful amount of
revenue. The Company is currently winding down its business, reducing expenses,
collecting receivables and negotiating the termination or satisfaction of all of
its remaining obligations. In August 1998, the Company retained Manchester
Financial Group, Inc., a local investment banking firm, to explore strategic
options for the Company. The Company is actively seeking buyers for its
technology and merger candidates.
There can be no assurance that the Company will be successful in terminating or
satisfying all of its obligations or converting any portion of outstanding
indebtedness into Common Stock. Further, there can be no assurance that the
Company will be successful in selling its technology or merging with another
entity. If the Company is unable to successfully complete these activities, it
may be forced to seek protection under the bankruptcy laws.
RESULTS OF OPERATIONS
The Company reported revenues of $43,300 for the three months ended September
30, 1998, a decrease of $79,200 from the third quarter of 1997. Revenues
consisted of recurring license fees only for the quarter. Revenues for the
quarter ended September 30, 1997 were $122,500 and consisted of development fees
of $67,500, installation fees of $25,000 and $30,000 of recurring license fees.
Revenues for the nine months ended September 30, 1998 totaled $438,800, an
increase of $72,700, or 20%, over the same period one year ago. Revenues
consisted of $304,700 of installation and interface fees and $134,100 of
recurring license fees for the nine months ended September 30, 1998. Revenues
for the nine months ended September 30, 1997 totaled $366,100 and consisted of
$217,500 of development fees, installation fees of $25,000 and recurring fees of
$123,600..
Cost of revenues was $107,500 and $175,700 for the three months ended September
30, 1998 and 1997, respectively. Amortization of capitalized software
development costs included in cost of revenues was $14,200 and $0 for the three
months ended September 30, 1998 and 1997, respectively. Cost of revenues was
$552,200 and $696,300 for the nine months ended September 30, 1998 and 1997,
respectively. Amortization of capitalized
7
<PAGE>
software development costs included in cost of revenues was $32,900 and $50,500
for the nine months ended September 30, 1998 and 1997, respectively. Cost of
revenues in 1998 has declined compared to 1997 due to the reduction in employee
head count during 1997 and 1998 which resulted in decreased payroll expense and
travel expense.
Sales and marketing expense was $102,300 and $456,800 for the three and nine
months ended September 30, 1998, respectively. This compares to $290,200 and
$1,055,200 for the three and nine months ended September 30,1997, respectively.
Expenses for the three and nine months ended September 30, 1998 have declined
compared to the same periods last year due to the cost reduction programs
initiated in 1997 and 1998 which resulted in reductions in payroll expenses,
travel expenses and other sales and marketing expenses. The Company does not
plan to incur any significant sales and marketing expenses in future periods.
Research and development expenses for the three months ended September 30, 1998
were $94,300 compared to $227,400 for the three months ended September 30, 1997.
For the nine months ended September 30, 1998 research and development expenses
were $648,100 compared to $969,400 for the nine months ended September 30, 1997.
The Company capitalizes software development costs after technological
feasibility is achieved on new products and enhancements to existing products.
In the first quarter of 1998, the Company capitalized $84,600 of development
costs. No development costs were capitalized in the second and third quarter of
1998 or for the first nine months of 1997. Research and development costs have
decreased from one year ago due to the cost reduction programs initiated in 1997
and 1998. The cost reduction program resulted in reductions in payroll, travel
and other development expenses. These decreases have been partially offset by
increased consulting expense related to new product development for the three
and nine months ended September 30, 1998. The Company does not plan to fund any
further research and development.
General and administrative expenses were $358,100 and $400,100 for the three
months ended September 30, 1998 and 1997, respectively. Expenses for the nine
months ended September 30, 1998 and 1997 were $1,121,300 and $1,543,500,
respectively. Expenses for 1998 are lower in the areas of payroll and travel
expenses due to the cost reduction programs initiated in 1997 and 1998 offset by
the additional bad debt expense of $211,000 recorded in the second and third
quarter of 1998. Expenses for the nine months ended September 30,1997 included
one-time expenses consisting of $93,900 of legal fees for the renegotiation of
certain royalty agreements, $76,000 of recruiting expenses for a new chief
executive officer and a $100,000 milestone payment under one of the royalty
agreements.
Interest income and other income and expenses were $12,900 and $4,100 for the
three months ended September 30, 1998 and 1997, respectively. For the nine
months ended September 30, 1998 and 1997 interest income and other income and
expenses were $58,900 and $28,100, respectively. Changes in interest income are
due to fluctuations in the Company's cash balances. The Company completed a
significant equity financing in January 1998.
Interest expense was $11,600 and $113,600 for the three months ended September
30, 1998 and 1997, respectively. Interest expense for the nine months ended
September 30, 1998 was $31,200, a decrease of $154,100 over the same period one
year ago. The decrease is due to the convertible subordinated notes payable
issued by the Company during 1997 becoming non-interest bearing as part of a
restructuring of the Company's debt in November 1997.
Liquidity and Capital Resources
The Company has financed its operations since inception primarily through
private and public placement of Common Stock, and, secondarily from revenues.
At September 30, 1998 the Company had $663,100 in cash and cash equivalents, a
decrease of $101,100 from December 31, 1997. The decrease was due to
unprofitable operations of the Company offset by the sale of Common Stock in
January 1998, which resulted in net proceeds to the Company of $1,955,300.
During the first
8
<PAGE>
nine months of 1998, the Company has used $1,939,200 of cash to fund operations,
$84,600 to fund capitalized software development costs, $22,900 to purchase
capital equipment and $10,100 to make payments on capital leases. The Company
does not have significant capital equipment purchase commitments.
The Company's material obligations consist of: (a) a $1,000,000 non-interest
bearing convertible promissory note to Medtronic, Inc. ("Medtronic") due May
2002; (b) a $2,250,000 non-interest bearing convertible subordinated promissory
note to the Atlanta Cardiology Group, P.C. ("ACG") due April 2002; (c) an office
lease with total future lease payments of $591,900; and (d) future lease
payments due under various capital and operating leases totaling $124,500. The
Company is negotiating with the promissory note holders to convert the notes to
Common Stock and with the lessors to cancel the leases.
The report of the Company's independent auditors on the Company's financial
statements for the year ended December 31, 1997 contains an explanatory
paragraph which states that the Company's recurring losses and negative cash
flow from operations raises substantial doubt about its ability to continue as a
going concern. The Company is in the process of negotiating the termination or
satisfaction of all its obligations, including without limitation its customer
contracts and lease. In addition, the Company is in the process of negotiating
agreements with Medtronic and ACG pursuant to which their promissory notes would
be converted into Common Stock of the Company. There can be no assurance that
the Company will be successful in terminating or satisfying all of its
obligations or converting any portion of outstanding indebtedness into Common
Stock. Further, there can be no assurance that the Company will be successful in
selling its technology or merging with another entity. If the Company is unable
to successfully complete these activities, it may be forced to seek protection
under the bankruptcy laws. The Company estimates that its current cash balances
will be sufficient to fund its minimal operations for the foreseeable future.
However, the Company's cash balance will not be sufficient to meet its
obligations unless it is able to convert outstanding indebtedness into Common
Stock and reach settlements with the lessors.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously disclosed in the Company's Current Report on Form 8-K, dated
February 27, 1998, in February 1998, Curran Partners L.P., John P. Curran and
John P. Curran Retirement Trust filed a complaint in the Supreme Court of the
State of New York, County of New York, naming LifeRate Systems, Inc. and certain
other parties as defendants. In September 1998, the parties entered into a
Settlement Agreement resolving the suit and releasing all claims.
ITEM 2. CHANGES IN SECURITIES AND USE-OF PROCEEDS.
In September 1998, the Company issued an aggregate of 325,000 shares of Common
Stock to a private third party in connection with the settlement of a claim
against the Company. In October 1998, the Company issued an aggregate of 260,000
shares of Common Stock to David J. Chinsky, a former officer and director of the
Company, in lieu of a cash bonus of $65,000 to which Mr. Chinsky was entitled
under a prior employment agreement with the Company. Also in October 1998, the
Company issued an aggregate of 200,000 shares of Common Stock to William W.
Chorske, a former officer and director of the Company, in lieu of a cash bonus
of $75,000 to which Mr. Chorske was entitled under a prior employment agreement
with the Company. All of such issuances were made pursuant to Section 4(2) of
the Securities Act of 1933, as amended. The Company did not pay any commissions
in connection with the issuance of any such securities.
9
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
ITEM NUMBER ITEM METHOD OF FILING
27.1 Financial Data Schedule Filed herewith
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-k on September 10, 1998 to
disclose the Company has exited its existing business, retained an investment
banking firm to explore strategic options for the Company and that David J.
Chinsky, its president and chief executive officer, has resigned.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunder
duly authorized.
Dated: November 13, 1998
LIFERATE SYSTEMS, INC.
By:/s/F.G. Hamilton
---------------
F.G. Hamilton
Acting Chief Executive Officer
(Principal Executive Officer)
By:/s/Kenneth G. Tarr
-----------------
Kenneth G. Tarr
Acting Chief Financial Officer
(Principal Financial and Accounting
Officer)
11
