As filed with the Securities and Exchange Commission on April 24, 1998.
Registration No. 333-47361
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
LIFERATE SYSTEMS, INC.
(Name of small business issuer in its charter)
MINNESOTA 7373 41-1682994
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
7210 METRO BOULEVARD
MINNEAPOLIS, MINNESOTA 55439
(612) 844-0599
(Address and telephone number of principal executive offices
and principal place of business)
--------------------------------------
DAVID J. CHINSKY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
7210 METRO BOULEVARD
MINNEAPOLIS, MINNESOTA 55439
(612) 844-0599
(Name, address and telephone number of agent for service)
---------------
COPIES TO:
THOMAS A. LETSCHER, ESQ.
OPPENHEIMER WOLFF & DONNELLY LLP
3400 PLAZA VII, 45 SOUTH SEVENTH STREET
MINNEAPOLIS, MN 55402
(612) 607-7443
---------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
-----------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
----------------------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION DATED APRIL 24, 1998
PROSPECTUS
16,788,000 SHARES
LIFERATE SYSTEMS, INC.
COMMON STOCK
-----------------------
This Prospectus relates to 16,788,000 shares (the "Shares") of
Common Stock, no par value (the "Common Stock), of LifeRate Systems, Inc. (the
"Company"), that may be offered for sale for the account of certain shareholders
of the Company as stated herein under the heading "Selling Shareholders." The
Shares being offered by the Selling Shareholders hereunder consist of: (i)
8,394,000 outstanding shares of Common Stock issued in connection with a
Securities Purchase Agreement dated as of November 14, 1997 between the Company
and the Selling Shareholders (the "Purchase Agreement"), and (ii) 8,394,000
shares of Common Stock issuable upon the exercise of warrants (the "Warrants")
issued in connection with the Purchase Agreement. No period of time has been
fixed within which the Shares covered by this Prospectus may be offered or sold.
The Selling Shareholders have advised the Company that sales of the
Shares offered hereunder by them, or by their pledgees, donees, transferees or
other successors in interest, may be made from time to time in the
over-the-counter market, through negotiated transactions or otherwise, at market
prices prevailing at the time of sale or at negotiated prices. The Shares may be
sold by one or more of the following methods: (i) a block trade in which the
broker or dealer so engaged will attempt to sell the Shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (ii) purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this Prospectus; and (iii)
ordinary brokerage transactions and transactions in which the broker solicits
purchasers. Sales may be made pursuant to this Prospectus to or through
broker-dealers who may receive compensation in the form of discounts,
concessions or commissions from the Selling Shareholders or the purchasers of
Shares for whom such broker-dealer may act as agent or to whom they may sell as
principal, or both (which compensation as to a particular broker-dealer may be
in excess of customary commissions). One or more supplemental prospectuses will
be filed pursuant to Rule 424 under the Securities Act of 1933, as amended (the
"Securities Act"), to describe any material arrangements for the sales of the
Shares offered hereunder when such arrangements are entered into by the Selling
Shareholders and any other broker-dealers that participate in the sale of the
Shares. In addition, any Shares that qualify for sale pursuant to Rule 144 under
the Securities Act may be sold under Rule 144 rather than pursuant to this
Prospectus.
The Selling Shareholders and any broker-dealers or other persons
acting on their behalf in connection with the sale of Shares hereunder may be
deemed to be "underwriters" within the meaning of the Securities Act, and any
commissions received by them and any profit realized by them on the resale of
Shares as principals may be deemed to be underwriting commissions under the
Securities Act. As of the date hereof, there are no special selling arrangements
between any broker-dealer or other person and any Selling Shareholder.
The Company will not receive any part of the proceeds of any sales
of Shares pursuant to this Prospectus. Pursuant to the terms of the Purchase
Agreement, the Company will pay all the expenses of registering the Shares,
except for selling expenses incurred by the Selling Shareholders in connection
with this offering, including any fees and commissions payable to broker-dealers
or other persons, which will be borne by the Selling Shareholders. In addition,
the Purchase Agreement provides for certain other usual and customary terms,
including indemnification by the Company of the Selling Shareholders against
certain liabilities arising under the Securities Act.
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE CERTAIN RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
The Company's Common Stock is currently traded in the
over-the-counter market on the NASD "Electronic Bulletin Board" under the symbol
"LRSI." As a result, there may be a limited market for the Shares which could
have an adverse effect on the future sales price and liquidity of the Shares. On
April 15, 1998, the closing bid price of the Common Stock in the
over-the-counter market was $.53125 per share.
-----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------
THE DATE OF THIS PROSPECTUS IS _________, 1998.
<PAGE>
No person has been authorized to give any information or to make any
representations not contained or incorporated by reference in this Prospectus in
connection with the offer described in this Prospectus and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Company or the Selling Shareholders. Neither the delivery of
this Prospectus nor any sale made under this Prospectus shall under any
circumstances create any implication that there has been no change in the
affairs of the Company since the date hereof or since the date of any documents
incorporated herein by reference. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any securities other than the
securities to which it relates, or an offer or solicitation in any state to any
person to whom it is unlawful to make such offer in such state.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company pursuant to the Exchange
Act may be inspected and copied at the public reference facilities maintained by
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at Seven World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
also be obtained from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the Commission's
Web site is http://www.sec.gov.
The Company has filed with the Commission a Registration Statement
on Form SB-2 under the Securities Act. This Prospectus does not contain all of
the information, exhibits and undertakings set forth in the Registration
Statement, certain portions of which are omitted as permitted by the Rules and
Regulations of the Commission. Copies of the Registration Statement and the
exhibits are on file with the Commission and may be obtained, upon payment of
the fee prescribed by the Commission, or may be examined, without charge, at the
offices of the Commission set forth above. For further information, reference is
made to the Registration Statement and its exhibits.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED
ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
LifeRate Systems, Inc. ("LifeRate" or the "Company") has developed
and is marketing a set of information products designed to enable healthcare
providers to evaluate and demonstrate the quality and cost-effectiveness of the
medical care they deliver. LifeRate tools allow physicians, nurses and other
allied healthcare professionals to capture relevant clinical data, allowing
quick and easy access to patient information and the ability to report on
clinical and patient outcomes. This information can be used by healthcare
providers to improve their medical decision-making process, and to enhance the
competitiveness and profitability of their business. LifeRate believes that as
healthcare purchasers and payors, both public and private, continue to demand
more appropriate and cost-effective medical care for their beneficiaries, the
market for clinical information tools enabling physicians and hospitals to
manage more effectively the care of their patients will expand.
The Company presently is focused on two medical specialties:
cardiology and asthma and allergy. The cardiovascular disease market is large
and growing. A number of large regional and national providers of
cardiovascular-related services are emerging that link cardiology networks and
seek to provide a range of practice management services. These large network
sponsors increasingly are recognizing the important role information can play in
facilitating more efficient and effective medical care for their patients. The
Company's other market focus is on asthma and allergy. An estimated fifteen
million Americans have asthma resulting in estimated cost of approximately $6.2
billion a year in missed work and school, in medications and hospital visits.
LifeRate's presence in both the cardiology and the asthma and allergy
specialties position the Company within the largest market segments for both
adult and pediatric medical care.
LifeRate released demonstration versions of its core system, along
with the Cardiovascular Outpatient module, in August 1995 and commercial
versions in December 1995. The Company accepted initial orders in the third
quarter of 1995, and began installation in the fourth quarter of 1995. During
1996, LifeRate completed development of its core software system, including
outpatient modules for cardiovascular and asthma and allergy specialties. The
software has been released in three phases, Version 1.1 in February, 1996;
Version 1.2 in October, 1996; and Version 1.3 in September, 1997. These releases
added functionality to the core software and increased its operational benefits.
During 1998, LifeRate plans to release a new suite of products with greater
emphasis on outcomes reporting and analysis.
LifeRate's product suite comprises software-based, patient-centered
clinical information tools and services that can be used to track a patient
throughout the continuum of care. Data collection tools are used to populate a
relational data repository that can be queried to analyze the quality and
effectiveness of patient care. Using analysis and report generation tools,
LifeRate and its customers are able to query the data repository on a variety of
parameters, such as drug utilization, treatment and effectiveness,
complications, functional status, etc. The Company believes its experienced
Integration Services team, which builds customized software links between
LifeRate and other clinical systems, represents a unique strength in the
healthcare information management marketplace.
The Company was incorporated in Minnesota in July, 1990. The
Company's principal executive offices are located at 7210 Metro Boulevard,
Minneapolis, Minnesota 55439, and its telephone number at that location is (612)
844-0599.
<PAGE>
RISK FACTORS
An investment in the Shares offered hereby is speculative and
involves a high degree of risk. See "Risk Factors."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Selling Shareholders...... 16,788,000 shares (including 8,394,000 shares
issuable pursuant to the exercise of Warrants
held by the Selling Shareholders)
Common Stock outstanding before the offering.......... 12,485,000 shares
Common Stock to be outstanding after the offering..... 20,879,000 shares based on all shares offered
under this Prospectus (assuming exercise of all
of the Warrants and no further issuances by the
Company)
Use of Proceeds....................................... None of the proceeds of the sale of the shares
registered hereunder will accrue to the
Company. See "Use of Proceeds."
</TABLE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
JULY 18, 1990 (DATE
YEAR ENDED DECEMBER 31 OF INCEPTION) TO
---------------------------------------- -------------
1995 1996 1997 DECEMBER 31, 1997
---- ---- ---- -----------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Net revenues................................. $263,300 $615,700 $620,300 $1,810,600
Operating expenses........................... 5,883,300 9,893,600 4,984,300 22,710,600
Interest income.............................. 97,000 261,900 34,000 392,900
Interest expense............................. 29,300 6,300 326,200 363,200
Net loss..................................... $(5,595,300) $(9,873,500) $(3,876,200) $(20,984,500)
Net loss per share - basic and
diluted...................................... $(2.66) $(2.61) $(0.88) $(11.91)
YEAR ENDED DECEMBER 31
--------------------------------------------------------
1995 1996 1997
---- ---- ---------------------------
ACTUAL AS ADJUSTED (1)
------ ---------------
BALANCE SHEET DATA:
Working capital.............................. $6,759,700 $1,833,600 $787,100 $2,745,100
Total assets................................. 8,403,700 3,076,300 1,544,800 3,502,800
Total liabilities............................ 1,259,400 2,923,900 2,512,900 2,512,900
Shareholders' equity (deficit)............... 7,144,300 152,400 (968,100) 989,900
</TABLE>
- --------------------
(1) Gives effect to the issuance of 4,000,000 shares of Common Stock pursuant to
the Purchase Agreement in January 1998, net of offering expenses.
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND MAY NOT BE APPROPRIATE FOR INVESTORS WHO CANNOT AFFORD TO LOSE THEIR
ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS OF THE SHARES OFFERED HEREBY SHOULD BE
FULLY AWARE OF THE FOLLOWING RISK FACTORS, AMONG OTHERS, AND SHOULD CAREFULLY
REVIEW THE INFORMATION AND FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS
PROSPECTUS.
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. FOR
THIS PURPOSE, ANY STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT
STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS.
WITHOUT LIMITING THE FOREGOING, WORDS SUCH AS "MAY," "WILL," "EXPECT,"
"BELIEVE," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER
VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; GOING CONCERN
UNCERTAINTY. The Company was formed in July, 1990, and has had revenues of
approximately $1,810,600 to date. As of December 31, 1997, the Company had an
accumulated deficit of approximately $20,984,500. The Company believes that its
future success will be dependent on the successful marketing of its
cardiovascular and asthma and allergy products and successful modification of
its core software system for other medical specialties. There can be no
assurance that the Company will generate sufficient sales to achieve positive
cash flow or profitable operations. 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.
FUTURE CAPITAL NEEDS. On November 14, 1997, the Company entered into
a Securities Purchase Agreement (the "Purchase Agreement") with Special
Situations Private Equity Fund, L.P., Special Situations Cayman Fund, L.P.,
Special Situations Fund III, L.P. (collectively, the "Funds") and the other
purchasers named in the Purchase Agreement (the Funds and such other purchasers
are collectively referred to herein as the "Purchasers"), pursuant to which the
Company agreed to sell for cash up to 9,000,000 shares of common stock, no par
value, of the Company at prices ranging from $.50 to $.56 per share and warrants
to purchase up to 9,000,000 shares of Common Stock, as well as an additional
104,000 Shares and warrants for cancellation of certain indebtedness. The
Company achieved all of the milestones that were a condition to the final
closing under the Purchase Agreement and completed the final closing on January
30, 1998. The Company has sold an aggregate of 8,394,000 shares of Common Stock
and issued 8,394,000 warrants under the Purchase Agreement for total gross cash
proceeds of $4,342,400.
With the proceeds received under the Purchase Agreement, the Company
currently estimates that it will not have sufficient cash to continue operations
through the end of 1998. The Company estimates that it will require additional
operating capital during the fourth quarter of 1998. The Company's working
capital requirements may vary substantially from those planned depending on
numerous factors, including a failure to significantly increase revenues, an
unexpected increase in expenses, growth of product sales beyond the Company's
current plan and other unplanned events. Required additional capital would be
sought from a number of sources and could include sales of additional shares of
capital stock or other securities or loans from banks or other sources. Any
additional sales of capital stock would likely be dilutive to shareholders. The
Company's ability to obtain additional capital will likely depend substantially
on operating results in future periods, and there can be no assurance that the
Company will be able to obtain
<PAGE>
additional capital on satisfactory terms or at all. The Company will be
materially adversely affected if it is not able to achieve positive cash flow or
profitability or to obtain any necessary financing on satisfactory terms.
EFFECTS OF DELISTING FROM NASDAQ SMALL CAP MARKET. Effective with
the close of business July 3, 1997, the Company's Common Stock was no longer
quoted on the Nasdaq Stock Market because the Company no longer met, and
currently does not meet, the minimum net tangible assets and capital and surplus
requirements for continued quotation. The Company's Common Stock is currently
quoted in the "over-the-counter" market and is eligible to trade on the OTC
Bulletin Board. The public trading market for the Company's Common Stock may
have been, and may continue to be, adversely affected by this development. In
order for the Company's Common Stock to be quoted on the Nasdaq Small Cap
Market, the Company will be required to meet initial listing criteria, which
require the Company to have at least three market makers in the Common Stock,
total net tangible assets of $4.0 million, a minimum bid price for the Common
Stock of $4.00 per share, 300 holders of its Common Stock and 1,000,000 shares
of its Common Stock held by non-affiliates, having a market value of $5,000,000
or more. There can be no assurance that the Company will be able to achieve the
total net tangible assets qualification standard, the minimum bid price standard
or the market value standard in the future. Consequently, the liquidity of the
Company's Common Stock may be further impaired, not only in the number of shares
which may be bought and sold, but also through delays in the timing of
transactions and reduction in security analysts' and the news media's coverage,
if any, of the Company.
APPLICABILITY OF "PENNY STOCK RULES." Federal regulations under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") regulate the
trading of so-called "penny stocks" (the "Penny Stock Rules"), which are
generally defined as any security not listed on a national securities exchange
or the Nasdaq Stock Market, priced at less than $5.00 per share and offered by
an issuer with limited net tangible assets and revenues. Because the Company's
Common Stock trades below $5.00 per share and is not listed on the Nasdaq Stock
Market or any national securities exchange, trading, if any, of the Company's
Common Stock is subject to the full range of the Penny Stock Rules. Under these
rules, broker-dealers must take certain steps prior to selling a "penny stock,"
which steps include: (i) obtaining financial and investment information from the
investor; (ii) obtaining a written suitability questionnaire and purchase
agreement signed by the investor; and (iii) providing the investor a written
identification of the shares being offered and the quantity of the shares. If
the Penny Stock Rules are not followed by the broker-dealer, the investor has no
obligation to purchase the shares. The application of the comprehensive Penny
Stock Rules makes it more difficult for broker-dealers to sell the Company's
Common Stock and shareholders of the Company may have difficulty in selling
their shares in the future in the secondary trading market.
LIMITED OPPORTUNITY TO DEVELOP MARKET PRESENCE. The Company believes
that its ultimate success will be highly dependent on its ability to capitalize
on the currently existing market opportunity for computer-based, clinical
healthcare decision support systems, like LifeRate's system. The Company does
not believe that it will be able to maintain its technical superiority over
competing information systems for an indefinite period of time and believes that
it will need to obtain a significant market presence in 1998 to achieve
long-term success. Although the Company's marketing personnel have experience in
marketing new products and services in the healthcare industry, LifeRate has
only limited experience in marketing its system. There can be no assurance that
the Company's marketing strategy will be successful.
SUCCESS DEPENDENT ON MARKET ACCEPTANCE. The Company's success will
also depend in large part on its ability to gain acceptance by physicians of
sophisticated, computer-based, clinical healthcare
<PAGE>
decision support systems. Certain physicians may perceive such computer-based
systems to infringe on their discretion in providing medical treatment and,
accordingly, may be reluctant to accept such computer-based systems.
Furthermore, although LifeRate's system has been designed to operate on standard
personal computer-based hardware, physician practice groups may be required to
upgrade their current computer hardware to operate LifeRate's system. Physician
groups may be reluctant to invest the financial resources necessary to acquire
LifeRate's system or any hardware upgrades necessary to operate LifeRate's
system. In addition, payors with significant investments in other hardware and
software systems may be reluctant to abandon those systems for LifeRate's
system. The Company believes, however, that the demands of payors and buyers of
healthcare and various healthcare legislation will ultimately lead to the
wide-spread use of computer-based systems, like LifeRate's system, that
integrate clinical and patient outcome data in a single database. There can be
no assurance, however, that the Company will be able to obtain sufficient
acceptance by providers and payors of its system to achieve profitable
operations.
COMPETITION. The healthcare information industry, of which the
Company is a part, is characterized by intense competition. A number of
companies provide computer-based healthcare information systems that provide
partial solutions to some or all of the types of healthcare information needs
that LifeRate's system addresses. In addition, the Company anticipates that new
competitors will attempt to enter the market and that existing or new
competitors will develop information systems in the future that duplicate or
improve on LifeRate's system. Some of the Company's competitors are well
established, better known and significantly larger with substantially greater
technical, marketing and financial resources than the Company. The Company's
ultimate ability to compete in the market will depend upon a number of factors,
including its success in generating market acceptance of LifeRate's system and
the success of its marketing efforts.
DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent on its
key management personnel, particularly David J. Chinsky, who became the
Company's President and Chief Executive Officer in August, 1997. The Company's
future success will also depend in part upon its ability to attract and retain
highly qualified management, technical, marketing and sales personnel. During
1997, a number of personnel left the Company. The Company competes for such
personnel with other companies, and there can be no assurance that the Company
will be successful in hiring or retaining qualified personnel. The loss of key
personnel or the inability to hire or retain qualified personnel could have a
material adverse effect on the Company. The Company does not maintain key-man
insurance on any of its employees. "See Management."
LIMITED HISTORY OF MARKETING AND SALES. The Company began marketing
its Cardiovascular Outpatient product in the third quarter of 1995. Currently,
LifeRate's Cardiovascular Outpatient System is in use by six cardiovascular
practice groups and the Asthma and Allergy Outpatient System is in use at four
asthma and allergy practice groups. At the end of 1997, the Company had entered
into three agreements for 1998 installations of the outpatient system at four
sites and the cardiac catheterization laboratory product at two sites. During
1995, the Company revised its marketing strategy to focus on cardiology
physician practice groups which the Company believes will provide significant
opportunities for sales of its system. During 1996, the Company established
internal sales, marketing, clinical support and quality assurance functions.
Prior to 1996, the Company relied, to a significant degree, on an independent
marketing firm to coordinate and conduct its marketing to physician groups,
rather than exclusively on its own employees. There can be no assurance that the
Company's revised marketing strategy, or its choice of cardiology and asthma and
allergy practice groups as initial target markets, will be successful.
<PAGE>
TECHNICAL OBSOLESCENCE. Computer-based technology in all industries
is undergoing, and is expected to continue to undergo, rapid and significant
technical advances. While LifeRate believes that its system is currently
technically superior to other computer-based healthcare information systems,
LifeRate expects future technology to be superior to the technology currently
used in its system. Although LifeRate's system has been designed to assimilate
future technical advancements, there can be no assurance that any such future
advancements or the development of new or competitive products by others will
not render LifeRate's system less competitive or obsolete. The greater financial
as well as other resources of many of the Company's present and potential
competitors may permit such competitors to respond more rapidly than the Company
to changes in the product needs and servicing requirements of healthcare
providers and payors.
LIMITED PROPRIETARY PROTECTION. The Company currently relies solely
on common law copyrights and trade secrets for proprietary protection of its
system. LifeRate does not currently have patent protection with respect to any
aspect of its system, although it has filed one U.S. patent application covering
certain aspects of its system and plans to file additional patent applications
in the future. There can be no assurance that the Company's measures to protect
its proprietary information will be successful, that it will be granted any
patents, or that any patents that may be granted will be of value to the
Company. In the absence of meaningful intellectual property protection, the
Company may be vulnerable to competitors who could lawfully attempt to copy the
Company's products. Moreover, there can be no assurance that other competitors
may not independently develop the same or similar technology. Similarly, while
LifeRate believes that it has all rights necessary to market and sell its system
without infringement of intellectual property rights held by others, the Company
has not conducted a formal infringement search, and there can be no assurance
that such conflicting rights do not exist.
UNDESIGNATED PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. The Board of
Directors of the Company is authorized to issue undesignated preferred stock
("Undesignated Stock") in one or more series, and to determine the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms or conditions of redemption of each series
without any vote or action of the shareholders of the Company. No shares of
Undesignated Stock or other senior equity securities have been established or
issued, and there is no plan to establish or issue any such securities in the
foreseeable future. However, the issuance of Undesignated Stock with
preferential rights could adversely affect the voting power and other rights of
the holders of Common Stock. The Company is subject to certain provisions of the
Minnesota Business Corporation Act which limit the voting rights of shares
acquired in "control share acquisitions" and restrict certain "business
combinations." Additionally, pursuant to the Purchase Agreement, so long as the
Purchasers own or have the right to acquire an aggregate of 20% or more of the
then outstanding shares of Common Stock, the Company shall not, without the
prior written consent of the Funds and Miller, Johnson & Kuehn, Incorporated
enter into certain business combinations. The ability to issue Undesignated
Stock, the foregoing provisions of the Minnesota Business Corporation Act and
certain provisions in the Purchase Agreement could, in certain circumstances,
have the effect of delaying or preventing a change in control of the Company.
CONTROL BY CERTAIN PERSONS. The Funds and Medtronic, Inc. currently
beneficially own (within the meaning of Rule 13d-3 under the Securities Exchange
Act of 1934, as amended) approximately 57% and 6% of the Company's outstanding
Common Stock, respectively. The Funds and Medtronic each have a designee who
serves on the Board of Directors. In addition, Miller, Johnson & Kuehn
Incorporated has the right to designate a person to serve on the Board of
Directors. Accordingly, these shareholders, individually and as a group, will be
able to influence the outcome of shareholder votes,
<PAGE>
including votes concerning election of directors, the adoption or amendment of
provisions in the Company's Amended and Restated Articles of Incorporation and
Amended and Restated Bylaws and the approval of certain mergers or other similar
transactions. Such control by existing shareholders could have the effect of
delaying, deferring or preventing a change in control of the Company. See
"Principal Shareholders and Beneficial Ownership of Management."
PENDING LITIGATION. 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. The Company has until May 4, 1998
to respond to the complaint. The complaint contains causes of action against the
Company alleging fraud, deceit, negligent misrepresentation and other wrongdoing
in connection with a private placement of common stock conducted by the Company
in December 1995. The plaintiffs purchased shares of common stock in the private
placement at a price of $6.50 per share for a total purchase price of
approximately $1 million. The Company sold in the private placement in December
1995 and January 1996 a total of 858,399 shares of common stock at a price of
$6.50 per share for total gross proceeds of approximately $5.6 million. The
plaintiffs are seeking rescission of their investment, compensatory damages,
exemplary and punitive damages, general consequential and incidental damages and
disgorgement and restitution of profits received by the defendants, as well as
plaintiff's costs, including attorneys' fees, accountants' fees and experts'
fees. The Company believes the claims to be without merit and plans to
vigorously defend this action. An adverse resolution to this action could have a
material adverse effect on the Company.
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From January 1, 1996 to July 3, 1997, the Common Stock was traded on
The Nasdaq Small Cap Market. See "Risk Factors -- Effects of Delisting from
Nasdaq Small Cap Market." The Common Stock currently trades in the
over-the-counter market on the NASD "Electronic Bulletin Board" under the symbol
"LRSI." The following table shows the high and low bid and asked prices of the
Common Stock for the periods indicated as reported by Nasdaq from January 1,
1996 through July 3, 1997 and by the OTC Bulletin Board, thereafter. These
quotations reflect inter-dealer prices without retail markup, markdown or
commission and may not necessarily represent actual transactions.
HIGH: LOW:
1996:
First quarter $11 7/8 $ 9 5/8
Second quarter $10 1/4 $ 7 15/32
Third quarter $ 8 $ 3 7/8
Fourth quarter $ 5 1/8 $ 1 3/4
1997:
First quarter $ 3 5/8 $ 2 1/2
Second quarter $ 2 5/8 $ 3/4
Third quarter $ 2 $ 3/8
Fourth quarter $ 1 3/16 $ 3/8
1998:
First quarter $ 3/4 $ 15/32
Second quarter (through April 15, 1998) $ 11/16 $ 17/32
As of April 15, 1998, there were approximately 137 record holders of
the Company's Common Stock.
The Company has never paid cash dividends on the Common Stock and
currently intends to retain all future earnings, if any, for the continued
growth and development of its business and has no plans to pay cash dividends in
the future.
USE OF PROCEEDS
None of the proceeds from the sale of the Shares of Common Stock
registered hereunder will accrue to the Company.
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as
of December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 (1)
------------------------------------
ACTUAL AS ADJUSTED (2)
------ ---------------
<S> <C> <C>
Long-term obligations: $ 2,197,800 $ 2,197,800
Shareholders' equity:
Preferred Stock, no par value; 1,000,000 shares
authorized; no shares issued and outstanding --- ---
Common Stock, no par value, 75,000,000 shares
authorized; 8,485,000 shares issued and outstanding;
12,485,000 as adjusted 20,016,400 21,974,400
Accumulated deficit (20,984,500) (20,984,500)
----------- -----------
Total shareholders' equity (deficit) (968,100) 989,900
----------- -----------
Total long-term obligations and shareholders' equity (deficit): $ 1,229,700 $ 3,187,700
=========== ===========
</TABLE>
- ---------------------
(1) Does not include an aggregate of 11,401,618 shares of Common Stock issuable
upon exercise of options, warrants or conversion of convertible promissory notes
outstanding as of April 15, 1998.
(2) Gives effect to the issuance of 4,000,000 shares of Common Stock pursuant to
the Purchase Agreement in January 1998, net of offering expenses.
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
this Prospectus. The statement of operations data set forth below for the years
ended December 31, 1995, 1996 and 1997 and the period from July 18, 1990 (date
of inception) to December 31, 1997 and the balance sheet data at December 31,
1996 and 1997 are derived from the financial statements audited by Ernst & Young
LLP included elsewhere in this Prospectus. The balance sheet data set forth
below at December 31, 1995 are derived from audited financial statements not
included in this Prospectus.
<TABLE>
<CAPTION>
JULY 18, 1990
YEAR ENDED DECEMBER 31, (DATE OF
----------------------------------------- INCEPTION) TO
1995 1996 1997 DECEMBER 31, 1997
---- ---- ---- -----------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Net Revenues................................. $263,300 $615,700 $620,300 $1,810,600
Operating expenses:
Sales and marketing....................... 2,525,800 1,738,000 1,279,700 5,929,500
Research and development.................. 2,104,500 5,309,900 1,302,100 9,313,700
General and administrative................ 1,253,000 2,845,700 2,402,500 7,467,400
Interest income.............................. 97,000 261,900 34,000 392,900
Interest expense............................. 29,300 6,300 326,200 363,200
Extraordinary item -
debt restructuring .......................... - - 1,312,800 1,312,800
Net loss..................................... $(5,595,300) $(9,873,500) $(3,876,200) $(20,984,500)
Net loss per share - basic and diluted ...... $(2.66) $(2.61) $(0.88) $(11.91)
Weighted average number of
shares of common stock
outstanding.................................. 2,105,811 3,783,931 4,387,405 1,762,514
========= ========= ========= =========
DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997
---- ---- ------------------------------
BALANCE SHEET DATA: ACTUAL AS ADJUSTED (1)
- ------------------- ------ ---------------
Current assets............................ $7,915,900 $2,337,100 $1,102,200 $3,060,200
Total assets.............................. 8,403,700 3,076,300 1,544,800 3,502,800
Current liabilities....................... 1,156,200 503,500 315,100 315,100
Total liabilities......................... 1,259,400 2,923,900 2,512,900 2,512,900
Shareholders' equity (deficit)............ 7,144,300 152,400 (968,100) 989,900
</TABLE>
- -------------------------
(1) Gives effect to the issuance of 4,000,000 shares of Common Stock pursuant to
the Purchase Agreement in January 1998, net of offering expenses.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues in 1997 were $620,300 compared to revenues of $615,700 in
1996. Revenues of $275,000, or 44.3% of total revenue, were generated from
development work done for National Jewish Medical and Research Center. Revenues
of $100,200, or 16.1% of total revenue, were generated from National Allergy and
Asthma System ("NAAS"). Revenues of $97,500, or 15.7% of total revenue, were
generated from Washington Heart, a cardiovascular medical center. The remaining
$147,600 of 1997 revenues are related to the installation and monthly license
fees generated from the Company's Cardiovascular Outpatient product.
Revenues for 1996 were $615,700, a $352,400 increase from 1995.
Revenues of $349,800, or 56.8% of total revenue, were generated from NAAS.
Revenues of $68,200, or 11.1% of total revenue, were generated from two Pfizer,
Inc. related Cardiovascular Outpatient product installations and two Pfizer,
Inc. evaluation sites. The Company recognized $25,000, or 4.1% of total revenue,
in 1996 from National Jewish Medical & Research Center. The remaining $172,700
of 1996 revenues were related to the installation and monthly license fees
generated from the Company's Cardiovascular Outpatient product and other
development work. The revenue increase in 1996 was primarily due to fees from
NAAS and an increase in the number of customer installations of the Company's
products.
During the first quarter of 1997, the Company implemented a cost
reduction program to reduce levels of expenditures and conserve cash funds. As
part of this cost reduction program, the Company reduced employee head count
during 1997 in order to more effectively match expenses with revenues.
Cost of revenues in 1997 was $532,800, a $318,400 decrease from
1996. The 1997 expense consists of $50,500 in amortization of software
development costs, $36,500 of royalty expense and $445,800 of customer support
expenses. Customer support expenses declined in 1997 as a result of the cost
reduction program described above.
Cost of revenues in 1996 was $851,200, a $808,200 increase from
1995. The expense in 1996 consists of $100,800 in amortization of software
development costs, $46,100 in royalty expenses, and $704,300 of customer support
expenses. In 1995, no royalty or software development amortization costs were
incurred. Customer support expenses were not significant in 1995 as the
Company's first commercial sales of the Outpatient product were not made until
December 1995.
Cost of revenues in future periods will continue to be affected by
royalty payments. As described in Note 11 to the financial statements, in March
1997 the Company completed a modified agreement with Dr. Furnary. Beginning in
1999 (or sooner if the Company reaches $20,000,000 of cumulative revenues) the
Company is obligated to pay royalties in the amount of 3.0% on all gross
revenues (as defined in the agreement) up to $100,000,000 and, thereafter, 3.6%
on all gross revenues. Through March 31, 1997, the Company was obligated to pay
royalties of 7.5% of gross revenues under the prior agreement with Dr. Furnary.
In March 1997, the Company also issued a convertible subordinated note to The
Atlanta Cardiology Group, P.C. ("ACG") in the principal amount of $2,250,000 in
exchange for the cancellation of the royalty agreement with ACG, which required
the Company to pay royalties to ACG at the rate of 10% of gross sales of the
Company's cardiology system and 2% of all
<PAGE>
database sales. The Company incurred royalty expenses of $36,500, $46,100 and $0
in 1997, 1996 and 1995, respectively, under these agreements.
Sales and marketing expense in 1997 was $1,279,700, a $458,400, or
26.4% decrease from 1996 expense of $1,738,000. Sales and marketing expense in
1996 declined $787,800, or 31%, from 1995. During 1995, Clinical Sales and
Service, Inc. ("CSSI") provided substantially all of the Company's sales,
marketing and clinical support functions. During the first quarter of 1996, the
employees of CSSI became employees of the Company. Sales and marketing expense
declined in 1997 compared to 1996 as a result of the cost reduction program
described above and one-time costs associated with the integration of CSSI in
1996.
During 1997, research and development efforts were focused on a new
release of the Outpatient modules for cardiovascular and asthma and allergy,
continued development of the cardiac catheterization laboratory product and
development work under the agreement with National Jewish Medical and Research
Center. Research and development expenses in 1997, which consist primarily of
payroll and related benefit expenses, totaled $1,302,100, a decrease of
$4,007,800 or 75.5% from 1996. The reduction in expenses was due to the cost
reduction program described above and one-time expenses incurred in 1996 of
$3,174,000, which are described below. Research and development activities in
1996 were focused on completion of LifeRate's core software system and
Outpatient modules for Cardiovascular and Asthma and Allergy. Additional
functionality was added to the core system in 1996 to increase the operational
benefit of using the system. Research and development expenses in 1996 were
$5,309,900, an increase of $3,205,400, or 152.3%, from 1995. The 1996 increase
mainly reflects the costs to cancel a royalty agreement with ACG and to modify a
royalty agreement with Dr. Furnary. The Company issued a $2,250,000 convertible
subordinated note to ACG in exchange for canceling the ACG agreement and in
consideration for the prior development and implementation work provided by ACG.
In connection with the modification of the royalty agreement with Dr. Furnary,
the Company granted Dr. Furnary options to purchase shares of common stock for
services rendered. The fair value of these options at the date of grant using a
Black-Scholes option pricing model was $924,000. These two transactions resulted
in additional research and development expenses of $3,174,000 in 1996. The
Company plans to continue to invest the resources needed to develop the product
capabilities demanded by the market place.
The Company capitalizes software development costs in accordance
with the provisions of Financial Accounting Standards Board ("FASB") Statement
No. 86. In the second quarter of 1995, the Company began capitalizing software
development costs after achieving technological feasibility on the core LifeRate
system. A total of $751,000 of development costs was capitalized during 1995.
The Company recorded a writedown of approximately $600,000 in the fourth quarter
of 1995 due to a decrease in the net realizable value of the capitalized costs
because of significant enhancements to the core system planned in 1996. These
enhancements have been released in 1996 as part of ongoing product maintenance.
No software development costs were capitalized in 1996 and 1997 for the core
LifeRate System, as the efforts were on enhancements released to customers when
technological feasibility was obtained. In 1997, the Company capitalized $28,600
of development costs related to development of the Company's CLE product, an
entry-level cardiac catheterization laboratory product that was released for
sale in January 1998.
General and administrative expenses were $2,402,500 in 1997, a
decrease of $443,200 or 15.6% from 1996. The decrease was due to the cost
reduction program described above and several one-time expenses incurred in
1996. General and administrative expenses were $2,845,700 in 1996, an increase
of $1,592,700, or 127.1% from 1995 expenses of $1,253,000. The 1996 increase
reflects the overall higher
<PAGE>
activity level of the Company plus several one-time expenses. One-time expenses
incurred in 1996 include $181,000 for the cancellation penalty on a lease for
new office space, $190,000 to settle a lawsuit brought by a former officer of
the Company and $50,000 to settle a lawsuit brought by a former employee. The
Company also incurred $133,100 in additional legal fees in 1996. These legal
expenses were incurred primarily in connection with the management change
completed in the second quarter of 1996 and the lease cancellation and lawsuit
settlements referred to above. Other increases in general and administrative
expenses in 1996 from 1995 which are of a recurring nature were $177,500 in
depreciation due to the fixed asset additions made in 1996, $65,000 in insurance
premiums due to increased insurance coverage, and $443,700 in increased payroll
and related expenses.
Interest income for 1997, 1996 and 1995 was $34,000, $261,900 and
$97,000, respectively. These changes in interest income primarily reflect
increases and decreases in the Company's cash balances during the respective
years, as the Company completed significant financings in March 1995, December
1995/January 1996, and November 1997.
Interest expense for 1997, 1996 and 1995 was $326,200, $6,300 and
$29,300, respectively. The increase in 1997 was due to interest expense accrued
on the convertible notes issued in 1997.
The extraordinary item of $1,312,800 in 1997 relates to the
restructuring of the Company's convertible notes payable as described under
"Liquidity and Capital Resources". The extraordinary item includes $200,000 of
interest payable that was forgiven. The remainder of the extraordinary item
relates to discounts recorded on the convertible notes as a result of the notes
not accruing interest after 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. During 1997, the Company needed additional financing to fund
operations.
In May 1997, the Company issued a convertible promissory note in the
principal amount of $1,000,000 to Medtronic, Inc., a shareholder of the Company
with a representative that serves on the Company's Board of Directors. Under the
original terms of the note, interest was at the prime rate, principal was due
upon the earlier of completion of an equity financing raising at least
$5,000,000 or November 30,1997, and was convertible, at the option of the
holder, into Common Stock at a conversion price equal to the lower of $2.00 or
the average per share price in one or more rounds of equity financing raising
gross proceeds of at least $5,000,000. In addition, the Company granted
Medtronic a warrant to purchase 100,000 shares of Common Stock exercisable at
the same price as the conversion price on the note. In connection with the
November 1997 equity financing, the Medtronic note was amended to provide that
no interest will accrue thereunder and accrued interest will be forgiven,
principal will not become due until May 2002 and the conversion price of the
note is $1.50 per share. The warrant was also amended to change the conversion
price to $.50 per share.
In July 1997, the Company issued additional convertible promissory
notes in the amount of $500,000 and warrants in a private placement. The notes
accrued interest at the prime rate, were due at the earlier of November 30, 1997
or completion of the next equity financing and were convertible at the lesser of
$2.00 per share or the average per share price paid in the next equity
financing. In addition, 50,000 warrants were issued to purchasers of the notes
at an exercise price of the lesser of $2.00 per share or the average purchase
price paid in the next equity financing. In connection with the November
<PAGE>
1997 equity financing, the notes were converted to Common Stock at a price of
$2.00 per share, accrued interest was forgiven and the warrant conversion price
was fixed at $2.00 per share.
In September, October and November 1997, the Company obtained bridge
loans of $258,000 from Miller, Johnson and Kuehn, Inc. while the Company
attempted to complete the November 1997 equity financing. After completing the
November 1997 equity financing, $206,000 of the notes were repaid in cash and
$52,000 of the notes were converted into 104,000 shares of Common Stock at a
conversion price of $.50 per share and warrants to purchase 104,000 shares of
Common Stock at an exercise price of $1.50 per share.
In October and November 1997, the Company obtained bridge loans of
$46,200 from the Company's Board of Directors. After completion of the November
1997 equity financing, $40,425 of the notes were repaid in cash and $5,775 of
the notes were converted into 11,550 shares of Common Stock at a conversion
price of $.50 per share.
In November 1997, the Company entered into a securities purchase
agreement whereby the Company agreed to sell up to 9,000,000 shares of Common
Stock at prices ranging from $.50 to $.56 per share and warrants to purchase up
to 9,000,000 shares of Common Stock at an exercise price of $1.50 per share. In
November 1997, 4,290,000 shares of Common Stock were sold under the agreement
resulting in net proceeds to the Company of $1,964,400. The agreement provided
that if the Company fulfilled certain conditions by January 15, 1998, the
Company would issue up to an additional 4,500,000 shares of Common Stock and
warrants. The Company satisfied the conditions and in January 1998 sold an
additional 4,000,000 shares of Common Stock and warrants under the agreement
resulting in additional net proceeds to the Company of $1,958,000.
At December 31, 1997, the Company had $764,200 in cash and cash
equivalents, a $1,307,800 decrease from December 31, 1996. In 1997, the Company
used $4,729,400 to fund operations, $20,100 to purchase furniture and equipment
and $28,600 to fund capitalized software development costs.
The Company does not have significant commitments to purchase
additional equipment, but does plan to continue to fund software development
efforts.
The Company estimates that its current cash balances, including the
proceeds received in January 1998 at the final closing of the November 1997
equity financing, will not be sufficient to fund operations of the Company
through the end of 1998. The Company estimates it will need additional operating
capital during the fourth quarter of 1998. Accordingly, the report of the
independent auditors on the Company's 1997 financial statements contains an
explanatory paragraph regarding the Company's ability to continue as a going
concern. There can be no assurance that the Company will be able to obtain
additional financing on satisfactory terms, or at all. If the Company is unable
to obtain additional financing it will be forced to cease operations and may be
forced to seek protection under bankruptcy laws.
YEAR 2000 ISSUES
Computer programs have historically been written to abbreviate dates
by using two digits instead of four digits to identify a particular year. The so
called "Year 2000" problem or "millennium bug" is the inability of computer
software or hardware to recognize or properly process dates ending in "00." As
the year 2000 approaches, significant attention is being focused on updating or
replacing such software
<PAGE>
and hardware in order to avoid system failures, miscalculations or business
interruptions that might otherwise result.
The Company has reviewed its software products and internal
information systems and believes that the costs and effort to address the Year
2000 problem will not be material to its business, financial condition or
results of operations. However, the Year 2000 problem may also adversely impact
the Company by affecting the business and operations of parties with which the
Company transacts business.
<PAGE>
BUSINESS
INTRODUCTION
LifeRate Systems, Inc. ("LifeRate" or the "Company") has developed
and is marketing a set of information products designed to enable healthcare
providers to evaluate and demonstrate the quality and cost effectiveness of the
medical care they deliver. LifeRate tools allow physicians, nurses and other
allied healthcare professionals to capture relevant clinical data, allowing
quick and easy access to patient information and the ability to report on
clinical and patient outcomes. This information can be used by healthcare
providers to improve their medical decision making process, and to enhance the
competitiveness and profitability of their business. LifeRate believes that as
healthcare purchasers and payors, both public and private, continue to demand
more appropriate and cost effective medical care for their beneficiaries, the
market for clinical information tools enabling physicians and hospitals to
manage more effectively the care of their patients will expand.
MARKET OVERVIEW
Propelled by the rapid transition to managed care, the Health Care
Information Systems ("HCIS") market is estimated to be approximately $10 billion
today, and is expected to be $20 billion by the year 2000. An emphasis on
controlling costs, which began in the 1980's, has led to a consolidation of
healthcare purchasers and providers in the 1990's, as well as a stronger need
for improved computer based communications and information systems. Payors soon
realized, however, that healthcare decisions could not be made solely based on
cost. The focus began shifting from simply controlling costs, to delivering
quality medical care cost effectively.
The Company presently is focused on two medical specialties:
cardiology and asthma and allergy. The cardiovascular disease market is large
and growing. Each year more money is spent on the treatment of heart disease
than on any other disease. While it is estimated that nearly 75% of the roughly
16,000 cardiologists in the U.S. today practice alone or in groups of two or
three physicians, a growing number of cardiologists are organizing themselves
into larger clinics and networks. A number of large regional and national
providers of cardiovascular related services are emerging that link cardiology
networks and seek to provide a range of practice management services. These
large network sponsors increasingly are recognizing the important role
information can play in facilitating more efficient and effective medical care
for their patients. Included among this growing network of cardiology practice
management companies are MedCath, Raytel Medical Corporation, Cardiovascular
Provider Resources, CORDA Medical Care, Inc. and InteCardia.
The Company's other market focus is on asthma and allergy. An estimated fifteen
million Americans have asthma at an estimated cost of approximately $6.2 billion
a year in missed work and school, in medications and hospital visits. Asthma has
become the most common chronic disease of childhood and the number one cause of
hospitalization and absenteeism. LifeRate's presence in both the cardiology and
the asthma and allergy specialties position the Company within the largest
market segments for both adult and pediatric medical care.
COMPANY MISSION AND EVOLUTION
The Company was founded in 1990 to develop a computer system that
could help physicians respond to the fee discount demands from managed care
organizations. As development ensued and the
<PAGE>
market need for patient-centered data grew, the Company's mission was formed: to
be the acknowledged leader in developing software based solutions and clinical
tools that allow healthcare providers to demonstrate quality and cost
effectiveness of the medical care they deliver. This mission is based on the
belief that the most formidable barrier to consistent excellence in American
medicine is the failure by well intentioned and competent physicians to
carefully examine what works best and then integrate those findings into routine
use. LifeRate is committed to providing its customers with products and related
services that improve and increase the overall effectiveness and quality of care
delivered by healthcare providers, by identifying patterns of medical care and
treatment that work better than others, and by helping healthcare providers
document their own best practice experience in order to increase their
profitability when negotiating with managed care and other payor organizations.
LifeRate released demonstration versions of its core system, along
with the Cardiovascular Outpatient module, in August 1995 and commercial
versions in December 1995. The Company accepted initial orders in the third
quarter of 1995, and began installation in the fourth quarter of 1995. During
1996, LifeRate continued its development activities, focusing on releasing two
Cardiovascular Outpatient product enhancements and an Asthma and Allergy
Outpatient module. LifeRate made important investments in technical support,
customer service and field sales as it internalized these functions. Marketing
and software quality assurance functions were also established.
An emphasis on sales in 1996 and 1997 has yielded positive results.
Currently, LifeRate's Cardiovascular Outpatient System is in use by six
cardiovascular practice groups and the Asthma and Allergy Outpatient System is
in use at four asthma and allergy practice groups. At the end of 1997, the
Company had entered into three agreements for 1998 installations of the
outpatient system at four sites and the cardiac catheterization laboratory
product at two sites. Development of LifeRate's newest product, LifeRate CLE, an
entry-level product for the cardiac catheterization laboratory, has been
completed and is now available for sale.
The Company has also entered into several agreements with key
strategic partners.
* In December 1995, LifeRate entered into Investment and
Development Agreements with Medtronic, Inc., a worldwide
leader in clinical devices.
* In January 1996, LifeRate and Pfizer, Inc., an established
international leader in drug manufacturing, entered into a
three year pilot program for LifeRate to install outpatient
cardiology systems at five cardiology practice groups and
explore ways to capture and report clinical data.
* In February 1996, LifeRate entered into a preliminary
agreement with the National Asthma and Allergy System
("NAAS"), a partnership of leading asthma and allergy group
practices, to install allergy and asthma outpatient systems at
up to eight asthma and allergy practice groups. NAAS was also
appointed as LifeRate's exclusive distributor of the asthma
and allergy outpatient system. The parties signed a final
development agreement in August 1997.
* In January 1997, National Jewish Medical and Research Center,
a renowned center of respiratory medicine and immunology
excellence, signed an agreement with LifeRate to develop a
clinical information system for their disease management
program.
* In June 1997, Washington Heart, a worldwide leader in
cardiovascular medicine, contracted with LifeRate to utilize
its clinical data repository to capture and report clinical
information from several different data sources.
<PAGE>
The Company's plans for 1998 call for building revenues from
existing and new products, and leveraging the strengths of its key partners.
PRODUCTS
LifeRate's product suite comprises software-based, patient-centered
clinical information tools and services that can be used to track a patient
throughout the continuum of care. Data collection tools are used to populate a
relational data repository that can be queried to analyze the quality and
effectiveness of patient care. Using analysis and report generation tools,
LifeRate and its customers are able to query the data repository on a variety of
parameters, such as drug utilization, treatment effectiveness, complications,
functional status, etc. The Company believes its experienced System Integration
team, which builds customized software links between LifeRate and other clinical
systems, represents a unique strength in the healthcare information management
marketplace. The Company's Client Services team includes clinical and technical
professionals that assist providers with integrating the various tools into
their overall clinical practice.
During 1996, LifeRate completed development of its core software
system, including outpatient modules for cardiovascular and asthma and allergy
specialties. The software has been released in three phases: Version 1.1 in
February, 1996; Version 1.2 in October, 1996; and Version 1.3 in September,
1997. These releases added functionality to the core software and increased its
operational benefits. During 1998, LifeRate plans to release a new suite of
products with greater emphasis on outcomes reporting and analysis.
MARKET STRATEGY
The Company's customer focus is on healthcare providers seeking
information systems solutions that allow them to maintain leadership and market
position. LifeRate targets those organizations that are:
* Thought leaders in their specialty
* Progressively responding to managed care trends
* High volume and procedurally oriented
* Committed to demonstrating they deliver quality medical care
on a cost effective basis within their practices
LifeRate plans to continue to align itself with national partners
committed to providing information to ensure more efficient and effective
medical care. Specifically in 1998, LifeRate plans to expand its target market
to include the growing number of physician practice management organizations
serving the cardiology and asthma and allergy medical specialties.
COMPETITION
The HCIS market originated by satisfying the need for computer
based systems focused largely on practice management (e.g., billing, accounting,
scheduling and purchasing) and electronic medical records ("EMR") documentation.
As the HCIS market evolved, some vendors added the ability to capture limited
clinical data.
<PAGE>
LifeRate's product has been designed specifically as a
clinically-oriented, outcomes-based information system that generates outcomes
reports targeted at demonstrating quality of care. LifeRate's tools and services
provide the following competitive advantages:
* In-depth clinical data collection tools for the specialties of
cardiology and asthma and allergy
* A comprehensive clinical data repository
* Real-time, online access to individual patient data
* The ability to successfully integrate data from clinical
systems and other diverse software applications
* A robust technical architecture that includes a
patient-centered, problem-oriented relational database and
that offers open access to industry standard tools
* A collection of tools and services that comprise a total
solution for providers incorporating information systems into
their patient care activities
The following products, while not directly competing on a per
product capability basis or across segments within specialty areas, are
potential competitors: Summit Medical Systems' VISTA and CRESCENDO products,
Seattle Systems' APOLLO, Apache's HEART CARE SERIES CARDIOCOMPASS and SURVEYOR+,
Health Point's HEALTH POINT ACS, Medical Logic's LOGICIAN and Cerner and
Clinitec's NEXT GEN. These products are generally considered to be electronic
medical record systems, meaning they capture limited clinical data and cannot
support detailed outcomes reporting.
In addition to the foregoing competitors, the Company anticipates
that new competitors may attempt to enter the market and that existing or new
competitors may develop information systems in the future that duplicate or
improve on LifeRate's system. Some of the Company's competitors are well
established, better known and significantly larger with substantially greater
technical, marketing and financial resources than the Company. The Company's
ultimate ability to compete in the market will depend upon a number of factors,
including its success in generating market acceptance of LifeRate's system and
the success of its marketing efforts.
RESEARCH AND DEVELOPMENT
The Company has in the past, and plans to continue in the future, to
dedicate significant resources to research and development activities. These
research and development activities consist primarily of developing and
releasing enhancements and new versions of its core software system. During
1996, LifeRate completed development of its core system, including outpatient
modules for cardiovascular and asthma and allergy specialists. During 1997,
research and development efforts were focused on a new release of the outpatient
modules for cardiovascular and asthma and allergy, continued development of the
cardiac catheterization laboratory product and development work under the
agreement with National Jewish Medical and Research Center. The core software
has been released in three phases: Version 1.1 in February, 1996; Version 1.2 in
October, 1996 and Version 1.3 in September, 1997. In addition, in January 1998,
the Company released an entry-level product for use in the cardiac
catheterization laboratory. LifeRate plans to continue to enhance the existing
cardiovascular and allergy and asthma outpatient products with special attention
to the growing market need for actionable outcomes information. The Company
spent $1,302,100, $5,309,900 and $2,104,500, respectively, on research and
development in the years ended December 31, 1997, 1996 and 1995.
PROPRIETARY PROTECTION
<PAGE>
The Company currently relies solely on common law copyrights and
trade secrets for proprietary protection of its system. LifeRate does not
currently have patent protection with respect to any aspect of its system,
although it has filed one U.S. patent application covering certain aspects of
its system and plans to file additional patent applications in the future. There
can be no assurance that the Company's measures to protect its proprietary
information will be successful, that it will be granted any patents, or that any
patents that may be granted will be of value to the Company. In the absence of
meaningful intellectual property protection, the Company may be vulnerable to
competitors who could lawfully attempt to copy the Company's products. Moreover,
there can be no assurance that other competitors may not independently develop
the same or similar technology. Similarly, while LifeRate believes that it has
all rights necessary to market and sell its system without infringement of
intellectual property rights held by others, the Company has not conducted a
formal infringement search, and there can be no assurance that such conflicting
rights do not exist.
Trademarks of the Company include LifeRate Systems(TM),
Cardiovascular Outpatient System(TM) and Asthma and Allergy Outpatient
System(TM).
EMPLOYEES
As of March 2, 1998, the Company had 26 full-time employees and 1
part-time employee including 4 in management and administration, 12 in software
development, 6 in sales and marketing and 5 in customer support.
LEGAL PROCEEDINGS
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. The Company has until May 4, 1998 to respond to the
complaint. The complaint contains causes of action against the Company alleging
fraud, deceit, negligent misrepresentation and other wrongdoing in connection
with a private placement of common stock conducted by the Company in December
1995. The plaintiffs purchased shares of common stock in the private placement
at a price of $6.50 per share for a total purchase price of approximately $1
million. The Company sold in the private placement in December 1995 and January
1996 a total of 858,399 shares of common stock at a price of $6.50 per share for
total gross proceeds of approximately $5.6 million. The plaintiffs are seeking
rescission of their investment, compensatory damages, exemplary and punitive
damages, general consequential and incidental damages and disgorgement and
restitution of profits received by the defendants, as well as plaintiff's costs,
including attorneys' fees, accountants' fees and experts' fees. The Company
believes the claims to be without merit and plans to vigorously defend this
action. An adverse resolution to this action could have a material adverse
effect on the Company.
<PAGE>
MANAGEMENT
The directors and executive officers of the Company as of April 15,
1998 are as follows:
NAME AGE POSITION
---- --- --------
David J. Chinsky 43 President and Chief Executive
Officer and Director
Kenneth G. Tarr 41 Chief Financial Officer
Mark W. Sheffert 50 Director and Chairman of the Board
Daniel A. Pelak 46 Director
Mark D. Dixon 32 Director
Robert N. Riner, M.D. 49 Director
DAVID J. CHINSKY. Mr. Chinsky joined the Company in August, 1997 as
President and Chief Executive Officer and a director. Prior to joining LifeRate,
Mr. Chinsky was employed for more than nine years in a variety of positions by
The MEDSTAT Group, an information services and consulting firm serving the
healthcare industry, most recently as Executive Vice President. Mr. Chinsky
received his undergraduate degree from the University of Michigan, his Master of
Business Administration degree from the Keller Graduate School of Management,
his Master of Science in Public Health degree from the University of Illinois
and his Doctor of Public Health degree from the University of Michigan.
KENNETH G. TARR. Mr. Tarr joined the company as Controller in
September 1997 and became its Chief Financial Officer in April, 1998. Prior to
joining LifeRate, Mr. Tarr was Controller at Ternes Register System from 1995 to
1997. Prior to that, Mr. Tarr was Controller at Minntech Corporation from 1990
to 1995. Mr. Tarr received his Bachelor of Science degree from the University of
Minnesota and became a Certified Public Accountant in 1980.
MARK W. SHEFFERT. Mr. Sheffert became a director and Chairman of the
Board of the Company in January, 1998. Mr. Sheffert has over 25 years of
financing and financial services experience. He is the founder of Manchester
Companies, Inc. ("MCI") whose business is investment banking, corporate
restructuring, management consulting and commercial finance. Before founding
MCI, Mr. Sheffert was a senior executive with First Bank System, a $28 billion
bank holding company where he served in various high-level management capacities
and was eventually named one of two President's of First Bank System. Before
joining First Bank System, Mr. Sheffert was Chief Operating Officer and Director
of North Central Life Insurance Company. Mr. Sheffert serves and has served on
the Board of Directors of several public companies, including Telident, Inc. and
Medical Graphics Corporation, privately held corporations, and community
organizations. Mr. Sheffert is the designee of the Funds elected to the Board,
as required by the Purchase Agreement.
DANIEL A. PELAK. Mr. Pelak has been a director of the Company since
January, 1996. Mr. Pelak is currently a Vice President of Medtronic, Inc., a
multi-national medical device manufacturer. He has been with Medtronic, Inc.
since 1976 and has held several key managerial positions. Mr. Pelak served as
the Vice President and General Manager of the Nortech Division of Medtronic from
1988 to 1992, and he is currently Vice President of Cardiovascular Marketing at
Medtronic. Mr. Pelak was elected to the Board as the designee of Medtronic. See
"Certain Transactions."
MARK D. DIXON. Mr. Dixon became a director of the Company in April,
1998. He is the Administrator of Abbott Northwestern Hospital. Mr. Dixon began
his career with Abbott Northwestern Hospital in 1984 serving as Operations Vice
President and as Executive Director of the Sister Kenny Institute. His
responsibilities have included planning, marketing, operations and overall
direction for the Cardiovascular, Rehabilitation, Neuroscience and Dialysis
programs, as well as numerous other ancillary departments and services. Mr.
Dixon received a Bachelor of Science Degree from the University of Minnesota in
1978 and a Master's Degree in Hospital and Health Care Administration in 1984
from the University of Minnesota.
RONALD N. RINER, M.D. Dr. Riner became a director of the Company in
April, 1998. Dr. Riner is president of the Riner Group, Inc., an advisory and
consulting firm he founded in 1980. Dr. Riner currently serves as a member of
the Executive Management Team of the American College of Cardiology and is
responsible for business development and vendor relations in the College's
efforts at instituting a national data repository for clinical outcomes. A
graduate of Princeton University, Dr. Riner attended Cornell University Medical
College and received his internship and residency training at The New York
Hospital/Memorial Sloan Kettering Cancer Center.
<PAGE>
ADDITIONAL INFORMATION ABOUT THE BOARD OF DIRECTORS
In November, 1997, as a condition to the closing of an equity
financing transaction, the Company's Board of Directors was reduced from ten
directors to five directors, and all of the non-employee directors of the
Company, other than Daniel A. Pelak and Kevin L. Roberg, resigned from the
Board. In connection with the November, 1997 equity financing, the Company also
agreed, so long as the Purchasers under the Purchase Agreement, own or have the
right to acquire at least 20% of the then outstanding shares of Common Stock,
that (a) the Company shall maintain the number of directors who constitute the
Board of Directors at five; (b) so long as the Funds own at least 2.5% of the
then outstanding shares of Common Stock, the Company shall maintain on the Board
one director nominee to be designated by the Funds; and (c) for a period of
three years from the date of the Purchase Agreement, the Company shall maintain
on the Board of Directors one director nominee to be designated by MJK, which
nominee is to be mutually acceptable to the Company and MJK. The Funds
designated Mark W. Sheffert as their director under the Purchase Agreement. MJK
has not designated its director as of the date hereof. See "Certain Transactions
- -- November, 1997 Equity Financing."
Kevin L. Roberg resigned from the Board in December, 1997.
On January 21, 1998, the Board of Directors reconstituted the Audit
Committee of the Board of Directors to consist solely of Mark Sheffert and
Daniel Pelak, who will act as Chairman of the Audit Committee. In addition, the
Board of Directors established a Compensation Committee, which has the
responsibility for making recommendations to the Board of Directors concerning
the compensation of the Company's directors, determining compensation for the
Company's Chief Executive Officer and approving compensation for senior
management of the Company and acting on such other matters relating to
compensation of directors, officers and senior management. The Compensation
Committee is currently comprised of Mark D. Dixon and Dr. Robert N. Riner.
DIRECTOR COMPENSATION
The Company does not pay fees to directors of the Company. The
Company generally reimburses directors of the Company for out-of-pocket expenses
incurred while attending Board or committee meetings.
Prior to March, 1997, the Company generally granted options to
directors to purchase 13,333 shares of Common Stock upon their initial election
to the Board. In March, 1997, the Company granted to each director options to
purchase 2,500 shares of Common Stock, exercisable at $3.00 per share, the Fair
Market Value (as defined under the Company's 1993 Stock Option Plan), and
vesting in one third increments on each of the three anniversaries following the
March 1997 grant date. See "Report on Repricing of Options."
In November, 1997, as a condition to the closing of the November,
1997 equity financing, all of the non-employee directors of the Company agreed
to cancel all options and warrants to purchase shares of Common Stock held by
them (except for certain options to purchase an aggregate of 236,333 shares held
by APF, LLC and Dr. Anthony P. Furnary and options to purchase 10,000 shares,
exercisable at $1.00 per share held by each of William W. Chorske and William D.
Knopf, M.D.). See "Certain Transactions -- November, 1997 Equity Financing."
<PAGE>
Mr. Chorske received $47,850 for acting as Chairman of the Board of
the Company during the period from May to November of 1997.
<PAGE>
COMPENSATION AND OTHER BENEFITS
The following table sets forth the total compensation for each of
the last three fiscal years awarded to or earned by the Chief Executive Officer
of the Company and each executive officer of the Company whose total
compensation exceeded $100,000 in 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------------- -----------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) UNDERLYING OPTIONS COMPENSATION (2)
- --------------------------- ---- ------ ----- --------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
David J. Chinsky (3) 1997 $78,750 $108,000 $11,258 650,000 --
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
William W. Chorske (4) 1997 $88,636 $150,000 (5) $47,850 54,917 (6) --
FORMER PRESIDENT AND CHIEF 1996 $166,667 -- $20,000 75,000 --
EXECUTIVE OFFICER AND FORMER
CHAIRMAN
John R. Goodrich (7) 1997 $77,000 -- -- -- --
FORMER INTERIM PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Paul D. Benson (8) 1997 $95,000 $7,754 -- 8,000 $2,450
FORMER SENIOR VICE PRESIDENT, 1996 $95,000 $20,000 -- -- --
STRATEGIC BUSINESS DEVELOPMENT 1995 $75,000 $20,000 -- -- --
</TABLE>
- ------------------------
(1) "Other Annual Compensation" paid to Mr. Chinsky is comprised of an
apartment and travel allowance. "Other Annual Compensation" paid to Mr.
Chorske in 1997 was in connection with his services as Chairman of the
Board of the Company.
(2) "All Other Compensation" paid to Mr. Benson is comprised entirely of
matching contributions to the Company's 401(k) plan.
(3) David J. Chinsky became President and Chief Executive Officer in August,
1997.
(4) William W. Chorske served as President and Chief Executive Officer from
May, 1996 through April, 1997. Mr. Chorske became Chairman of the Board in
May, 1997 and resigned such position on November 14, 1997. See "Certain
Transactions -- November, 1997 Equity Financing."
(5) The $150,000 bonus for 1997 became payable under Mr. Chorske's employment
agreement upon termination of his employment, but has not yet been paid.
See "Compensation and Other Benefits -- Employment Agreements, Chorske
Employment Agreement."
<PAGE>
(6) In March, 1997, the Company granted Mr. Chorske options to purchase 2,500
and 52,417 shares of Common Stock each at an exercise price of $3.00 per
share and expiring five years from the date of grant, and canceled Mr.
Chorske's prior options covering 61,667 shares exercisable at $9.375 per
share. In November, 1997, in connection with the November 1997 equity
financing Mr. Chorske agreed to cancel all outstanding options except that
he retained options to purchase 10,000 shares at an exercise price of
$1.00 per share. See "Report on Repricing of Options" below.
(7) John R. Goodrich served as interim President and Chief Executive Officer
from May, 1997 to August, 1997.
(8) Paul D. Benson resigned from the Company in February, 1998.
OPTION GRANTS AND EXERCISES IN 1997
The following tables provide information for the year ended December
31, 1997 as to individual grants and exercises of options to purchase shares of
the Company's Common Stock by each of the Named Executive Officers of the
Company.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED TO MARKET PRICE
UNDERLYING OPTIONS GRANTED EMPLOYEES IN FISCAL EXERCISE OR BASE ON DATE EXPIRATION
NAME (#) (1) YEAR PRICE ($/Sh) OF GRANT DATE
- ---- -------------------------- ------------------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
David J. Chinsky 650,000 (2) 77.0% $0.50 $1.125 8/26/05
William W. Chorske 52,417 (3) 6.2% $3.00 $3.00 3/7/02
2,500 (3) 0.3% $3.00 $3.00 3/7/02
Paul D. Benson 8,000 (4) 0.9% $3.00 $3.00 3/7/02
</TABLE>
- ------------------------
(1) Upon a defined "Change in Control" of the Company, all outstanding options
become immediately exercisable in full and will remain exercisable for the
remainder of their terms regardless of whether the holder remains in the
employ or service of the Company or any subsidiary. A "Change in Control"
of the Company for purposes of both options granted outside of as well as
under the 1993 Stock Option Plan includes (i) the sale, lease, exchange or
other transfer of all or substantially all of the assets of the Company to
a corporation that is not controlled by the Company, (ii) the approval by
the Company's shareholders of any plan or proposal for the liquidation or
dissolution of the Company, (iii) the acquisition by any person, directly
or indirectly, of 50% of more of the Company's Common Stock, excluding
shares acquired by Special Situation Fund (see "Certain Transactions --
November 1997 Equity Financing") or (iv) any change in control of the
Company of a nature that would be required to be reported pursuant to
Section 13 or 15(d) of the Exchange Act, whether or not the Company is
then subject to such reporting requirements.
(2) Such options to Mr. Chinsky were not granted under any formal stock option
plan of the Company. Such options vest at the rate of one-third of the
shares covered by such options on the
<PAGE>
first three anniversaries of the date Mr. Chinsky began his employment
with the Company, provided that Mr. Chinsky continues to provide services
to the Company. The exercise price of these options is equal to the per
share price of the shares sold in the November 1997 equity financing. At
the time of the grant of these options, Mr. Chinsky waived his right to
any additional options to which he would otherwise have been entitled
pursuant to his employment agreement. See "Compensation and Other Benefits
-- Employment Agreements, Chinsky Employment Agreement" and "Certain
Transactions -- November 1997 Equity Financing."
(3) In March, 1997, the Company granted Mr. Chorske options under the
Company's 1993 Stock Option Plan to purchase 2,500 and 52,417 shares of
Common Stock each at an exercise price of $3.00 per share and expiring
five years from the date of grant, and canceled Mr. Chorske's prior
options covering 61,667 shares exercisable at $9.375 per share. In
November, 1997, in connection with the November 1997 equity financing Mr.
Chorske agreed to cancel all outstanding options except that he retained
options to purchase 10,000 shares at an exercise price of $1.00 per share.
See "Report on Repricing of Options" below.
(4) Such options to Mr. Benson were granted under the Company's 1993 Stock
Option Plan and are subject to the terms of such plan.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FY-END (#)(1) MONEY OPTIONS AT FY-END ($)(2)
------------------------- ------------------------------
NAME (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
- ---- --------------------------- ------------------------------
<S> <C> <C>
David J. Chinsky 0/650,000 $0/$81,250
William W. Chorske 10,000/0 0/0
Paul D. Benson 0/8,000 0/0
</TABLE>
- ------------------------
(1) The exercise price may be paid in cash or, in the Stock Option Committee's
discretion, in shares of the Company's Common Stock valued at fair market
value on the date of exercise.
(2) Based on the closing bid price on December 31, 1997 of $.625, as reported
by the OTC Bulletin Board.
REPORT ON REPRICING OF OPTIONS
On March 7, 1997, the Stock Option Committee of the Board of
Directors granted new options to all employees of the Company, including William
W. Chorske, the Company's President and Chief Executive Officer at that time, at
an exercise price of $3.00 per share, the Fair Market Value (as defined in the
Company's 1993 Stock Option Plan) on such date, and canceled all options
previously granted to then current employees. Prior to March 7, 1997, the
exercise price of all options held by employees ranged from $4.50 to $10.625 per
share. In addition, the number of shares covered by the new options granted to
employees was reduced by 15% from the number of shares covered by the canceled
options. The vesting of the new options was also extended so as to preserve a
continuing equity incentive for all employees to remain with the Company over
the next several years. The new options vested in one third
<PAGE>
increments on each of three anniversaries following the March 7, 1997 grant. The
Stock Option Committee granted these options because it concluded that the grant
was necessary to maintain an appropriate future equity incentive for the
employees of the Company.
EMPLOYMENT AGREEMENTS
CHINSKY EMPLOYMENT AGREEMENT. In August, 1997, the Company and David
J. Chinsky entered into an employment agreement, which provides for the
employment of Mr. Chinsky as the Company's President and Chief Executive
Officer. The agreement has an initial term of one year and will automatically
renew for additional one-year periods, unless terminated by one of the parties.
The agreement provides for an annual base salary of $225,000 with an annual
performance bonus of up to $100,000 per year if to be agreed upon performance
criteria are met. The Company has guaranteed payment of a first year bonus of
$100,000. The Company also agreed to pay Mr. Chinsky $108,000 in February, 1998
for a bonus that Mr. Chinsky would have otherwise received from previous
employment, provided that the Company successfully completed an equity
financing. In addition, the Company agreed to grant Mr. Chinsky options to
purchase an aggregate of 300,000 shares of Common Stock at an exercise price
equal to the fair market value of the shares on the date of his acceptance of
employment. The Company also agreed to grant Mr. Chinsky options to purchase
additional shares of Common Stock such that after any equity financings
completed within Mr. Chinsky's first year of employment he will have been
granted options covering a total number of shares of Common Stock equal to 7.84%
of the number of outstanding shares of Common Stock. In the event that Mr.
Chinsky terminates the agreement for "good reason" following a change of control
of the Company, Mr. Chinsky is entitled to receive his base salary for the
remaining term of the agreement and the bonus that would otherwise be payable.
The agreement also requires Mr. Chinsky to assign to the Company any inventions
related to the Company's business and to keep the Company's proprietary
information confidential. Mr. Chinsky is also prohibited from competing with the
Company for a period of two years following termination of his employment with
the Company.
In connection with the closing of the November, 1997 equity
financing, Mr. Chinsky's employment agreement was amended to provide that: (a)
the transactions contemplated by the November, 1997 equity financing did not
constitute a "change in control," as defined in the employment agreement; (b)
bonuses payable to Mr. Chinsky will be payable, at the option of the Company, in
cash or shares of Common Stock; (c) the payment of a certain bonus in the amount
of $108,000 was accelerated and paid in November, 1997; (d) the exercise price
of all options granted under the agreement would be $.50 per share, the per
share price of the shares sold in the November 1997 equity financing; (e) Mr.
Chinsky be granted an option to purchase 650,000 shares of Common Stock; and (f)
Mr. Chinsky waived his right to receive any additional options upon completion
of the November, 1997 equity financing. See "Certain Transactions."
CHORSKE EMPLOYMENT AGREEMENT. Effective May 1, 1996, the Company and
William W. Chorske entered into a one-year employment agreement, which provided
for the employment of Mr. Chorske as the Company's President and Chief Executive
Officer. The agreement provided for an annual base salary of $250,000. In
addition, the Company granted Mr. Chorske an option (not under any formal plan
of the Company) to purchase 61,667 shares of Common Stock at a price of $9.375
per share, which became exercisable in full upon completion of one year of
employment. In March 1997, this option was replaced with an option covering
52,417 shares exercisable at $3.00 per share. Mr. Chorske is also entitled to
receive a bonus under the agreement equal to $150,000 because the exercise price
of the options was greater than the market value of the Company's Common Stock
at the time of termination of his employment. In consideration for his service
as a director, the Company also granted
<PAGE>
Mr. Chorske an option under the Company's 1993 Stock Option Plan to purchase
13,333 shares of Common Stock at price of $9.375, exercisable with respect to
one-third of such shares and will become exercisable with respect to one-third
of such shares on each of the first two anniversaries of his election as a
director, provided that Mr. Chorske remains a director of the Company. The
agreement also required Mr. Chorske to assign to the Company any inventions
related to the Company's business and to keep the Company's proprietary
information confidential. Mr. Chorske was also prohibited from competing with
the Company for a period of two years following termination of his employment
with the Company. Mr. Chorske's employment and positions as President and Chief
Executive Officer ended April 30, 1997, and he resigned as a director in
November 1997. In connection with the November 1997 equity financing Mr. Chorske
agreed to cancel all outstanding options except that he retained options to
purchase 10,000 shares at $1.00 per share.
CERTAIN TRANSACTIONS
NOVEMBER 1997 EQUITY FINANCING
On November 14, 1997, the Company entered into the Purchase
Agreement with Special Situations Private Equity Fund, L.P., Special Situations
Cayman Fund, L.P., Special Situations Fund III, L.P. (collectively, the "Funds")
and the other purchasers named in the Purchase Agreement (the Funds and such
other purchasers are collectively referred to herein as the "Purchasers"),
pursuant to which the Company agreed to sell up to 9,000,000 shares of Common
Stock of the Company at prices ranging from $.50 to $.56 per share and warrants
to purchase up to 9,000,000 shares of Common Stock, as well as an additional
104,000 shares of Common Stock and warrants to purchase 104,000 shares of Common
Stock for cancellation of certain indebtedness. The warrants are exercisable for
a period of ten years at a price of $1.50 per share, subject to adjustment as
provided in the warrants. The first closing under the Purchase Agreement was
held on November 14, 1997, at which the Company sold an aggregate of 2,500,000
shares of Common Stock at a price of $.50 per share and issued warrants to
purchase an aggregate of 2,500,000 shares of Common Stock to the Funds for an
aggregate purchase price of $1,250,000 and an aggregate of 104,000 shares of
Common Stock and warrants to purchase an aggregate of 104,000 shares of Common
Stock for the cancellation of $52,000 of indebtedness (the "First Closing"). The
interim closing was held on November 21, 1997 (the "Interim Closing"), at which
the Company sold an additional 1,790,000 shares of Common Stock at a price of
$.56 per share and issued warrants to purchase an aggregate of 1,790,000 shares
of Common Stock to purchasers other than the Funds for an aggregate purchase
price of $1,002,400.
The Purchase Agreement also provided that, in the event the Company
fulfilled certain conditions by January 15, 1998 (the "Second Closing
Conditions"), the Company would issue up to an additional 4,500,000 shares of
Common Stock and warrants to purchase 4,500,000 shares of Common Stock at a
purchase price of between $.50 and $.56 per share on or before January 31, 1998
(the "Second Closing"). The Second Closing Conditions included (a) the approval
by the shareholders of the Company of an amendment to the Company's Amended and
Restated Articles of Incorporation to increase the total number of authorized
shares of Common Stock to an aggregate of 75,000,000 and (b) the attainment by
the Company no later than January 15, 1998, of the following milestones: (i) the
Company's net revenues derived from the sale of existing or new systems during
the period from October 1, 1997 through January 15, 1998, shall be at least
$200,000; (ii) the Company shall have executed letters of intent and/or sales
contracts, each with a minimum value of $5,000, with at least five new
(excluding current or previous) customers for the sale of any existing or new
systems during the period from October 1, 1997 through January 15, 1998; and
(iii) the Company shall have made generally
<PAGE>
available for sale a commercially marketable entry level cardiac catheterization
laboratory product designed to support the data requirements of the American
College of Cardiology, with a sales price range of $5,000 to $15,000.
The Company satisfied these Second Closing Conditions and a second
closing was held on January 30, 1998 (the "Second Closing"), at which the
Company sold an aggregate of 2,500,000 shares of Common Stock at a price of $.50
per share and issued warrants to purchase an aggregate of 2,500,000 shares of
Common Stock to the Funds for an aggregate purchase price of $1,250,000 and sold
an aggregate of 1,500,000 shares of Common Stock at a price of $.56 per share
and issued warrants to purchase an aggregate of 1,500,000 shares of Common Stock
to purchasers other than the Funds for an aggregate purchase price of $840,000.
The Shares and Warrants acquired by the Funds constitute "beneficial ownership"
(within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as
amended) of approximately 57% of the Company's Common Stock immediately
following the Second Closing.
As a condition to the First Closing, the Company's Board of
Directors was reduced from ten directors to five directors, and all of the
non-employee directors of the Company, other than Daniel A. Pelak and Kevin L.
Roberg, resigned from the Board. In addition, all of the non-employee directors
of the Company agreed to cancel all options or warrants to purchase shares of
Common Stock held by them (except for certain options to purchase an aggregate
of 236,333 shares held by APF, LLC ("APF") and Dr. Furnary and options to
purchase 10,000 shares, exercisable at $1.00 per share held by each of William
W. Chorske and William D. Knopf, M.D.). Under the Purchase Agreement, the
Company has also agreed, so long as the Purchasers own or have the right to
acquire at least 20% of the then outstanding shares of Common Stock, that (a)
the Company shall maintain the number of directors who constitute the Board of
Directors at five; (b) so long as the Funds own at least 2.5% of the then
outstanding shares of Common Stock, the Company shall maintain on the Board of
Directors one director nominee to be designated by the Funds; and (c) for a
period of three years form the date of the Purchase Agreement, the company shall
maintain on the Board of Directors one director nominee to be designated by
Miller Johnson & Kuehn, Incorporated ("MJK"), which nominee is to be mutually
acceptable to the company and MJK (the "MJK Director"). The Funds have
designated Mr. Mark W. Sheffert as their nominee to the Board. MJK has not
designated its nominee to the Board as of the date hereof.
The Company agreed to a number of covenants under the Purchase
Agreement. So long as the Purchasers own or have the right to acquire at least
20% of the outstanding shares of Common Stock, the Company has agreed not to do
any of the following without the consent of the Funds and the MJK Director: (a)
sell Common Stock or any rights or securities convertible into or exercisable or
exchangeable for Common Stock at a purchase, exercise or conversion price, as
the case may be, of less than $1.00 per share of Common Stock for a period of
three years from the date of the Purchase Agreement; (b) issue any securities
senior to the common Stock; (c) effect any reclassification, capital
reorganization or other change of outstanding shares of capital stock of the
Company; (d) merge, consolidate or enter into any other business combination of
the company with or into another entity (other than a merger of a wholly owned
subsidiary, in which merger the Company shall be the surviving entity); (e)
sell, lease or otherwise dispose of all or substantially all of its assets; or
(f) liquidate, dissolve or wind-up the Company.
As further conditions to the First Closing, the Company amended
certain agreements between the Company and certain officers, directors and
affiliated entities. These amendments are described above and under the heading
"Compensation and Other Benefits -- Employment Agreements."
<PAGE>
NON-EMPLOYEE DIRECTOR LOANS
In October 1997, eight of the Company's then non-employee directors
loaned the Company $5,775 and an aggregate of $46,200 in order for the Company
to continue operations pending completion of the November 1997 equity financing.
The Company repaid a total of $40,425, without interest, to seven of these
non-employee directors from the proceeds of the November 1997 equity financing,
and the balance of $5,775 owed to Mr. Wegmiller was converted into 11,550 shares
of Common Stock at a price of $.50 per share.
AGREEMENTS WITH MEDTRONIC, INC.
In May 1997, the Company issued a convertible promissory note in the
principal amount of $1,000,000 to Medtronic, Inc. (the "Medtronic Note"), a
principal shareholder of the Company with a representative that serves on the
Company's Board of Directors. As originally issued, the Medtronic Note accrued
interest at the prime rate. Under its original terms, the Medtronic Note would
have become due upon the earlier of the completion by the Company of an equity
financing raising gross proceeds of at least $5,000,000 or November 30, 1997,
and was convertible, at the option of the holder, into Common Stock at a
conversion price equal to the lower of $2.00 or the average per share price in
one or more rounds of equity financing raising gross proceeds to the Company of
at least $5,000,000 (including proceeds from this offering). At the time of
issuance of the original Medtronic Note, the Company granted Medtronic a warrant
to purchase 100,000 shares of Common Stock, exercisable at the same price as the
conversion price of the Medtronic Note (the "Medtronic Warrant"). Under the
original terms of the Medtronic Note, the Company would have been obligated to
grant an additional warrant to purchase a number of shares of Common Stock equal
to 5% of the principal amount of the Medtronic Note if the note was not paid by
November 30, 1997 and an additional warrant to purchase a number of shares of
Common Stock equal to 5% of the principal amount of the Medtronic Note if the
note was not paid by February 28, 1998. In connection with the November 1997
equity financing, the Medtronic Note was amended to provide that: (a) no
interest will accrue thereunder and accrued interest will be forfeited; (b)
principal will not become due until May 12, 2002; (c) the conversion price of
the Medtronic Note is $1.50 per share; and (d) the Company will not be obligated
to issue any additional warrants to Medtronic under the Medtronic Note. The
Medtronic Warrant was also amended to provide that the exercise price is $.50
per share and that there was no other adjustment to the exercise price or the
number of shares covered by the Medtronic Warrant as a result of the November
1997 equity financing.
On December 26, 1995, the Company entered into an Investment
Agreement and a License and Development Agreement with Medtronic, Inc.
("Medtronic") and a Shareholder Voting Agreement with Medtronic and certain
shareholders of the Company. Pursuant to the Investment Agreement, the Company
privately sold to Medtronic 600,000 shares of Common Stock at a price of $8.00
per share for a total price of $4.8 million. The Company granted to Medtronic
certain rights of first refusal to purchase capital stock and assets of the
Company and to develop or commercialize the Company's technology in one or more
fields other than the cardiovascular and neurological fields, certain rights to
have shares of the Company held by Medtronic and certain assignees of Medtronic
registered for sale to the public and the right to designate one person to be
nominated and elected to the Board of Directors of the Company. Daniel A. Pelak,
a Vice President of Medtronic, was elected to the Company's Board in January
1996 as Medtronic's designee under this agreement. Pursuant to the License and
Development Agreement, the Company granted to Medtronic a 30-year world-wide,
fully paid, royalty free license granting Medtronic certain rights relating to
the sale and use of the Company's system in the cardiovascular and neurological
fields. In addition, the Company agreed to install the Company's system
<PAGE>
at certain clinical sites specified by Medtronic on a preferred pricing basis,
to install the system at one site specified by Medtronic at no cost to Medtronic
and to engage with Medtronic in certain joint development of products and
systems. Under the Shareholder Voting Agreement, officers of the Company who are
parties to the agreement, including Paul D. Benson, agreed to vote their shares
of Common Stock of the Company for the person designated by Medtronic to be a
member of the Board of Directors of the Company. In connection with the November
1997 equity financing, Medtronic waived the restrictions on registration rights
contained in Section 8.4 of the Investment Agreement, waived its right of first
refusal to purchase securities in the November 1997 equity financing, agreed not
to exercise and to otherwise waive any of its registration rights until January
1, 2000, waived its superior position with respect to an underwriter's cutback
of piggyback registration rights and waived its right of first refusal on the
sale of the Company in certain circumstances.
AGREEMENTS WITH FURNARY AND APF, LLC
In July 1995, the Company entered into an agreement with Anthony P.
Furnary, M.D., an advisor to the Company at the time, and APF, an entity owned
by Dr. Furnary under which the Company acquired certain software developed by
Dr. Furnary and agreed to pay royalties to Dr. Furnary initially equal to 7.5%
of gross revenues. Dr. Furnary also received an option to purchase 26,000 shares
of Common Stock at an exercise price of $4.50 per share. During 1995, 1996 and
1997 the Company paid approximately $81,000 in royalties under this agreement to
Dr. Furnary. In March 1997, the Company and Dr. Furnary entered into an
agreement modifying the July 1995 agreement. Under the terms of the modified
agreement, beginning in 1999 (or sooner if the Company reaches $20,000,000 of
cumulative revenues) the Company will pay royalties in the amount of 3% on all
gross revenues (as defined in the agreement) up to $100,000,000, and thereafter,
3.6% on all gross revenues. The existing royalty rate of 7.5% of gross revenues
remained in place through March 31, 1997. In addition, among other things, under
the modification the Company agreed (i) to make certain milestone payments
totaling $450,000 when the Company reaches certain revenue levels; (ii) to issue
options to APF, for services previously rendered to the Company, to purchase
550,000 shares of Common Stock at an exercise price of $2.625 per share and to
reprice outstanding options to purchase 36,333 shares held by Dr. Furnary to
$2.625 per share (which represents the closing price of the Company's Common
Stock on the date the Company and Dr. Furnary reached agreement in principle on
the modification agreement); (iii) to enter into a consulting agreement with Dr.
Furnary; and (iv) to appoint Dr. Furnary to the Company's Board of Directors
within 90 days. The consulting agreement, which has an initial term of five
years, with two-year renewal rights upon mutual agreement, provides that Dr.
Furnary will provide consulting services to the Company in the area of system
design and development as the Senior Advisor and System Architect for an annual
fee of $100,000.
In connection with the November 1997 equity financing, the
Consulting Agreement, between the Company and Dr. Furnary was terminated, and
the Company's obligation to make milestone royalty payments of $450,000 under
the modified agreement was terminated. The 550,000 share stock option agreement
was amended to reduce the number of shares to 200,000 and the exercise price to
$1.00 per share. APF and Furnary also agreed (a) not to exercise and to
otherwise waive any of their registration rights under the foregoing option or
the other options held by them to purchase an aggregate of an additional 36,333
shares until January 1, 2000; (b) not to sell or otherwise transfer any shares
of Common Stock purchased upon exercise of any of such options prior to January
1, 2000; and (c) that there was no other adjustment to the exercise price of
such options or the number of shares issuable upon exercise of the foregoing
options thereof as a result of the November 1997 equity financing. Furnary also
waived his right to be appointed to the Company's Board of Directors and agreed
that his observer status is only exercisable by him personally.
<PAGE>
AGREEMENTS WITH THE ATLANTA CARDIOLOGY GROUP, P.C.
In September 1994, The Atlanta Cardiology Group, P.C. ("ACG") and
the Company entered into an agreement for the joint development of practice
guidelines and clinical outcomes for cardiology, under which ACG agreed to pay
the Company a fee for system design and implementation and ACG was to receive
royalties on sales of the cardiology system over the next ten years. During
1995, the Company paid (or accrued) $150,000 for all services rendered by ACG
and the Company received $50,000 in revenues from the sale of products and
services to ACG. In early 1996, the Company and ACG agreed to restructure their
relationship. Among other things, the Company agreed to pay ACG a royalty equal
to 10% of gross sales of the Company's cardiology system and a 2% royalty on all
database sales. In 1996, the Company received no revenues from ACG and accrued
$60,052 in fees to ACG for all services rendered in 1996, including royalties
under the prior agreement. In March 1997, the Company entered into an agreement
with ACG to replace the prior agreements. Under the revised agreement, the
Company issued a convertible subordinated note to ACG in the principal amount of
$2,250,000, maturing on April 1, 2002 (the "ACG Note"). The note accrues
interest at a rate of 10% per annum, and interest is payable at the rate of 5%
per year, with the balance of accrued interest payable at the maturity date. Up
to $2,000,000 of the principal amount of the note is convertible by ACG into
shares of Common Stock at the rate of $3.32 per share. As long as the note is
outstanding, ACG has the right to designate an individual to attend all board
meetings. William D. Knopf, M.D., a practicing cardiologist and partner in ACG,
is a director of the Company. In connection with the November 1997 equity
financing, the ACG Note was amended to provide that no interest will accrue
thereunder and that any accrued interest shall be forfeited. In addition, ACG
agreed that there was no adjustment to the conversion price of the ACG Note or
the number of shares issuable upon conversion of the ACG Note as a result of the
November 1997 equity financing. ACG also agreed not to exercise and to otherwise
waive any of its registration rights prior to January 1, 2000 and waived its
right to designate a person to attend meetings of the Board.
KNOPF AGREEMENT
In September 1996, the Company entered into an agreement with
William D. Knopf, M.D., a former director of the Company, relating to the
termination of Dr. Knopf's employment by the Company. Pursuant to this
agreement, the Company entered into a consulting agreement with Dr. Knopf, under
which Dr. Knopf has agreed to provide certain consulting and advisory services
to the Company and will receive an annual consulting fee of $60,000. The
consulting agreement also includes a non-competition covenant for 12 months
following the expiration of the term of the consulting agreement, which expired
by its terms on September 1, 1997. In addition, Dr. Knopf received an option to
purchase 50,000 shares at an exercise price equal to the fair market value on
the date of grant, which was $6.625 per share. This option was exercisable with
respect to one-third of such shares on the date of grant and will become
exercisable with respect to one-third of such shares on each of the first two
anniversaries of the date of grant. The option is exercisable for a period of
ten years from the date of grant. The Company and Dr. Knopf also executed mutual
releases of any and all claims relating to Dr. Knopf's employment by the Company
or the termination of his employment.
EDMONDS AGREEMENT
In September 1996, the Company entered into an agreement with Donna
J. Edmonds, a former director and executive officer of the Company, whose
employment with the Company terminated effective April 24, 1996. Pursuant to
such agreement, the Company agreed to pay Ms. Edmonds an
<PAGE>
aggregate of $190,000 and granted Ms. Edmonds an option to purchase 80,000
shares of the Company's Common Stock, at an exercise price of $5.00 per share,
which was the closing bid price on September 12, 1996. This option is
exercisable for a period of ten years following the date of grant. The Company
and Ms. Edmonds also agreed to execute a stipulation of dismissal with prejudice
to resolve the then pending litigation brought by Ms. Edmonds against the
Company. The Company and Ms. Edmonds also executed mutual releases of any and
all other claims relating to Ms. Edmonds' employment by the Company or the
termination of her employment.
HASKIN AGREEMENT
In June 1996, the Company entered into an agreement with David W.
Haskin, a former director and Chief Executive Officer of the Company, whose
employment with the Company terminated effective April 24, 1996. Pursuant to the
terms of this agreement, the Company agreed to pay or reimburse Mr. Haskin up to
$10,000 per year for premiums on health insurance coverage for himself and his
spouse until Mr. Haskin reaches age 65. In addition, the Company agreed to use
its reasonable efforts to cause the release of shares owned by Mr. Haskin from
the "cheap stock" escrow with the Commissioner of Commerce for the State of
Minnesota and certain lock-up arrangements with MJK and granted Mr. Haskin
certain registration rights with respect to certain shares of the Company's
Common Stock. The Company and Mr. Haskin also executed mutual releases of any
and all claims relating to Mr. Haskin's employment by the Company or the
termination of his employment.
COMER AGREEMENT
In June 1996, the Company entered into an agreement with Jeffrey B.
Comer, a former executive officer of the Company, whose employment with the
Company terminated effective April 24, 1996. Pursuant to the terms of this
agreement, the Company entered into a consulting agreement with Mr. Comer,
pursuant to which Mr. Comer provided consulting services for a period of six
months and received an aggregate of $160,000 for such consulting services. The
consulting agreement also included a non-competition covenant for 12 months
following the expiration of the term of the consulting agreement, which occurred
on December 1, 1996. In addition, Mr. Comer received an option to purchase
51,000 shares of the Company's Common Stock for an exercise price per share
equal to the fair market value per share on the date of such grant, which was
$8.625 per share, and the Company granted him certain registration rights with
respect to certain shares owned or subject to options held by Mr. Comer. The
Company and Mr. Comer also executed mutual releases of any and all claims
relating to Mr. Comer's employment by the Company or the termination of his
employment.
<PAGE>
PRINCIPAL SHAREHOLDERS AND BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Common Stock of the Company as of April 15, 1998, unless
otherwise indicated, by (a) each shareholder who is known by the Company to own
beneficially more than 5% of the outstanding Common Stock, (b) each director,
(c) each of the Named Executive Officers and (d) all directors and executive
officers of the Company as a group.
SHARES OF COMMON STOCK
NAME BENEFICIALLY OWNED (1)
- ---- --------------------------------------------
AMOUNT PERCENT OF CLASS (2)
------ --------------------
Special Situations Funds (3) 10,040,000 (3) 57.4%
John R. Albers 1,288,333 (4) 9.8%
Aaron Boxer Rev. Trust 885,000 (5) 6.9%
Medtronic Inc. 700,000 (6) 5.6%
David J. Chinsky 0 0
Daniel A. Pelak 0 (7) 0
Mark W. Sheffert 0 0
Mark D. Dixon 0 0
Robert N. Riner 0 0
Paul D. Benson 98,240 *
William W. Chorske 10,000 (8) *
John R. Goodrich 0 0
All directors and executive
officers as a group (6 persons) 0 (7) 0
- ------------------------
* Less than 1% of the outstanding shares
(1) Unless otherwise noted, all of the shares are held by individuals
possessing sole voting and dispositive power with respect to the shares
shown. Shares not outstanding, but deemed beneficially owned by virtue of
the right of a person or member of a group to acquire them within 60 days,
are treated as outstanding only when determining the amount and percent
owned by such person or group.
<PAGE>
(2) Based upon 12,485,000 outstanding shares of Common Stock as of April 15,
1998.
(3) As set forth in a Schedule 13D/A filed with the Securities and Exchange
Commission on February 10, 1998, this amount consists of: (i) 2,000,000
shares of Common Stock held by Special Situations Private Equity Fund,
L.P.; (ii) 2,000,000 shares of Common Stock issuable to Special Situations
Private Equity Fund, L.P. pursuant to outstanding warrants; (iii)
2,200,000 shares of Common Stock held by Special Situations Fund III,
L.P.; (iv) 2,200,000 shares of Common Stock issuable to Special Situations
Fund III, L.P. pursuant to outstanding warrants; (v) 840,000 shares of
Common Stock held by Special Situations Cayman Fund, L.P.; and (vi)
800,000 shares of Common Stock issuable to Special Situations Cayman Fund,
L.P. pursuant to outstanding warrants. Austin W. Marxe and David M.
Greenhouse, principals of the investment advisors to the Funds, are deemed
to beneficially own the securities held by the Funds as reported herein
The address of Special Situations Funds is 153 East 53rd Street, 51st
Floor, New York, New York 10022.
(4) Based upon records available to the Company, such shares include 638,333
shares that Mr. Albers has the right to acquire within 60 days pursuant to
the exercise of warrants. Mr. Albers' address is 3825 Gillon Avenue,
Dallas, Texas 75205.
(5) Based upon records available to the Company, such shares include 427,500
shares that the Aaron Boxer Rev. Trust has the right to acquire within 60
days pursuant to the exercise of warrants. The address of the Aaron Boxer
Rev. Trust is 7287 Sidonia Court, Boca Raton, Florida 33433.
(6) Includes 100,000 shares that Medtronic, Inc. has the right to acquire
within 60 days pursuant to the exercise of warrants. The address of
Medtronic, Inc. is 7000 Central Avenue, N.E., Minneapolis, Minnesota
55432.
(7) Does not include any shares beneficially owned by Medtronic, Inc. Mr.
Pelak is an employee of Medtronic and its designee for election to the
Board of Directors.
(8) Includes 10,000 shares that Mr. Chorske has the right to acquire within 60
days pursuant to the exercise of stock options.
<PAGE>
SELLING SHAREHOLDERS
This Prospectus relates to the offering of 16,788,000 shares of
Common Stock of the Company by the Selling Shareholders named below. The shares
being offered by the Selling Shareholders hereunder include: (i) 8,394,000
currently outstanding shares of Common Stock issued to the Selling Shareholders
in a private transaction pursuant to the Purchase Agreement, and (ii) 8,394,000
shares of Common Stock issuable pursuant to the exercise of warrants held by the
Selling Shareholders. The Company agreed to provide registration rights pursuant
to the Purchase Agreement, which required the Company to register the 8,394,000
shares of Common Stock issued to the Selling Shareholders and the 8,394,000
shares of Common Stock issuable to the Selling Shareholders upon the exercise of
warrants. The 16,788,000 shares of Common Stock have been registered hereunder
pursuant to such registration rights. The following table sets forth certain
information, as of February 15, 1998, and as adjusted to reflect the sale of the
shares offered hereby, with respect to the beneficial ownership of the Common
Stock by the Selling Shareholders. Unless otherwise indicated, the Selling
Shareholders possess sole voting and investment power with respect to the shares
shown.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER
SHARES OF COMMON NUMBER OF COMPLETION OF
STOCK BENEFICIALLY SHARES THE OFFERING (2)
OWNED PRIOR TO THE BEING --------------------------------
SELLING SHAREHOLDER OFFERING (1) OFFERED NUMBER % OF CLASS (3)
- ------------------- ------------ ------- ------ --------------
<S> <C> <C> <C> <C>
Special Situations Fund III, L.P. (4) 4,400,000 (5) 4,400,000 0 0
Special Situations Private Equity Fund, L.P. (4) 4,000,000 (5) 4,000,000 0 0
Special Situations Cayman
Fund, L.P. (4) 1,600,000 (5) 1,600,000 0 0
John R. Albers 1,288,333 (6) 1,200,000 88,333 *
Aaron Boxer Rev. Trust 885,000 (7) 790,000 95,000 *
June Lawrence 4th RGI Trust 400,000 (5) 400,000 0 0
James N. Owens Rev. Trust 400,000 (5) 400,000 0 0
David B. Johnson Family Foundation 400,000 (8) 400,000 0 0
Kenneth Cheng 353,077 (9) 300,000 53,077 *
Lee Wesley 350,000 (5) 350,000 0 0
Betty Johnson 210,000 (10) 200,000 10,000 *
Lawrence A. Laukka IRA 200,000 (5) 200,000 0 0
Mary J. Laukka IRA 200,000 (5) 200,000 0 0
Steve Romanek 200,000 (5) 200,000 0 0
Kenneth M. Viste 200,000 (5) 200,000 0 0
John O. Hanson 163,500 (11) 100,000 63,500 *
Thomas Petters 160,000 (5) 160,000 0 0
Wallace S. Wells 160,000 (5) 160,000 0 0
David B. Johnson (12) 138,090 (13) 62,400 75,690 *
Paul R. Kuehn (12) 138,090 (14) 62,400 75,690 *
Jeff Dobbs 138,000 (15) 90,000 48,000 *
Robert W. Clark Self-Declared Trust 103,000 (16) 100,000 3,000 *
Mike J. Brings 100,000 (5) 100,000 0 0
Isadore J. Goldstein Rev. Living Trust 100,000 (5) 100,000 0 0
Judy Peterson 100,000 (5) 100,000 0 0
VBS General Partnership 100,000 (5) 100,000 0 0
<PAGE>
John L. Von Gunten and Jeanette Von Gunten Trust
dated 10/18/91 100,000 (5) 100,000 0 0
Ila M. Waseka Rev. Living Trust 100,000 (5) 100,000 0 0
Eldon C. Miller (12) 87,630 (17) 62,400 25,230 *
Kenneth G. Benson 50,000 (5) 50,000 0 0
Alton B. Meyer, Jr. Rev. Trust 50,000 (5) 50,000 0 0
Linda Kintzel 50,000 (5) 50,000 0 0
John S. and David B. Rydberg 50,000 (5) 50,000 0 0
Donal C. Thomas Trust 50,000 (5) 50,000 0 0
Leola J. Vidger 50,000 (5) 50,000 0 0
Frank E. Walton 50,000 (5) 50,000 0 0
Michael W. Wright 1993 Irrev. GST Family Trust 50,000 (5) 50,000 0 0
First Trust NA As TTEE for the Dorsey & Whitney
Master Investment Trust-Wright 50,000 (5) 50,000 0 0
Stanley D. Rahm (12) 46,031 (18) 20,800 25,231 *
Jeffrey D. Rahm & Susan Rahm Jt/Ten 30,000 (5) 30,000 0 0
Claude Tihon & Berengere Tihon Jt/Ten 30,000 (5) 30,000 0 0
David Heytman & Hazeldell Heytman Jt/Ten 20,000 (5) 20,000 0 0
</TABLE>
- -------------------------------------
* Less than one percent (1%)
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or member of a group to acquire them within 60 days are treated as
outstanding only when determining the amount and percentage owned by such person
or group.
(2) This assumes all shares being offered and registered hereunder are sold,
although the Selling Shareholders are not obligated to sell any shares.
(3) Based upon 12,485,000 shares of Common Stock outstanding as of February 15,
1998.
(4) Pursuant to the Purchase Agreement, so long as Special Situations Private
Equity Fund, L.P., Special Situations Fund III, L.P. and Special Situations
Cayman Fund, L.P. (collectively, the "Funds"), individually or in the aggregate,
own 2.5% of the then outstanding shares of Common Stock of the Company, the
Funds have the right to nominate one director on the Board of Directors of the
Company.
(5) One-half of all shares of Common Stock beneficially owned by such Selling
Shareholder is issuable upon the exercise of outstanding warrants.
(6) Includes 638,333 shares issuable to Mr. Albers within 60 days upon the
exercise of warrants.
(7) Includes 427,500 shares issuable to the Aaron Boxer Rev. Trust within 60
days upon the exercise of warrants.
(8) Includes 200,000 shares issuable to the David B. Johnson Family Foundation
within 60 days upon the exercise of warrants. Excludes 138,090 shares
beneficially owned by David B. Johnson.
<PAGE>
(9) Includes 150,000 shares issuable to Mr. Cheng within 60 days upon the
exercise of warrants.
(10) Includes 50,000 shares issuable to Ms. Johnson within 60 days upon the
exercise of warrants.
(11) Includes 3,800 shares held by the John O. Hanson IRA and 70,000 shares
issuable to Mr. Hanson within 60 days upon the exercise of warrants.
(12) Such individual is a principal of Miller, Johnson & Kuehn, Incorporated
("MJK"), which has acted as the Company's placement agent in connection with
private sales of the Company's Common Stock. MJK also makes a market in the
Company's Common Stock. Pursuant to the Purchase Agreement, MJK has the right to
nominate one director on the Board of Directors of the Company, which nominee is
to be mutually acceptable to the Company and MJK, for a period of three years
from the date of the Purchase Agreement.
(13) Includes 106,890 shares issuable to Mr. Johnson within 60 days upon the
exercise of warrants. Excludes 400,000 shares beneficially owned by the David B.
Johnson Family Foundation.
(14) Includes 106,890 shares issuable to Mr. Kuehn within 60 days upon the
exercise of warrants.
(15) Includes 58,000 shares issuable to Mr. Dobbs within 60 days upon the
exercise of warrants.
(16) Includes 3,000 shares held by the Robert W. Clark Trust and 50,000 shares
issuable to the Robert W. Clark Self-Declared Trust within 60 days upon the
exercise of warrants. Mr. Robert W. Clark is trustee for both such trusts.
(17) Includes 56,430 shares issuable to Mr. Miller within 60 days upon the
exercise of warrants.
(18) Includes 35,631 shares issuable to Mr. Rahm within 60 days upon the
exercise of warrants.
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 75,000,000
shares of Common Stock (the "Common Stock"), and 1,000,000 shares of
undesignated preferred stock (the "Undesignated Stock"). As of the date hereof,
there were 12,485,000 shares of Common Stock issued and outstanding, held by
approximately 137 holders of record, and no shares of Undesignated Stock issued
and outstanding. In addition, 11,958,661 shares of Common Stock were reserved
for issuance under the Company's 1993 Stock Option Plan, Employee Stock Purchase
Plan and outstanding options, warrants and convertible securities as of the date
hereof.
COMMON STOCK
All outstanding shares of Common Stock, including the Shares offered
hereby, are fully paid and nonassessable. Each share of the outstanding Common
Stock is entitled to participate equally in dividends as and when declared by
the Board of Directors and is entitled to participate equally in any
distribution of net assets made to the shareholders upon liquidation of the
Company. There are no redemption, sinking fund, conversion or preemptive rights
with respect to the shares of Common Stock. All shares of Common Stock have
equal rights and preferences. The holders of Common Stock are entitled to one
vote for each share held of record on all matters voted upon by shareholders and
may not cumulate votes for the election of directors. Accordingly, the owners of
a majority of the shares of Common Stock outstanding may elect all of the
directors if they choose to do so, subject to the rights of the Funds and MJK to
designate directors to be nominated under the Purchase Agreement, and the owners
of the balance of such shares would not be able to elect any directors.
UNDESIGNATED STOCK
Under applicable Minnesota law, no action by the Company's
shareholders is necessary, and only action of the Board of Directors is
required, to authorize the issuance of any Undesignated Stock. The Board of
Directors is empowered to establish, and to designate the name of, each class or
series of the shares of Undesignated Stock and to set the terms of such shares
(including terms with respect to redemption, sinking fund, dividend,
liquidation, preemptive, conversion and voting rights and preferences). The
Board of Directors can issue shares of such class or series to, among other
individuals, the holders of another class or series of preferred stock or to the
holders of Common Stock. Accordingly, the Board of Directors, without
shareholder approval, can issue preferred stock with voting or conversion rights
which could adversely affect the voting power of the holders of the Common
Stock. The Undesignated Stock may have the effect of discouraging an attempt,
through acquisition of a substantial number of shares of Common Stock, to
acquire control of the Company with a view to effecting a merger, sale or
exchange of assets or a similar transaction. For example, the Board of Directors
could issue such shares as a dividend to holders of Common Stock or place such
shares privately with purchasers who may side with the Board of Directors in
opposing a takeover bid.
OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES
The Company has reserved 750,000 shares of Common Stock under the
1993 Stock Option Plan. As of the date hereof, the Company has outstanding
options to purchase an aggregate of 275,147 shares under the plan and options to
purchase an aggregate of 956,000 shares that were not issued under any formal
plan. The weighted average exercise price of outstanding options is $1.61. As of
the date hereof, the Company also has warrants to purchase an aggregate of
8,901,395 shares of Common Stock at a
<PAGE>
weighted average exercise price of $1.64 per share, which are exercisable at
various times, the earliest of which expire in December 1999 and the latest of
which expire in January, 2008. The outstanding options and warrants provide for
anti-dilution adjustments in the event of certain mergers, consolidations,
reorganizations, recapitalizations, stock dividends, stock splits or other
changes in the corporate structure of the Company. In addition, options to
purchase an aggregate of 200,000 shares are subject to a weighted-average
anti-dilution adjustment for issuances of Common Stock (including options,
warrants and other rights to acquire Common Stock) at a price of less than $2.52
per share. Holders of the outstanding warrants have certain demand and
incidental registration rights with respect to the shares issuable upon exercise
of the warrants. See "Description of Capital Stock -- Registration Rights."
The Company also has outstanding a subordinated convertible
promissory note in the principal amount of $2,250,000. Up to $2,000,000
principal amount of this note is convertible, at the option of the holder, into
shares of Common Stock at a conversion price of $3.32 per share. The conversion
price of this note is subject to a weighted-average anti-dilution adjustment for
issuances of Common Stock (including options, warrants and other rights to
acquire Common Stock) at a price of less than $3.32 per share. Additionally, the
Company has outstanding a convertible promissory bridge note in the principal
amount of $1,000,000 that is convertible, at the option of the holder, into
shares of Common Stock at a conversion price of $1.50 per share.
REGISTRATION RIGHTS
All of the shares of Common Stock issuable upon exercise of options
granted or to be granted under the Company's 1993 Stock Option Plan and Employee
Stock Purchase Plan have been registered under the Securities Act. The Company
has filed this Registration Statement covering the resale of an aggregate of
8,394,000 shares of Common Stock and warrants to purchase an aggregate of
8,394,000 shares of Common Stock issued in connection with the Company's
November, 1997 equity financing. In addition, holders of certain options,
warrants and convertible promissory notes have certain demand and incidental
registration rights with respect to the shares issuable upon exercise of such
options and warrants and conversion of such notes. In connection with the
Company's November, 1997 equity financing, the holders of substantially all of
these securities agreed not to exercise and to otherwise waive their
registration rights until January 1, 2000.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION
The Company's Amended and Restated Articles of Incorporation provide
the Company's Board of Directors with the power and authority to limit the
liability of its directors to the fullest extent permitted by the Minnesota
Business Corporation Act. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of fiduciary duty as
directors, except liability for (i) any breach of the duty of loyalty to the
Company or its shareholders, (ii) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) dividends or
other distributions of corporate assets that are in contravention of certain
statutory or contractual restrictions, (iv) violations of certain Minnesota
securities laws, or (v) any transaction from which the director derives an
improper personal benefit. Liability under federal securities law is not limited
by the Amended and Restated Articles of Incorporation or action by the Company's
Board of Directors.
The Minnesota Business Corporation Act requires that the Company
indemnify any director, officer or employee made or threatened to be made a
party to a proceeding, by reason of the former or present official capacity of
the person, against judgments, penalties, fines, settlements and reasonable
expenses incurred in connection with the proceeding if certain statutory
standards are met. "Proceeding"
<PAGE>
means a threatened, pending or completed civil, criminal, administrative,
arbitration or investigative proceeding, including a derivative action in the
name of the Company. Reference is made to the detailed terms of Section 302A.521
of the Minnesota Business Corporation Act for a complete statement of such
indemnification rights. The Company's Bylaws also require the Company to provide
indemnification to the fullest extent of the Minnesota Business Corporation Act.
The Company maintains directors' and officers' liability insurance,
including a reimbursement policy in favor of the Company.
Pursuant to the Purchase Agreement, the directors and officers of
the Company are indemnified against certain civil liabilities that they may
incur under the Securities Act in connection with this Prospectus and the
related Registration Statement.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company is aware that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company is subject to the provisions of Sections 302A.671 and
302A.673 of the Minnesota Business Corporation Act. These anti-takeover
provisions may eventually operate to deny shareholders the receipt of a premium
on their Common Stock and may also have a depressive effect on the market price
of the Company's Common Stock. In general, Section 302A.671 provides that the
shares of a corporation acquired in a "control share acquisition" have no voting
rights unless voting rights are approved by the shareholders in a prescribed
manner. A "control share acquisition" is defined as an acquisition of beneficial
ownership of shares that would, when added to all other shares beneficially
owned by the acquiring person, entitle the acquiring person to have voting power
of 20% or more in the election of directors. Section 302A.673 prohibits a public
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of four years after the date of the transaction in
which the person became an interested shareholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions. An "interested
shareholder" is a person who is the beneficial owner, of 10% or more of the
corporation's voting stock. Reference is made to the detailed terms of Sections
302A.671 and 302A.673 of the Minnesota Business Corporation Act.
Pursuant to the Purchase Agreement, so long as the Selling
Shareholders own or have the right to acquire an aggregate of 20% or more of the
then outstanding shares of Common Stock, the Company shall not, without the
prior written consent of the Funds and MJK, (i) effect any reclassification,
capital reorganization or other change of outstanding shares of capital stock of
the Company, (ii) merge, consolidate or enter into any business combination of
the Company with or into another entity (other than a merger of a wholly owned
subsidiary, in which merger the Company shall be the surviving entity), (iii)
sell, lease or otherwise dispose of all or substantially all of its assets or
(iv) liquidate, dissolve or wind-up the Company.
TRANSFER AGENT
The transfer agent for the Company's Common Stock is Norwest Bank
Minnesota, N.A.
<PAGE>
VALIDITY OF SHARES
Certain legal matters with respect to the Shares offered hereby will
be passed upon for the Company by Oppenheimer Wolff & Donnelly LLP, Minneapolis,
Minnesota. Michel A. LaFond, a partner of Oppenheimer Wolff & Donnelly LLP, is
the Secretary of the Company and owns approximately 6,000 shares of Common Stock
and options to purchase 13,000 shares of Common Stock.
EXPERTS
The financial statements of LifeRate Systems, Inc. as of December
31, 1997, 1996 and 1995, included in this prospectus and in the Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The following Financial Statements and Independent Auditors' Report
thereon are included herein on the pages indicated:
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS: PAGE(S)
- --------------------- -------
<S> <C>
Report of Independent Auditors F-1
Balance Sheets as of December 31, 1997 and 1996 F-2 - F-3
Statements of Operations for the years ended December 31, 1997, 1996 and 1995
and the period from July 18, 1990 (date of inception) to
December 31, 1997 F-4
Statements of Changes in Shareholders' Equity (deficit) for the period from
July, 1990 to December 31, 1997 F-5 - F-7
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995
and the period from July 18, 1990 (date of inception)
to December 31, 1997 F-8
Notes to Financial Statements F-9 - F-19
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
LifeRate Systems, Inc.
We have audited the accompanying balance sheets of LifeRate Systems,
Inc. (a development stage company) as of December 31, 1997 and 1996 and the
related statements of operations, shareholders' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1997, and for the
period from July 18, 1990 (inception) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of LifeRate Systems,
Inc. (a development stage company) at December 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997 and for the period from July 18, 1990 (inception)
to December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 3 to the financial statements, the Company's
recurring losses and negative cash flow from operations raise substantial doubt
about its ability to continue as a going concern. The 1997 financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 27, 1998
F-1
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 764,200 $2,072,000
Accounts receivable, less allowance of $62,850
in 1997 and $60,350 in 1996 278,200 142,400
Prepaid expenses and other
current assets 59,800 122,700
---------- ----------
Total current assets 1,102,200 2,337,100
Furniture and fixtures 177,600 177,400
Computer equipment 872,000 837,200
---------- ----------
1,049,600 1,014,600
Less accumulated depreciation 635,600 325,900
---------- ----------
414,000 688,700
Software development costs, net
of accumulated amortization of
$100,800 in 1996 28,600 50,500
---------- ----------
Total assets $1,544,800 $3,076,300
========== ==========
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 71,600 $ 251,700
Accrued compensation 203,300 43,900
Accrued consulting fees 5,000 86,100
Accrued royalties 19,700 36,100
Other current liabilities 3,200 73,900
Current portion of long-term debt and capital
lease obligations 12,300 11,800
------------ ------------
Total current liabilities 315,100 503,500
Long-term debt and capital lease obligations 2,020,600 2,251,800
Deferred rent 4,900 16,800
Deferred revenue 172,300 151,800
Shareholders' equity (deficit):
Preferred stock, no par value:
Authorized shares - 1,000,000
Issued and outstanding shares - none in 1997
and 1996 -- --
Common stock, no par value:
Authorized shares - 75,000,000
Issued and outstanding shares - 8,485,000
in 1997 and 3,811,639 in 1996 20,016,400 17,260,700
Deficit accumulated during the development stage (20,984,500) (17,108,300)
------------ ------------
Total shareholders' equity (deficit) (968,100) 152,400
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 1,544,800 $ 3,076,300
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
JULY 18, 1990
(DATE OF
INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1997 1996 1995 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 620,300 $ 615,700 $ 263,300 $ 1,810,600
Cost of revenues 532,800 851,200 43,000 1,427,000
------------ ------------ ------------ ------------
Gross profit 87,500 (235,500) 220,300 383,600
Operating expenses:
Sales and marketing 1,279,700 1,738,000 2,525,800 5,929,500
Research and development 1,302,100 5,309,900 2,104,500 9,313,700
General and administrative 2,402,500 2,845,700 1,253,000 7,467,400
------------ ------------ ------------ ------------
Loss from operations (4,896,800) (10,129,100) (5,663,000) (22,327,000)
Interest income 34,000 261,900 97,000 392,900
Interest expense 326,200 6,300 29,300 363,200
------------ ------------ ------------ ------------
Net loss before extraordinary
item (5,189,000) (9,873,500) (5,595,300) (22,297,300)
Extraordinary item - debt
restructuring 1,312,800 -- -- 1,312,800
------------ ------------ ------------ ------------
Net loss $ (3,876,200) $ (9,873,500) $ (5,595,300) $(20,984,500)
============ ============ ============ ============
Net loss per share before
extraordinary item $ (1.18) $ (2.61) $ (2.66) $ (11.91)
Extraordinary item per share 0.30 -- -- --
------------ ------------ ------------ ------------
Net loss per share - basic and diluted $ (0.88) $ (2.61) $ (2.66) $ (11.91)
============ ============ ============ ============
Weighted average number of
common shares outstanding 4,387,405 3,783,931 2,105,811 1,762,514
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ISSUED DURING STOCK
-------------------- DEVELOPMENT SUBSCRIPTIONS
SHARES AMOUNTS STAGE RECEIVABLE TOTAL
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Founder's common stock issued during July 1990 444,400 $ 1,000 $ -- $ -- $ 1,000
Net loss for the period -- -- (200) -- (200)
--------- --------- --------- --------- ---------
Balance December 31, 1990 444,400 1,000 (200) -- 800
Net loss -- -- (3,400) -- (3,400)
--------- --------- --------- --------- ---------
Balance December 31, 1991 444,400 1,000 (3,600) -- (2,600)
Common stock issued 392,254 29,400 -- (14,400) 15,000
Net loss -- -- (188,600) -- (188,600)
--------- --------- --------- --------- ---------
Balance December 31, 1992 836,654 30,400 (192,200) (14,400) (176,200)
Sale of common stock 32,000 2,400 -- (1,900) 500
Private placement of common stock, net of
offering costs of $30,700 99,999 269,400 -- (25,000) 244,400
Conversion of debt into common stock 25,000 75,000 -- -- 75,000
Repurchase of common stock (17,733) (1,300) -- -- (1,300)
Canceled stock subscriptions (140,000) (10,500) -- 10,500 --
Payments on stock subscription -- -- -- 2,600 2,600
Net loss -- -- (574,800) -- (574,800)
--------- --------- --------- --------- ---------
Balance December 31, 1993 (carried forward) 835,920 365,400 (767,000) (28,200) (429,800)
</TABLE>
F-5
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Statements of Shareholders' Equity (Deficit) (continued)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ISSUED DURING STOCK
--------------------- DEVELOPMENT SUBSCRIPTIONS
SHARES AMOUNTS STAGE RECEIVABLE TOTAL
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1993 (brought forward) 835,920 $ 365,400 $ (767,000) $ (28,200) $ (429,800)
Private placement of common stock, net of
offering costs of $30,700 71,557 183,900 -- -- 183,900
Payments on stock subscriptions -- -- -- 26,000 26,000
Common stock issued for services 19,331 58,000 -- -- 58,000
Canceled stock subscriptions (1,600) (100) -- 100 --
Common stock issued in connection with bridge financing 155,555 700,000 -- -- 700,000
Conversion of accrued salaries into common stock 66,664 300,000 -- -- 300,000
Conversion of notes payable and other
indebtedness to related parties into common stock 26,652 120,000 -- -- 120,000
Sale of common stock 79,997 310,000 -- (125,000) 185,000
Net loss -- -- (872,500) -- (872,500)
---------- ----------- ----------- ----------- -----------
Balance December 31, 1994 1,254,076 2,037,200 (1,639,500) (127,100) 270,600
Sale of common stock, net of offering costs of $1,393,744 2,209,353 12,297,400 -- -- 12,297,400
Common stock issued for services 17,665 79,500 -- -- 79,500
Stock subscription canceled as consideration for services
provided -- -- -- 50,000 50,000
Stock subscription canceled (6,666) (30,000) -- 30,000 --
Payments on stock subscriptions -- -- -- 42,100 42,100
Net loss -- -- (5,595,300) -- (5,595,300)
---------- ----------- ----------- ----------- -----------
Balance December 31, 1995 (carried forward) 3,474,428 14,384,100 (7,234,800) (5,000) 7,144,300
</TABLE>
F-6
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Statements of Shareholders' Equity (Deficit) (continued)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ISSUED DURING STOCK
---------------------- DEVELOPMENT SUBSCRIPTIONS
SHARES AMOUNTS STAGE RECEIVABLE TOTAL
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1995 (brought forward) 3,474,428 $ 14,384,100 $ (7,234,800) $ (5,000) $ 7,144,300
Private placement of common stock, net of offering
costs of $253,846 295,546 1,667,200 -- -- 1,667,200
Payments on stock subscriptions -- -- -- 5,000 5,000
Stock options exercised 41,665 235,400 -- -- 235,400
Value of stock options granted for services rendered -- 974,000 -- -- 974,000
Net loss -- -- (9,873,500) -- (9,873,500)
----------- ------------ ------------ ---------- ------------
Balance December 31, 1996 3,811,639 17,260,700 (17,108,300) -- 152,400
Private placement of common stock, net of offering
costs of $177,700 4,290,000 1,964,400 -- -- 1,964,400
Conversion of notes payable to common stock, net of
unamortized discount of $31,800 365,550 525,900 -- -- 525,900
Value of warrants issued to holders of notes -- 204,500 -- -- 204,500
Stock options exercised 17,811 33,400 -- -- 33,400
Value of stock options granted for services rendered -- 27,500 -- -- 27,500
Net loss -- -- (3,876,200) -- (3,876,200)
----------- ------------ ------------ ---------- ------------
Balance December 31, 1997 8,485,000 $ 20,016,400 $(20,984,500) $ -- $ (968,100)
=========== ============ ============ ========== ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
JULY 18, 1990
(DATE OF
INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1997 1996 1995 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,876,200) $ (9,873,500) $ (5,595,300) $(20,984,500)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 309,700 238,600 61,100 636,200
Amortization of software development costs 50,500 100,800 -- 151,300
Amortization of discounts on long-term debt 76,300 -- -- 76,300
Value of stock options granted for services rendered 27,500 974,000 -- 1,001,500
Value of warrants issued to note holders 204,500 -- -- 204,500
Convertible subordinated note issued for services
rendered -- 2,250,000 -- 2,250,000
Extraordinary item - discount on notes (1,273,800) -- -- (1,273,800)
Writedown of software development costs to net
realizable value -- -- 599,600 599,600
Stock issued for services -- -- 129,500 187,500
Changes in operating assets and liabilities:
Accounts receivable (135,800) (38,000) (80,900) (278,200)
Advances to agent -- -- 108,000 --
Prepaid and other current assets 68,200 (61,700) (61,000) (54,500)
Other assets -- 11,800 (1,200) --
Accounts payable (180,100) (247,700) 381,400 96,400
Accrued compensation 159,400 (200,900) (34,700) 503,300
Accrued consulting fees (81,100) (296,500) 333,400 5,000
Accrued royalties (16,400) 36,100 -- 19,700
Other current liabilities (70,700) 72,400 (1,500) 14,200
Deferred revenue 20,500 90,900 (29,600) 172,300
Deferred rent (11,900) (11,900) (8,600) 4,900
------------ ------------ ------------ ------------
Net cash used in operating activities (4,729,400) (6,955,600) (4,199,800) (16,668,300)
INVESTING ACTIVITIES
Software development costs (28,600) -- (750,900) (779,500)
Purchase of furniture and equipment (20,100) (602,600) (332,400) (992,500)
------------ ------------ ------------ ------------
Net cash used in investing activities (48,700) (602,600) (1,083,300) (1,772,000)
FINANCING ACTIVITIES
Payments on notes payable and capital leases (265,000) (27,900) (55,900) (426,400)
Stock subscription received -- 5,000 -- 5,000
Proceeds from issuance of notes payable 1,737,500 -- 51,800 2,027,700
Proceeds from issuance of common stock 1,997,800 1,902,600 12,424,500 17,598,200
------------ ------------ ------------ ------------
Net cash provided by financing activities 3,470,300 1,879,700 12,420,400 19,204,500
------------ ------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (1,307,800) (5,678,500) 7,137,300 764,200
Cash and cash equivalents at beginning of period 2,072,000 7,750,500 613,200 --
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 764,200 $ 2,072,000 $ 7,750,500 $ 764,200
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
1. DESCRIPTION OF BUSINESS
LifeRate Systems, Inc. (the Company) is a development stage enterprise engaged
in marketing a proprietary software operating system to healthcare providers and
payors throughout the United States to produce information to measure and
quantify the quality and cost of healthcare.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
FURNITURE AND EQUIPMENT
Furniture and equipment, principally computer equipment, is stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets ranging from 3 to 7 years.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No.
128, "Earnings Per Share." FASB Statement No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share under the
previous rules. Earnings per share amounts for all periods have been presented,
and where necessary, restated to conform to the FASB Statement No. 128
requirements.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with the
provisions of FASB Statement No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." Capitalization of software
development costs, including significant product enhancements, begins upon the
establishment of technological feasibility for the product and concludes when
the product is available for release to customers. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic life and changes in software and hardware
technology. During 1995, the Company recorded writedowns to the net realizable
value of software development costs totaling $599,600 due to pending product
upgrades.
REVENUE RECOGNITION
Revenues derived from software licenses are recognized upon execution of a
license agreement, delivery of the software product, reasonable assurance of
customer acceptance of the software and fulfillment of any other significant
contract obligations. Revenues derived from customer service and support
activities are deferred and recognized ratably over the term of the contract.
Revenues derived from software development contracts will be recognized using a
percentage of
F-9
<PAGE>
LifeRate Systems, Inc
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
completion method based on meeting key milestones over the term of the contract.
Cash received as deposits on software license contracts is recorded as deferred
revenue in the accompanying balance sheet.
COST OF REVENUES
Cost of revenues includes royalty expense, amortization of capitalized software
expense and costs of customer support activities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from the estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure only provisions of FASB Statement No.
123, "Accounting for Stock-Based Compensation," but applies Accounting
Principles Board Opinion No. 25 (APB 25), and related interpretations in
accounting for its stock option plans. Under APB 25, when the exercise price of
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." FASB Statement No. 130 is effective for financial statements for fiscal
years beginning after December 15, 1997. This standard defines comprehensive
income as the changes in equity of an enterprise except those resulting from
stockholder transactions. All components of comprehensive income are required to
be reported in a new financial statement. Management believes the adoption of
FASB Statement No. 130 will not have a material effect on the Company's
financial statements.
In June 1997, the FASB also issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." FASB Statement No. 131 is
effective for financial statements for periods beginning after December 15,
1997. FASB Statement No. 131 establishes standards for disclosures about
operating segments, products and services, geographic areas and major customers.
Management believes the adoption of FASB Statement No. 131 will not have a
material effect on the Company's financial statements.
F-10
<PAGE>
LifeRate Systems, Inc
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The American Institute of Certified Public Accountants has approved a new
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which
will supersede Statement of Position 91-1, "Software Revenue Recognition."
Management is currently evaluating the impact of SOP 97-2 and has not determined
the result, if any, on the Company's financial position, results of operations
or cash flows.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
3. CONTINUED EXISTENCE
The company has incurred losses since inception and has an accumulated deficit
of $20,984,500 at December 31, 1997. The Company's ability to continue as a
going concern and the realization of its assets and orderly satisfaction of its
liabilities are dependent on obtaining additional funds from outside sources and
generating sufficient working capital from operations. The Company estimates
that cash balances at December 31, 1997 and proceeds from the January 1998 sale
of common stock will not be enough to fund operations for 1998. The Company will
require additional capital during 1998 to continue operations and is currently
exploring financing alternatives. There can be no assurance that the Company
will be successful in obtaining additional financing.
4. LONG-TERM DEBT AND EXTRAORDINARY ITEM
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---- ----
<S> <C> <C>
Convertible subordinated note payable, non-interest
bearing at December 31, 1997 (10% interest at December
31, 1996), due April 2002 $2,250,000 $2,250,000
Convertible promissory note payable, non-interest
bearing, due May 2002 1,000,000 -
Note payable, bears interest at 1.0% above prime
(9.5% at December 31, 1997), due in monthly
installments of $970 plus interest through February 1998 1,700 12,600
Capital lease obligation, bears interest at 19.1%,
due in monthly installments of $1,020 through March 1999 13,500 1,000
---------- ----------
3,265,200 2,263,600
Less discount on non-interest bearing notes (1,232,300) -
Current portion - long-term debt (12,300) (11,800)
---------- ----------
$2,020,600 $2,251,800
========== ==========
</TABLE>
F-11
<PAGE>
LifeRate Systems, Inc
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
4. LONG-TERM DEBT AND EXTRAORDINARY ITEM (CONTINUED)
Future payments of long-term debt and capital lease obligations are as follows:
Year ending December 31:
1998 $13,900
1999 3,100
2002 3,250,000
----------
3,267,000
Less amount representing interest (1,800)
----------
$3,265,200
==========
In March 1997, the Company issued a $2,250,000 convertible subordinated note for
services previously rendered by a physician group. In November 1997, the terms
of the note were restructured. Under the new terms, the convertible subordinated
note was changed to be non-interest bearing (prior to the restructuring the note
incurred interest at 10% per year) and all accrued interest from March 1997 to
November 1997, amounting to approximately $142,400, was forgiven. At the time of
the debt restructuring, the Company recorded a discount on the note of
approximately $795,900. The discount is being amortized over the remaining life
of the note. The note is convertible into shares of the Company's common stock
at the conversion rate of $3.32 per share.
In May 1997, the Company issued a $1,000,000 convertible promissory note to
Medtronic, Inc. The terms of the note called for interest to be incurred at the
prime rate and the note was due on the earlier of November 30, 1997 or the
completion of $5,000,000 of additional financing for the Company. In connection
with the note, the Company issued Medtronic a warrant to purchase 100,000 shares
of stock at a price of $2.00 per share. The warrant expires in 2002. In November
1997, the terms of the note were changed to be non-interest bearing and accrued
interest of approximately $44,000 was forgiven. In addition, the term of the
note was extended to 2002. At the time of the restructuring, the Company
recorded a discount on the note of approximately $316,900, which is being
amortized over the remaining life of the note. In addition, the conversion price
on the note was changed to $1.50 per share and the exercise price on the warrant
was changed to $.50 per share.
NOTES PAYABLE - RELATED PARTY
The Company entered into a settlement agreement with a former employee and
director to remit unpaid compensation amounting to $6,500, which was paid in
full during 1996. During 1997, non-employee directors of the Company loaned the
Company $46,200. In November 1997, $5,775 of the loans were converted into
11,550 shares of common stock and $40,425 was repaid.
EXTRAORDINARY ITEM
The extraordinary item of $1,312,800 in 1997 relates to the restructuring of the
terms of the $1,000,000 convertible promissory note and the $2,250,000
convertible subordinated note and the cancellation of $200,000 in interest due
on the notes from the time of issuance until November 1997, when the terms of
the notes were restructured.
5. COMMON STOCK AND WARRANTS
In March 1995, the Company sold 1,046,500 shares of common stock in an initial
public offering. The offering resulted in net proceeds to the Company of
$4,294,700. In connection with the public offering the Company granted
F-12
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
5. COMMON STOCK AND WARRANTS (CONTINUED)
the underwriter warrants to purchase 91,000 shares of common stock at $6.00 per
share. The warrants may be exercised over a four year period beginning March
1996.
In December 1995, the Company sold 600,000 shares of common stock to Medtronic,
Inc., resulting in net proceeds to the Company of $4,782,400. In connection with
the sale of common stock, the Company entered into a license and development
agreement with Medtronic (see Note 12).
Also in December 1995, the Company sold 562,853 shares of common stock in a
private placement. The sale resulted in net proceeds to the Company of
$3,220,300.
In January 1996, the Company sold an additional 295,546 shares of common stock
resulting in net proceeds to the Company of $1,667,200. In connection with the
December 1995 and January 1996 private placements of stock, the Company agreed
to grant the underwriter 85,540 warrants to purchase shares of common stock. The
warrants are exercisable at a price of $6.50 and remain outstanding for a period
of ten years.
In July 1997, the Company issued convertible promissory notes totaling $500,000.
Purchasers of the notes also received 50,000 warrants at an exercise price of
$2.00 per share. The warrants remain outstanding for a period of five years. In
connection with the sale of the notes, the underwriter was granted a warrant to
purchase 25,000 shares of common stock. The warrant is exercisable at a price of
$2.00 per share and remains outstanding for a period of five years. In November
1997, the convertible promissory notes were converted into 250,000 shares of
common stock at a conversion price of $2.00 per share and $13,600 of accrued
interest was forgiven.
In November 1997, a director loan of $5,775 was converted into 11,550 shares of
stock at a price of $.50 per share. In November 1997, notes payable for an
aggregate of $52,000 were converted into 104,000 shares of common stock at a
price of $.50 per share and ten year warrants for 104,000 shares of common stock
at an exercise price of $1.50 per share.
In November 1997, the Company sold 4,290,000 shares of common stock and issued
warrants to purchase 4,290,000 shares of common stock at an exercise price of
$1.50. The warrants expire in November 2007. The sale resulted in net proceeds
to the Company of $1,964,400.
As of December 31, 1997, the Company had 4,901,395 warrants outstanding with
exercise prices ranging from $ .50 to $6.50. The warrants expire at various
dates ranging from December 1999 to November 2007.
6. EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan whereby eligible employees may
purchase on each purchase date, as defined, shares of common stock at the lower
of 85% of the market price at the time of grant or the time of purchase.
Employees may contribute up to 10% of wages to the plan and may purchase up to
2,000 shares per year under the plan. There are 100,000 shares reserved for this
plan. During 1997, 17,811 shares were issued at prices ranging from $.53 to
$2.76.
7. STOCK OPTIONS
In December 1993, the Company adopted the LifeRate Systems, Inc. 1993 Stock
Option Plan (the "Plan"). The Company has reserved 750,000 shares for issuance
to employees and consultants as either incentive stock options or non-qualified
options. Under the Plan, incentive stock options may be granted at prices not
less than the fair market value of the Company's common stock at the grant date.
The grant price of non-qualified options is determined
F-13
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
7. STOCK OPTIONS (CONTINUED)
by the Board Committee administering the Plan, but the grant price must be at
least 85% of the fair market value of the common stock as of the grant date.
Options are exercisable based on terms set by the Board Committee and the option
term may not exceed ten years from the date of grant.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -------------------------
AVERAGE AVERAGE AVERAGE
WEIGHTED WEIGHTED WEIGHTED
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 409,441 $ 7.68 250,106 $ 5.97 84,442 $ 3.36
Granted 302,779 2.82 274,333 8.84 245,664 5.90
Exercised -- (41,665) 5.66 --
Canceled (539,873) 5.77 (73,333) 7.35 (80,000) 5.88
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at end of year 172,347 $ 5.14 409,441 $ 7.68 250,106 $ 5.97
========== ========== ========== ========== ========== ==========
Options exercisable
at year-end 147,789 $ 5.52 239,326 $ 7.03 167,445 $ 3.97
========== ========== ========== ========== ========== ==========
</TABLE>
At December 31, 1997, there were 577,653 shares available for grant under the
1993 Stock Option Plan.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
--------------- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$1.00 to $1.938 30,707 4.7 Years $ 1.33 30,707 $ 1.33
$2.625 to $3.00 44,974 5.5 Years 2.91 20,416 3.00
$5.875 to $6.33 45,666 7.2 Years 5.99 45,666 5.99
$8.625 51,000 8.4 Years 8.625 51,000 8.625
------- ------
172,347 6.7 Years $ 5.14 147,789 $ 5.52
======= =======
</TABLE>
The Company has also granted non-qualified options to certain employees and
directors that are outside of the 1993 Stock Option Plan. These options total
956,000 shares with prices ranging from $.50 to $5.00 per share. Expiration
dates of these options range from August 2003 to March 2007. At December 31,
1997, 306,001 options were exercisable at a weighted average exercise price of
$2.23 per share.
In March 1997, the Company canceled previously granted options held by employees
and consultants to purchase 186,000 shares of common stock with original
exercise prices that ranged from $4.50 to $10.625 per share. New options
totaling 163,550 shares were granted with exercise prices ranging from $2.625 to
$3.00 per share.
F-14
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
7. STOCK OPTIONS (CONTINUED)
Pro forma information regarding net loss and loss per share is required by FASB
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. For
purpose of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss $(4,246,500) $(11,094,600) $(5,931,700)
Pro forma loss per share - basic and diluted $( .97) $(2.93) $ (2.82)
</TABLE>
The pro forma effect on the net loss for 1997, 1996 and 1995 is not
representative of the pro forma effect on net income (loss) in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995.
The fair value of options granted during 1997, 1996 and 1995 was estimated using
the Black-Scholes option pricing model with the following assumptions: no
dividend yield; a risk free interest rate of 5.5%, 6.0% and 6.0% during 1997,
1996 and 1995, respectively; expected volatility of the market price of the
Company's common stock of 71%, 64% and 64% during 1997, 1996 and 1995,
respectively; and expected option lives ranging from three to five years. The
weighted average fair value of plan options granted at market prices during the
years ended December 31, 1997, 1996 and 1995 was $1.05, $5.19 and $3.33 per
share, respectively. The weighted average fair value of non-plan options granted
at market prices during the years ended December 31, 1997, 1996 and 1995 was
$.90, $3.09 and $2.68 per share, respectively.
The Black-Sholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-15
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
8. INCOME TAXES
The tax effects of significant components of the Company's deferred tax assets
and liabilities are as follows:
1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforwards $8,254,000 $6,704,000
Accounts receivable allowance 25,100 24,100
Deferred rent 2,000 6,700
Deferred revenue 68,900 60,700
Accrued salaries 81,300 17,200
Accrued consulting fees 2,000 34,400
Deferred tax liabilities:
Depreciation 49,500 56,300
---------- ----------
Net deferred tax assets 8,383,800 6,790,800
Valuation allowance 8,383,800 6,790,800
---------- ----------
$ - $ -
========== ==========
A valuation allowance of 100% of tax benefits has been provided because of the
Company's history of operating losses.
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $20,636,000 that expire at various times through the year 2012.
The Company's ability to utilize these carryforwards to offset future taxable
income is subject to certain restrictions under Section 382 of the Internal
Revenue Code in the event of certain changes in the equity ownership of the
Company. The Company experienced ownership changes in 1993, 1995 and 1997.
However, the Company does not believe that such changes will significantly limit
its ability to use the existing net operating loss carryforwards.
9. COMMITMENTS
LEASES
The Company leases its office facilities under an operating lease that expires
September 30, 2001. The Company leases office equipment under various operating
leases, which expire from September 1999 to March 2001. Rent expense for the
years ended December 31, 1997, 1996, and 1995 was $255,700, $182,600 and
$72,300, respectively. Future minimum rental payments required under the leases
are as follows:
Year ending December 31:
1998 $262,600
1999 276,600
2000 208,900
2001 139,600
--------
$887,700
========
F-16
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
9. COMMITMENTS (CONTINUED)
LETTER OF CREDIT
In January 1997, the Company issued a standby letter of credit in the amount of
$50,000, expiring December 31, 2001, which is being maintained to support the
installation of software. The agreement provides for a reduction of the letter
of credit by $10,000 each at October 1, 1997, October 1, 1998, October 1, 1999
and October 1, 2000. Partial draws are not permitted. The balance at December
31, 1997 on the letter of credit was $40,000.
10. MARKETING AGREEMENTS
In November 1994, the Company entered into a marketing arrangement with Clinical
Sales and Services, Inc. (CSSI), pursuant to which CSSI agreed to assist the
Company in coordinating and conducting marketing of the Company's system to
healthcare providers and payers. The agreement had an initial term of three
years and was renewable on an annual basis thereafter.
In September 1995, the Company entered into a new sales and marketing agreement
with CSSI. The agreement called for monthly business development fees of $30,000
to be offset by commissions earned by CSSI on product sales. The amount of
business development fees paid per month was subject to adjustment by the
parties. In addition, the Company granted certain individuals affiliated with
CSSI options to purchase 100,000 shares of the Company's common stock. The
options were exercisable at a price of $5.875 with a term of ten years from the
date of grant. These options were subsequently canceled.
In December 1995, the Company's Board of Directors approved the direct
employment of CSSI personnel by the Company and the termination of the September
1995 sales and marketing agreement. In connection with this resolution, the
Company granted options for the purchase of 299,000 shares of the Company's
common stock to certain CSSI individuals. These options were granted at exercise
prices ranging from $7.13 to $9.00 per share. During 1996, these options were
subsequently canceled.
No expense was incurred in 1997 or 1996 by the Company related to CSSI business
development fees. In 1995, the Company paid CSSI $1,650,000 in business
development fees and other costs.
11. LICENSE, ROYALTY AND DEVELOPMENT AGREEMENTS
In 1995, the Company entered into an agreement with a physician group, of which
a doctor in the group was a member of the Company's Board of Directors. The
agreement called for the physician group to assist in the development and
implementation of practice guidelines and clinical outcomes associated with the
Company's software products. In 1995, the Company incurred expense of $150,000
related to assistance provided by the physicians group and recorded $50,000 of
revenue for systems design work and implementation. In addition, the agreement
called for the Company to issue the physician group shares of common stock if
certain product sales of the Company's database occurred. In March 1997, this
agreement was terminated. The Company issued the physician group a $2,250,000
convertible subordinated note as compensation for services rendered by the
physician group in prior years. The terms of the note were restructured in
November 1997. (See Note 4). The physician group may convert up to $2,000,000 of
the convertible subordinated note into common stock at a conversion rate of
$3.32 per share, subject to certain antidilution provisions.
In July 1995, the Company entered into a license agreement with an advisor to
the Company. The agreement called for the Company to grant to the advisor a
license to utilize software developed by the advisor at one healthcare facility.
In addition, the Company agreed to pay to the advisor a royalty of 7.5% through
December 31, 1998, and 5% thereafter, on
F-17
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
11. LICENSE, ROYALTY AND DEVELOPMENT AGREEMENTS (CONTINUED)
certain product sales. In connection with the agreement, the Company granted the
advisor options to purchase 26,000 shares of the Company's common stock at an
exercise price of $4.50 per share. In March 1997, this agreement was modified.
Under the terms of the modified agreement, after March 31, 1997, no royalties
will be due until the sooner of the Company reaching $20,000,000 of cumulative
revenues or January 1, 1999, at which time the Company will pay royalties of 3%
of gross sales to the physician. The Company will pay the physician royalties of
3.6% on all gross revenues once the Company has reached $100,000,000 of gross
revenues. In addition, the Company agreed to make certain milestone payments
aggregating $450,000 based upon the Company reaching certain revenue goals and
had agreed to pay the physician $100,000 per year for the next five years under
a consulting agreement. Also, the Company granted the physician an option to
purchase 550,000 shares of common stock at $2.625 per share for assistance with
the development of the Company's system. The fair value of these options at the
date of grant was $924,000. In November 1997, the consulting agreement and the
Company's obligation to make certain milestone payments were canceled. Also, the
option to purchase 550,000 shares of common stock was changed to 200,000 shares
of common stock with an exercise price of $1.00 per share.
The Company incurred royalty expense of $36,500, $46,200 and $0 in 1997, 1996
and 1995, respectively.
12. MEDTRONIC AGREEMENT
In December 1995, the Company entered into a license and development agreement
with Medtronic, Inc. Under the agreement, the Company granted Medtronic a 30
year worldwide, royalty free license relating to the sales and use of the
Company's system sold by Medtronic under the agreement. The Company has agreed
to pay a commission to Medtronic relating to any assessment, installation,
training, data conversion and monthly service fees. In addition, the Company has
agreed to install its system at one site specified by Medtronic at no cost and
to engage with Medtronic in joint development of products and services.
13. SUPPLEMENTAL CASH FLOW INFORMATION
The Company entered into the following non-cash transactions:
DECEMBER 31
1997 1996 1995
---- ---- ----
Stock subscription receivable canceled as
consideration for services provided $ - $ - $50,000
Conversion of notes payable
into common stock 557,800 - -
Equipment and other assets
acquired under a capital lease 20,200 - -
14. MAJOR CUSTOMERS
In 1997, the Company had three customers that accounted for 44.3%, 16.1% and
15.7% of revenue, respectively. In 1996, two customers accounted for 56.8% and
11.1% of revenue, respectively.
F-18
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
15. LEGAL PROCEEDINGS
In February 1998, the Company was named in a complaint brought in New York state
court, by a shareholder, alleging fraud, deceit, negligent misrepresentation and
other wrongdoing in connection with the Company's December 1995 private
placement of common stock. The plaintiffs, who purchased approximately $1
million of common stock, are seeking rescission of their investment,
compensatory damages, punitive damages and restitution of profits received by
the Company and other named defendants. The Company has not yet had an
opportunity to evaluate the claims against the Company in detail but believes
the claims to be without merit and plans to vigorously defend this action. It is
not possible at this time to estimate the loss, if any, the Company will incur
with regards to the legal proceedings, and thus the Company has not established
a reserve for the outcome of the proceedings.
16. SUBSEQUENT EVENT
In January 1998, a special meeting of shareholders was held. At the meeting the
shareholders approved increasing the authorized shares of common stock from
20,000,000 shares to 75,000,000 shares.
Also in January 1998, the Company sold an additional 4,000,000 shares of common
stock and issued warrants to purchase 4,000,000 shares of common stock at an
exercise price of $1.50 per share. The warrants expire in January 2008. Net
proceeds to the Company from the sale were $1,958,000.
F-19
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article IX of the Company's Amended and Restated Articles of
Incorporation provides the Company's Board of Directors with the power and
authority to limit the liability of its directors to the fullest extent
permitted by the Minnesota Business Corporation Act. Specifically, directors of
the Company will not be personally liable for monetary damages for breach of
fiduciary duty as directors, except liability for (i) any breach of the duty of
loyalty to the Company or its shareholders, (ii) acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law,
(iii) dividends or other distributions of corporate assets that are in
contravention of certain statutory or contractual restrictions, (iv) violations
of certain Minnesota securities laws, or (v) any transaction from which the
director derives an improper personal benefit. Liability under federal
securities law is not limited by the Amended and Restated Articles of
Incorporation or action by the Company's Board of Directors.
The Minnesota Business Corporation Act requires that the Company
indemnify any director, officer or employee made or threatened to be made a
party to a proceeding, by reason of the former or present official capacity of
the person, against judgments, penalties, fines, settlements and reasonable
expenses incurred in connection with the proceeding if certain statutory
standards are met. "Proceeding" means a threatened, pending or completed civil,
criminal, administrative, arbitration or investigative proceeding, including a
derivative action in the name of the Company. Reference is made to the detailed
terms of Section 302A.521 of the Minnesota Business Corporation Act for a
complete statement of such indemnification rights. The Company's Bylaws also
require the Company to provide indemnification to the fullest extent of the
Minnesota Business Corporation Act.
The Company maintains directors' and officers' liability insurance,
including a reimbursement policy in favor of the Company.
Pursuant to the Purchase Agreement, the directors and officers of
the Company are indemnified against certain civil liabilities that they may
incur under the Securities Act in connection with this Registration Statement
and the related Prospectus.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company is aware that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. [UPDATE]
The following table sets forth estimated expenses incurred by the
Company in connection with the issuance and distribution of the Shares being
registered. All such expenses are estimated except for the SEC registration fee.
SEC registration fee............................... $1,622.50
Printing expenses.................................. 2,500
Fees and expenses of counsel for the Company....... 10,000
Fees and expenses of accountants for Company....... 4,000
Blue sky fees and expenses......................... 1,000
Miscellaneous...................................... 5,877.50
---------
*Total................................. $ 25,000
- ---------------------
* None of the expenses listed above will be borne by the Selling
Shareholders.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since February 15, 1995, the Company has issued the following
securities without registration under the Securities Act:
1. In December, 1995, the Company issued to Medtronic, Inc. 600,000
shares of Common Stock at a price of $8.00 per share for a total
purchase price of $4,800,000.
2. In December, 1995, the Company issued an aggregate of 562,853 shares
of Common Stock to accredited investors at a price of $6.50 per
share for a total purchase price of approximately $3,658,545. In
connection therewith, the Company issued to a selling agent a
warrant to purchase 56,286 shares of Common Stock and paid
commissions to the selling agent equal to 10% of gross proceeds and
reimbursed certain expenses.
3. In January, 1996, the Company issued an aggregate of 295,546 shares
of Common Stock to accredited investors at a price of $6.50 per
share for a total purchase price of $1,921,049. In connection
therewith, the Company issued to a selling agent a warrant to
purchase 29,555 shares of Common Stock and paid commissions to the
selling agent equal to 10% of gross proceeds and reimbursed certain
expenses.
4. In March, 1997, the Company issued a convertible subordinated
promissory note to The Atlanta Cardiology Group, P.C. ("ACG") in the
principal amount of $2,250,000, maturing on April 1, 2002. As
originally issued, the note accrued interest at the rate of 10% per
year and interest was payable at the rate of 5% per year, with the
remainder payable at the maturity date. Up to $2,000,000 of the
principal amount of the note is convertible by ACG into Common Stock
at the rate of $3.32 per share, subject to adjustment in certain
cases to protect ACG from certain dilutive events. This note was
issued in exchange for the cancellation of a royalty agreement with
ACG. In connection with the November, 1997 equity financing, this
note was amended to be non-interest bearing.
5. In May, 1997, the Company issued to Medtronic, Inc. a convertible
promissory note in the principal amount of $1,000,000 and a warrant
to purchase 100,000 shares of Common Stock at
<PAGE>
an exercise price of the lower of $2.00 per share or the average
price per share of Common Stock paid by all purchasers of Common
Stock in the Company's next equity financing. In connection with the
November, 1997 equity financing, the warrant was amended to reflect
an exercise price of $.50 per share. As originally issued, the note
was convertible, at the option of Medtronic, Inc., into Common Stock
at a conversion price of $2.00 per share and bore interest at the
prime rate. In connection with the November, 1997 equity financing,
the note was amended to reflect a conversion rate of $1.50 per share
and to be non-interest bearing.
6. In July, 1997, the Company issued to accredited investors warrants
to purchase an aggregate of 50,000 shares of Common Stock
exercisable at a price of $2.00 per share and convertible promissory
notes in an aggregate principal amount of $500,000. In connection
therewith, the Company issued to a selling agent a warrant to
purchase 25,000 shares of Common Stock and paid the selling agent
commissions equal to 10% of gross proceeds and reimbursed certain
expenses. In November, 1997, these notes were converted into an
aggregate of 250,000 shares of Common Stock a conversion rate of
$2.00 per share.
7. In October, 1997, the Company issued a convertible promissory note
to each of the Company's then non-employee directors in the
principal amount of $5,775 and in the aggregate of $46,200. The
Company repaid a total of $40,425, without interest, to seven of
these non-employee directors from the proceeds of the November, 1997
equity financing, and the balance of $5,775 owed to one director was
converted into 11,550 shares of Common Stock at a price of $.50 per
share.
8. In November, 1997, the Company issued an aggregate of 4,394,000
shares of Common Stock to accredited investors. An aggregate of
2,500,000 shares were sold at a price of $.50 per share, an
aggregate of 1,790,000 shares were sold for $.56 per share, and an
aggregate of 104,000 shares were issued upon cancellation of
promissory notes at $.50 per share. In addition, each investor was
issued a warrant to purchase one share of Common Stock at a price of
$1.50 per share for each share purchased. In connection therewith,
the Company paid a selling agent commissions equal to 10% of gross
proceeds and reimbursed certain expenses.
9. In January, 1998, the Company issued an aggregate of 4,000,000
shares of Common Stock to accredited investors. An aggregate of
2,500,000 shares were sold at a price of $.50 per share and an
aggregate of 1,500,000 shares were sold for $.56 per share. In
addition, each investor was issued a warrant to purchase one share
of Common Stock at a price of $1.50 per share for each share
purchased. In connection therewith, the Company paid a selling agent
commissions equal to 10% of gross proceeds and reimbursed certain
expenses.
Except as set forth above, no underwriting commissions or discounts
were paid with respect to the sales of the unregistered securities described
above. In addition, all of the above sales were made in reliance on either
Section 4(2) of the Securities Act as transactions by an issuer not involving
any public offering or Regulation D of the Securities Act. In all such
transactions, certain inquiries were made by the Company to establish that such
sales qualified for such exemption from the registration requirements. In
particular, the Company confirmed that with respect to the exemption claimed
under Section 4(2) of the Securities Act (i) all offers of sales and sales were
made by personal contact from officers and directors of the Company or other
persons closely associated with the Company, (ii) each investor made
representations that he or she was sophisticated in relation to this investment
(and the Company has no reason to believe that such representations were
incorrect), (iii) each purchaser gave assurance of investment intent and the
certificates for the shares bear a legend accordingly, and (iv) offers and sales
within any offering were made to a limited number of persons.
<PAGE>
ITEM 27. EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Amended and Restated Articles of Incorporation, as amended.
3.2 Amended and Restated Bylaws, as amended.
4.1 Form of the Company's Common Stock Certificate.
4.2 Amended and Restated Articles of Incorporation, as amended. (See
Exhibit 3.1).
4.3 Amended and Restated Bylaws, as amended. (See Exhibit 3.2).
4.4 Form of Warrant dated December, 1994 to purchase shares of Common
Stock issued to investors in connection with the Company's December,
1994 Private Placement.
4.5 Form of Warrant dated March, 1995 to purchase 91,000 shares of
Common Stock issued to Principals of Miller Johnson & Kuehn, Inc. in
connection with the Company's Initial Public Offering.
4.6 Form of Warrant dated December, 1995 to purchase 56,286 shares of
Common Stock issued to Principals of Miller Johnson & Kuehn, Inc. in
connection with the Company's December, 1995 Private Placement.
4.7 Form of Warrant dated January, 1996 to purchase 29,555 shares of
Common Stock issued to Principals of Miller Johnson & Kuehn, Inc. in
connection with the Company's January, 1996 Private Placement.
4.8 Warrant dated May 12, 1997 to purchase 100,000 shares of Common
Stock issued to Medtronic, Inc.
4.9 Form of Warrant to purchase shares of Common Stock of the Company
issued to investors in connection with the July, 1997 Bridge
Financing.
4.10 Form of Warrant dated July 21, 1997 to purchase 29,555 shares of
Common Stock to Principals of Miller Johnson & Kuehn, Inc. in
connection with the Company's July, 1997 Bridge Financing.
4.11 Form of Warrant to Purchase Common Stock of the Company issued in
connection with the November 1997 Equity Financing.
5.1 Opinion and Consent of Oppenheimer Wolff & Donnelly LLP.
10.1 1993 Stock Option Plan, as amended.
10.2 Form of Incentive Stock Option Agreement for Employees.
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.3 Form of Non-Statutory Stock Option Agreement for Non-Employees.
10.4 Employee Stock Purchase Plan, as amended.
10.5 Form of Employment Agreement.
10.6 Lease Agreement with Alpha Associates, Inc. dated April 30, 1993.
10.7 Computer Software Purchase Agreement, dated July 2, 1995, between
the Company, Anthony Furnary, M.D. and APF, LLC.
10.8 Investment Agreement, dated as of December 26, 1995 between the
Company and Medtronic, Inc.
10.9 License and Development Agreement, dated as of December 26, 1995
between the Company and Medtronic, Inc.
10.10 Shareholder Voting Agreement, dated as of December 26, 1995 by and
among the Company, Medtronic, Inc., Donna J. Edmonds, Jeffrey B.
Comer, David W. Haskin and Paul D. Benson.
10.11 Employment Agreement, dated April 29, 1996 between the Company and
William W. Chorske.
10.12 Stock Option Agreement, dated April 29, 1996, between the Company
and William W. Chorske.
10.13 Agreement, dated June 4, 1996, between the Company and Jeffrey B.
Comer.
10.14 Non-Statutory Stock Option Agreement, dated June 6, 1995, between
the Company and Jeffrey B. Comer.
10.15 Agreement, dated June 5, 1996, between the Company and David W.
Haskin.
10.16 Agreement, dated September 1, 1996, between the Company and William
Knopf, M.D.
10.17 Non-Statutory Stock Option Agreement dated September 1, 1996,
between the Company and William Knopf, M.D.
10.18 Non-Statutory Stock Option Agreement, dated September 1, 1996,
between the Company and Donna J. Edmonds.
10.19 Agreement, dated September 25, 1996, between the Company and Donna
J. Edmonds.
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.20 Agreement, dated December 18, 1996, between the Company and National
Jewish Center (confidential portions have been omitted and filed
with the Secretary of the Commission).
10.21 Technical Support Agreement, dated as of December 18, 1996, between
the Company and National Jewish Center.
10.22 Non-Statutory Stock Option Agreement, dated March 4, 1997, covering
26,000 shares between the Company and APF, LLC.
10.23 Non-Statutory Stock Option Agreement, dated March 4, 1997, covering
10,333 shares between the Company and APF, LLC.
10.24 Non-Statutory Stock Option Agreement, dated March 24, 1997, covering
550,000 shares between the Company and APF, LLC.
10.25 Master Agreement, dated March 25, 1997, among the Company, Anthony
Furnary, M.D. and APF, LLC.
10.26 Modification Agreement, dated March 25, 1997, among the Company,
Anthony Furnary, M.D. and APF, LLC.
10.27 Agreement, dated March 28, 1997 between The Company and Atlanta
Cardiology Group, P.C.
10.28 Convertible Subordinated Promissory Note, dated March 28, 1997,
issued by the Company to The Atlanta Cardiology Group, PC.
10.29 Mutual Release, dated March 28, 1997, between the Company and The
Atlanta Cardiology Group, P.C.
10.30 Note dated May 12, 1997 in the principal amount of $1,000,000 issued
to Medtronic, Inc.
10.31 Employment Agreement, dated August 18, 1997, between the Company and
David J. Chinsky.
10.32 Letter Agreement, dated November 10, 1997, among the Company, APF,
LLC and Anthony P. Furnary, M.D.
10.33 Letter Agreement, dated November 10, 1997, between the Company and
the Atlanta Cardiology Group, P.C.
10.34 Letter Agreement, dated November 10, 1997, between the Company and
Medtronic, Inc.
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.35 Amendment to Employment Agreement, dated November 13, 1997, between
the Company and David J. Chinsky.
10.36 Non-Statutory Stock Option Agreement, dated November 13, 1997,
between the Company and David J. Chinsky.
10.37 Securities Purchase Agreement, dated as of November 14, 1997, among
the Company and the Purchasers. Omitted from this Exhibit, as filed,
are the exhibits and schedules referenced in such agreement. The
Company will furnish supplementally a copy of any such exhibits and
schedules to the Commission upon request.
23.1 Consent of Oppenheimer Wolff & Donnelly LLP. (Included in Exhibit
5.1).
23.2 Consent of Independent Auditors.
24.1 Power of Attorney. (Included on Part II-9 of the Registration
Statement as originally filed on February 27, 1998).
27.1 Financial Data Schedule.
ITEM 28. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
<PAGE>
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 24 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Pre-Effective
Amendment No. 1 to the Registration Statement on Form SB-2 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis
and State of Minnesota, on April 24, 1998.
LIFERATE SYSTEMS, INC.
By /s/ David J. Chinsky
------------------------
David J. Chinsky
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933,
this Pre-Effective Amendment No. 1 to the Registration Statement was signed by
the following persons in the capacities and on April 24, 1998.
Signatures Title
---------- -----
/s/ David J. Chinsky President and Chief Executive Officer and
----------------------------- Director (principal executive officer)
David J. Chinsky
/s/ Kenneth G. Tarr Chief Financial Officer
----------------------------- (principal financial and accounting
Kenneth G. Tarr officer)
* Director
-----------------------------
Daniel A. Pelak
* Director
-----------------------------
Mark W. Sheffert
* By /s/ David J. Chinsky
-----------------------------
David J. Chinsky
Attorney-in-Fact
<PAGE>
PRE-EFFECTIVE AMENDMENT NO. 1 TO
LIFERATE SYSTEMS, INC.
REGISTRATION STATEMENT ON FORM SB-2
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION (METHOD OF FILING)
- ----------- ------------------------------
3.1 Amended and Restated Articles of Incorporation, as amended.
(Incorporated by reference to Exhibit 3.1 of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997, File No.
0-25530).
3.2 Amended and Restated Bylaws, as amended. *
4.1 Form of the Company's Common Stock Certificate. *
4.2 Amended and Restated Articles of Incorporation, as amended. (See
Exhibit 3.1).
4.3 Amended and Restated Bylaws, as amended. (See Exhibit 3.2).
4.4 Form of Warrant dated December, 1994 to purchase shares of Common
Stock issued to investors in connection with the Company's December,
1994 Private Placement. *
4.5 Form of Warrant dated March, 1995 to purchase 91,000 shares of
Common Stock issued to Principals of Miller Johnson & Kuehn, Inc. in
connection with the Company's Initial Public Offering. *
4.6 Form of Warrant dated December, 1995 to purchase 56,286 shares of
Common Stock issued to Principals of Miller Johnson & Kuehn, Inc. in
connection with the Company's December, 1995 Private Placement. *
4.7 Form of Warrant dated January, 1996 to purchase 29,555 shares of
Common Stock issued to Principals of Miller Johnson & Kuehn, Inc. in
connection with the Company's January, 1996 Private Placement. *
4.8 Warrant dated May 12, 1997 to purchase 100,000 shares of Common
Stock issued to Medtronic, Inc. *
4.9 Form of Warrant to purchase shares of Common Stock of the Company
issued to investors in connection with the July, 1997 Bridge
Financing. *
4.10 Form of Warrant dated July 21, 1997 to purchase 29,555 shares of
Common Stock to Principals of Miller Johnson & Kuehn, Inc. in
connection with the Company's July, 1997 Bridge Financing. *
4.11 Form of Warrant to Purchase Common Stock of the Company issued in
connection with the November 1997 Equity Financing. *
5.1 Opinion and Consent of Oppenheimer Wolff & Donnelly LLP. *
<PAGE>
EXHIBIT NO. DESCRIPTION (METHOD OF FILING)
- ----------- ------------------------------
10.1 1993 Stock Option Plan, as amended. *
10.2 Form of Incentive Stock Option Agreement for Employees. *
10.3 Form of Non-Statutory Stock Option Agreement for Non-Employees. *
10.4 Employee Stock Purchase Plan, as amended. *
10.5 Form of Employment Agreement. *
10.6 Lease Agreement with Alpha Associates, Inc. dated April 30, 1993. *
10.7 Computer Software Purchase Agreement, dated July 2, 1995, between
the Company, Anthony Furnary, M.D. and APF, LLC. *
10.8 Investment Agreement, dated as of December 26, 1995 between the
Company and Medtronic, Inc. *
10.9 License and Development Agreement, dated as of December 26, 1995
between the Company and Medtronic, Inc. *
10.10 Shareholder Voting Agreement, dated as of December 26, 1995 by and
among the Company, Medtronic, Inc., Donna J. Edmonds, Jeffrey B.
Comer, David W. Haskin and Paul D. Benson. *
10.11 Employment Agreement, dated April 29, 1996 between the Company and
William W. Chorske. *
10.12 Stock Option Agreement, dated April 29, 1996, between the Company
and William W. Chorske. *
10.13 Agreement, dated June 4, 1996, between the Company and Jeffrey B.
Comer. *
10.14 Non-Statutory Stock Option Agreement, dated June 6, 1995, between
the Company and Jeffrey B. Comer. *
10.15 Agreement, dated June 5, 1996, between the Company and David W.
Haskin. *
10.16 Agreement, dated September 1, 1996, between the Company and William
Knopf, M.D. *
10.17 Non-Statutory Stock Option Agreement dated September 1, 1996,
between the Company and William Knopf, M.D. *
10.18 Non-Statutory Stock Option Agreement, dated September 1, 1996,
between the Company and Donna J. Edmonds. *
<PAGE>
EXHIBIT NO. DESCRIPTION (METHOD OF FILING)
- ----------- ------------------------------
10.19 Agreement, dated September 25, 1996, between the Company and Donna
J. Edmonds. *
10.20 Agreement, dated December 18, 1996, between the Company and National
Jewish Center (confidential portions have been omitted and filed
with the Secretary of the Commission). *
10.21 Technical Support Agreement, dated as of December 18, 1996, between
the Company and National Jewish Center. *
10.22 Non-Statutory Stock Option Agreement, dated March 4, 1997, covering
26,000 shares between the Company and APF, LLC. *
10.23 Non-Statutory Stock Option Agreement, dated March 4, 1997, covering
10,333 shares between the Company and APF, LLC. *
10.24 Non-Statutory Stock Option Agreement, dated March 24, 1997, covering
550,000 shares between the Company and APF, LLC. *
10.25 Master Agreement, dated March 25, 1997, among the Company, Anthony
Furnary, M.D. and APF, LLC. *
10.26 Modification Agreement, dated March 25, 1997, among the Company,
Anthony Furnary, M.D. and APF, LLC. *
10.27 Agreement, dated March 28, 1997 between The Company and Atlanta
Cardiology Group, P.C. *
10.28 Convertible Subordinated Promissory Note, dated March 28, 1997,
issued by the Company to The Atlanta Cardiology Group, PC. *
10.29 Mutual Release, dated March 28, 1997, between the Company and The
Atlanta Cardiology Group, P.C. *
10.30 Note dated May 12, 1997 in the principal amount of $1,000,000 issued
to Medtronic, Inc. *
10.31 Employment Agreement, dated August 18, 1997, between the Company and
David J. Chinsky. *
10.32 Letter Agreement, dated November 10, 1997, among the Company, APF,
LLC and Anthony P. Furnary, M.D. *
10.33 Letter Agreement, dated November 10, 1997, between the Company and
the Atlanta Cardiology Group, P.C. *
<PAGE>
EXHIBIT NO. DESCRIPTION (METHOD OF FILING)
- ----------- ------------------------------
10.34 Letter Agreement, dated November 10, 1997, between the Company and
Medtronic, Inc. *
10.35 Amendment to Employment Agreement, dated November 13, 1997, between
the Company and David J. Chinsky. *
10.36 Non-Statutory Stock Option Agreement, dated November 13, 1997,
between the Company and David J. Chinsky. *
10.37 Securities Purchase Agreement, dated as of November 14, 1997, among
the Company and the Purchasers. Omitted from this Exhibit, as filed,
are the exhibits and schedules referenced in such agreement. The
Company will furnish supplementally a copy of any such exhibits and
schedules to the Commission upon request. *
23.1 Consent of Oppenheimer Wolff & Donnelly LLP. (Included in Exhibit
5.1).
23.2 Consent of Independent Auditors. (Filed herewith).
24.1 Power of Attorney. (Included on Part II-9 of the Registration
Statement as originally filed on February 27, 1998).
27.1 Financial Data Schedule. (Filed herewith).
- -------------------
* Previously filed as an exhibit to the Registration Statement filed on February
27, 1998.
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated February 27, 1998, in
Pre-Effective Amendment No. 1 to the Registration Statement (Form SB-2) and
related Prospectus of LifeRate Systems, Inc. for the registration of 16,788,000
shares of its Common Stock.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF EARNINGS AND THE BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 764
<SECURITIES> 0
<RECEIVABLES> 341
<ALLOWANCES> 63
<INVENTORY> 0
<CURRENT-ASSETS> 1,102
<PP&E> 1,050
<DEPRECIATION> 636
<TOTAL-ASSETS> 1,545
<CURRENT-LIABILITIES> 315
<BONDS> 2,021
0
0
<COMMON> 20,016
<OTHER-SE> (20,984)
<TOTAL-LIABILITY-AND-EQUITY> 1,545
<SALES> 620
<TOTAL-REVENUES> 620
<CGS> 533
<TOTAL-COSTS> 4,921
<OTHER-EXPENSES> (34)
<LOSS-PROVISION> 63
<INTEREST-EXPENSE> 326
<INCOME-PRETAX> (5,189)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,189)
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<EXTRAORDINARY> 1,313
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<NET-INCOME> (3,876)
<EPS-PRIMARY> (.88)
<EPS-DILUTED> (.88)
</TABLE>
