SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
or
( ) Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Exact name of small business issuer as specified in its
charter)
COMMISSION FILE NO. 0-25530
--------------------------
LIFERATE SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
MINNESOTA 41-1682994
(State of Incorporation) (I.R.S. Employer Identification No.)
7210 METRO BOULEVARD
MINNEAPOLIS, MINNESOTA 55439
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 844-0599
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES _X_ NO __
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. (X)
The Registrant's revenues for the fiscal year ended December 31, 1997
were $620,300.
As of March 2, 1998, 12,485,000 shares of Common Stock of the
Registrant were outstanding, and the aggregate market value of the Common Stock
of the Registrant as of that date (based upon the average between the closing
bid and asked prices for the Common Stock on that date), excluding shares owned
beneficially by executive officers, directors and greater-than-5% shareholders,
was approximately $3,944,531.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-KSB incorporates by reference
information (to the extent specific sections are referred to herein) from the
Registrant's Proxy Statement for its Annual Meeting to be held May 14, 1998 (the
"1998 Proxy Statement").
Transitional Small Business Disclosure Format (check one): YES ___
NO _X_
<PAGE>
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. FOR THIS
PURPOSE, ANY STATEMENTS CONTAINED IN THIS REPORT 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. SEE
ITEM 6. "MANAGEMENT'S DISCUSSION AND ANALYSIS - CERTAIN FACTORS."
PART I
ITEM 1. DESCRIPTION OF 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.
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.
RECENT DEVELOPMENTS
During 1997, the Company accomplished several important milestones.
FINANCIAL In 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 in
order to more effectively match expenses with revenues.
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. At the time of issuance, the Company also granted
Medtronic a warrant to purchase 100,000 shares of common stock. In July 1997,
the Company issued convertible promissory notes in the aggregate principal
amount of $500,000, along with warrants, to certain private investors on
substantially the same terms as the Medtronic Note and warrants. In November
1997, the Company entered into a securities purchase agreement with certain
investment funds ("Funds") and other purchasers whereby the Company agreed to
issue up to 9,000,000 shares of common stock and warrants. In connection with
this financing, the convertible note agreements were modified so that the
$500,000 in convertible promissory notes issued to certain private investors
were converted to 250,000 shares of Common Stock and the Medtronic Note was
modified so that it no longer accrues interest until maturity in 2002 and all
accrued interest prior to November was forgiven. Under the securities purchase
agreement, the Company sold 4,290,000 shares of Common Stock and warrants to
purchase an additional 4,290,000 shares in November 1997 resulting in net
proceeds of $1,964,400. The securities purchase agreement contemplated a second
closing in January 1998 if the Company met certain milestones by January 15,
1998. These milestones were met and in January 1998 an additional 4,000,000
shares of Common Stock and warrants to purchase 4,000,000 shares were sold
resulting in additional net proceeds to the Company of $1,958,000. See Item 12
of this Report on Form 10-KSB for a more complete description of these
transactions.
As disclosed in Note 11 to the financial statements, included in this
report, in prior years the Company had entered into agreements with a physician
group, The Atlanta Cardiology Group, P.C. ("ACG") and an advisor, Anthony
<PAGE>
Furnary, M.D., both of which had assisted the Company in developing its
products. The agreements called for the Company to pay the respective parties
royalties and other amounts based upon future product sales. In March 1997, the
Company and ACG canceled the agreement in place between the parties and entered
into a new agreement that called for the Company to issue ACG a $2,250,000
convertible subordinated note bearing interest at 10% per year. The note matures
on April 1, 2002. The note replaces all future royalty payments and other
amounts due under the previous agreement for services provided by ACG. Under the
original note, the Company agreed to pay to ACG 50% of the interest accrued each
year with the remainder due on the note's maturity date. Under the terms of the
convertible subordinated note, ACG may convert up to $2,000,000 into shares of
the Company's common stock at a conversion rate of $3.32 per share. In
connection with the November 1997 equity financing, the agreement with ACG was
modified so that the note no longer accrues interest and interest due from March
to November 1997 was forgiven. Also in March 1997, the Company and Dr. Furnary
modified the existing agreement between the parties. 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 prior 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 reached certain revenue
levels; (ii) to issue options to Dr. Furnary, for services previously rendered,
to purchase 550,000 shares of the Company's Common Stock at an exercise price of
$2.625; (iii) to enter into a five year consulting agreement with Dr. Furnary,
including the payment of fees of $100,000 per year, and (iv) to appoint Dr.
Furnary to the Company's Board of Directors. In connection with the November
1997 equity financing, the agreement was modified to cancel the milestone
payment of $450,000 and the consulting agreement. In addition, the options were
decreased from 550,000 shares to 200,000 shares of the Company's Common Stock at
an exercise price of $1.00 and Dr. Furnary resigned as a director of the Company
and waived his right to be appointed to the Board. See Item 12 of this Report on
Form 10-KSB for a more complete description of these transactions.
CUSTOMERS In January 1997, the Company entered into an agreement with
National Jewish Medical and Research Center to develop a clinical information
system to expand their disease management programs in respiratory medicine and
immunology.
In June 1997, Washington Heart, a worldwide leader in cardiovascular
medicine, contracted with LifeRate to utilize its cardiovascular outpatient
product and integration capabilities to capture and report clinical information
from several different data sources.
During the fourth quarter of 1997, the Company signed customer
agreements for product installations at seven new sites.
MANAGEMENT In August 1997, David J. Chinsky became the Company's
President and Chief Executive Officer and a director.
PRODUCTS During September 1997, the Company released Version 1.3 of its
Cardiovascular Outpatient Product. This release added functionality to the
software and increased its operational benefits to the customer.
The Company released for commercial sale in January 1998 its LifeRate
CLE product, an entry-level product for the cardiac catheterization laboratory.
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
<PAGE>
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 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 four
cardiovascular practice groups and the Asthma and Allergy Outpatient System is
in use at six 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 six 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 catherization 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.
<PAGE>
* 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.
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.
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
<PAGE>
* 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
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.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's facilities are currently located at 7210 Metro Boulevard,
Minneapolis, Minnesota 55439 and consist of approximately 10,368 square feet of
office space. The Company leases this space pursuant to a lease that provides
for rent of approximately $14,000 per month (including operating expenses and
real estate taxes) and expires on September 30, 2001.
ITEM 3. 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 April 30, 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 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. An adverse resolution to this action could have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company, their ages and the offices held
as of March 31, 1998 are as follows:
Name Age Position
- ---- --- --------
David J. Chinsky 43 President and Chief Executive Officer
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, a healthcare information 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 Masters
of Business Administration degree from Keller Graduate School of Management, his
Masters of Science in Public Health degree from the University of Illinois and
his Doctor of Public Health degree from the University of Michigan.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
From January 1, 1996 to July 3, 1997, the Common Stock was traded on
the Nasdaq Small Cap Market. Effective 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 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
<PAGE>
the OTC Bulletin Board, thereafter. These quotations reflect inter-dealer prices
without retail markup, markdown or commission and may not necessarily represent
actual transactions.
COMMON STOCK
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
As of February 15, 1998, there were approximately 138 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.
Information regarding Recent Sales of Unregistered Securities can be
found in this Report under Item 1. "Description of Business -- Recent
Developments." All such 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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.
<PAGE>
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 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
<PAGE>
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 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 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
<PAGE>
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 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.
CERTAIN FACTORS
In addition to the factors identified above, there are several
important factors that could cause the Company's actual results to differ
materially from those anticipated by the Company or which are reflected in any
forward-looking statements of the Company. These factors, and their impact on
the success of the Company's operations and its ability to achieve its goals,
include the following:
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT. The Company was formed
in July 1990, and has had revenues of $1,810,600 to date. As of December 31,
1997, the Company had an accumulated deficit of $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.
<PAGE>
There can be no assurance that the Company will generate sufficient sales to
achieve positive cash flow or profitable operations.
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 significant market presence in 1998 to achieve long-term
success.
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 decision support systems.
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 operate
LifeRate's system. In addition, payers with significant investments in other
hardware and software systems may be reluctant to abandon those systems for
LifeRate's system.
COMPETITION. The healthcare information industry, of which the Company
is a part, is characterized by intense competition. 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.
TECHNICAL OBSOLESCENCE. Computer-based technology in all industries is
undergoing, and is expected to continue to undergo, rapid and significant
technical advances. 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.
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. 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.
CONTROL BY CERTAIN PERSONS. As of February 10, 1998, Special Situations
Fund III., L.P. and certain affiliated funds and Medtronic, Inc. beneficially
own (within the meaning of the 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, Inc. 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 and control
the outcome of shareholder votes.
LEGAL PROCEEDINGS. The Company is a defendant in a shareholder lawsuit.
See Item 3 of this Report on Form 10-KSB for more information.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
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> <C>
Report of Independent Auditors ..................................................... 14
Balance Sheets as of December 31, 1997 and 1996..................................... 15
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................................................................... 17
Statements of Shareholders' Equity (deficit) for the period from July, 1990 to
December 31, 1997 .................................................................. 18
Statements of Cash Flow for the years ended
December 31, 1997, 1996 and 1995 and the period
from July 18, 1990 (date of inception) to December 31, 1997......................... 21
Notes to Financial Statements ...................................................... 22
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
(A) DIRECTORS OF THE REGISTRANT
The information under the Captions "Election of Directors--Information
about Nominees" and "Election of Directors--Other Information About
Nominees" in the Company's 1998 Proxy Statement is incorporated herein
by reference.
(B) EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning Executive Officers of the Company is
included in this Report under Item 4A, "Executive Officers of the
Registrant".
(C) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 1998 Proxy Statement is
incorporated herein by reference.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The information under the captions: "Election of Directors - Director
Compensation" and "Compensation and Other Benefits" in the Company's 1998 Proxy
Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the caption: "Principal Shareholders and
Beneficial Ownership of Management" in the Company's 1998 Proxy Statement is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the captions: "Election of Directors -
Nomination," "Election of Directors - Director Compensation," "Election of
Directors - Other Information About Nominees" and "Certain Transactions" in the
Company's 1998 Proxy Statement is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Reference is made to the Exhibit Index hereinafter contained on pages
34 to 38 of this Report.
A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a shareholder of the
Company as of March 2, 1998, upon receipt from any such person of a written
request for any such exhibit. Such request should be sent to LifeRate Systems,
Inc., 7210 Metro Boulevard, Minneapolis, MN 55439. Attention: Investor
Relations.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an Exhibit to this Report, the
location of which is indicated in the Exhibit Index of this Report.
(1) Employee Stock Purchase Plan, as amended.
(2) LifeRate Systems, Inc. 1993 Stock Option Plan, as amended.
(3) Form of Incentive Stock Option Agreement.
(4) Form of Non-Statutory Stock Option Agreement.
(5) Employment Agreement and Amendment, dated August 18, 1997 and
November 13, 1997, respectively, between the Company and David
J. Chinsky.
(6) Non-Statutory Stock Option Agreement, dated November 13, 1997,
between the Company and David J. Chinsky.
(7) Employment Agreement, dated April 29, 1996, between the
Company and William W. Chorske.
(8) Stock Option Agreement, dated April 29, 1996, between the
Company and William W. Chorske.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on November 26,
1997 to report a change in control of the Company. The Company entered
into a securities purchase agreement on November 14, 1997 whereby the
Company agreed to sell up to 9,000,000 shares of Common Stock. See Item
1 of this report on Form 10-KSB for a more complete description of this
transaction.
<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
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---- ----
ASSETS
Current assets:
<S> <C> <C>
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>
<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.
<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.
<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>
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Statements of Shareholders' Equity (Deficit) (continued)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING STOCK
COMMON STOCK ISSUED 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>
<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)
============ ============ ============ ============ ============
SEE ACCOMPANYING NOTES.
</TABLE>
<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.
<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.
<PAGE>
LifeRate Systems, Inc
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
<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>
<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
<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
<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.
<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:
1997 1996 1995
---- ---- ----
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)
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.
<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
=======
<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
<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.
<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.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LIFERATE SYSTEMS, INC.
Dated: March 25, 1998 By: /s/ David J. Chinsky
----------------------
David J. Chinsky
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated below and on the date indicated.
NAME TITLE DATE
/s/ David J. Chinsky Chief Executive Officer, March 25, 1998
David J. Chinsky President and Director
(Principal Executive, Financial
and Accounting Officer)
/s/ Mark W. Sheffert Chairman of the Board of Directors March 25, 1998
Mark W. Sheffert and Director
/s/ Daniel A. Pelak Director March 27, 1998
Daniel A. Pelak
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION (METHOD OF FILING)
NO.
- ---
3.1 Amended and Restated Articles of Incorporation,
as amended. (Filed herewith.)
3.2 Amended and Restated Bylaws, as amended. (Incorporated by
reference to Exhibit 3.2 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995, File No. 0-25530).
4.1 Form of the Company's Common Stock Certificate. (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement
on Form SB-2, File No. 33-89016C).
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. (Incorporated by
reference to Exhibit 10.17 of the Company's Registration
Statement on Form SB-2, File No. 33-89016C).
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.
(Incorporated by reference to Exhibit 4.5 of the Company's
Registration Statement on Form SB-2, File No. 333-42155).
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. (Incorporated by reference to Exhibit 4.6 of the
Company's Registration Statement on Form SB-2, File No.
333-42155).
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. (Incorporated by reference to Exhibit 4.7 of the
Company's Registration Statement on Form SB-2, File No.
333-42155).
4.8 Warrant dated May 12, 1997 to purchase 100,000 shares of Common
Stock issued to Medtronic, Inc. (Incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1997, File No. 0-25530).
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. (Incorporated by reference to Exhibit 4.9 of
the Company's Registration Statement on Form SB-2, File No.
333-42155).
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.
(Incorporated by reference to Exhibit 4.10 of the Company's
Registration Statement on Form SB-2, File No. 333-42155).
<PAGE>
EXHIBIT DESCRIPTION (METHOD OF FILING)
NO.
- ---
4.11 Form of Warrant to Purchase Common Stock of the Company issued
in connection with the November 1997 Equity Financing.
(Incorporated by reference to Exhibit 10.2 of the Company's
Current Report on Form 8-K dated November 26, 1997, File No.
0-25530).
10.1 1993 Stock Option Plan, as amended. (Incorporated by reference
to Exhibit 99.1 to the Company's Registration Statement on Form
S-8, File No. 333-02850).
10.2 Form of Incentive Stock Option Agreement for Employees.
(Incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form SB-2, File No. 33-89016C).
10.3 Form of Non-Statutory Stock Option Agreement for Non-Employees.
(Incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form SB-2, File No. 33-89016C).
10.4 Employee Stock Purchase Plan, as amended. (Incorporated by
reference to Exhibit 10.27 to the Company's Annual Report on
Form 10-KSB/A (Amendment No. 1), File No. 0-25530).
10.5 Form of Employment Agreement. (Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form
SB-2, File No. 33-89016C).
10.6 Lease Agreement with Alpha Associates, Inc. dated April 30,
1993. (Incorporated by reference to Exhibit 10.20 to the
Company's Registration Statement on Form SB-2, File No.
33-89016C).
10.7 Computer Software Purchase Agreement, dated July 2, 1995,
between the Company, Anthony Furnary, M.D. and APF, LLC.
(Incorporated by reference to Exhibit 10.28 of the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1995, File No. 0-25530).
10.8 Investment Agreement, dated as of December 26, 1995 between the
Company and Medtronic, Inc. (Incorporated by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-K dated
December 22, 1995, File No. 0-25530).
10.9 License and Development Agreement, dated as of December 26, 1995
between the Company and Medtronic, Inc. (Incorporated by
reference to Exhibit 10.3 of the Company's Current Report on
Form 8-K dated December 22, 1995, File No. 0-25530).
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.
(Incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated December 22, 1995, File No.
0-25530).
10.11 Employment Agreement, dated April 29, 1996 between the Company
and William W. Chorske. (Incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1996, File No 0-25530).
10.12 Stock Option Agreement, dated April 29, 1996, between the
Company and William W. Chorske. (Incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1996, File No. 0-25530).
<PAGE>
EXHIBIT DESCRIPTION (METHOD OF FILING)
NO.
- ---
10.13 Agreement, dated June 4, 1996, between the Company and Jeffrey
B. Comer. (Incorporated by reference to Exhibit 10.21 of the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996, File No. 0-25530).
10.14 Non-Statutory Stock Option Agreement, dated June 6, 1995,
between the Company and Jeffrey B. Comer. (Incorporated by
reference to Exhibit 10.23 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996, File No.
0-25530).
10.15 Agreement, dated June 5, 1996, between the Company and David W.
Haskin. (Incorporated by reference to Exhibit 10.24 of the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996, File No. 0-25530).
10.16 Agreement, dated September 1, 1996, between the Company and
William Knopf, M.D. (Incorporated by reference to Exhibit 10.1
of the Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1996, File No. 0-25530).
10.17 Non-Statutory Stock Option Agreement dated September 1, 1996,
between the Company and William Knopf, M.D. (Incorporated by
reference to Exhibit 10.3 of the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1996, File No.
0-25530).
10.18 Non-Statutory Stock Option Agreement, dated September 1, 1996,
between the Company and Donna J. Edmonds. (Incorporated by
reference to Exhibit 10.29 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996, File No.
0-25530).
10.19 Agreement, dated September 25, 1996, between the Company and
Donna J. Edmonds (Incorporated by reference to Exhibit 10.28 of
the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996, File No. 0-25530).
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). (Incorporated
by reference to Exhibit 10.30 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996, File No.
0-25530).
10.21 Technical Support Agreement, dated as of December 18, 1996,
between the Company and National Jewish Center. (Incorporated by
reference to Exhibit 10.31 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996, File No.
0-25530).
10.22 Non-Statutory Stock Option Agreement, dated March 4, 1997,
covering 26,000 shares between the Company and APF, LLC.
(Incorporated by reference to Exhibit 10.39 of the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1996, File No. 0-25530).
10.23 Non-Statutory Stock Option Agreement, dated March 4, 1997,
covering 10,333 shares between the Company and APF, LLC.
(Incorporated by reference to Exhibit 10.40 of the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1996, File No. 0-25530).
10.24 Non-Statutory Stock Option Agreement, dated March 24, 1997,
covering 550,000 shares between the Company and APF, LLC.
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1996, File
<PAGE>
EXHIBIT DESCRIPTION (METHOD OF FILING)
NO.
- ---
No. 0-25530).
10.25 Master Agreement, dated March 25, 1997, among the Company,
Anthony Furnary, M.D. and APF, LLC. (Incorporated by reference
to Exhibit 10.35 of the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996, File No. 0-25530).
10.26 Modification Agreement, dated March 25, 1997, among the Company,
Anthony Furnary, M.D. and APF, LLC. (Incorporated by reference
to Exhibit 10.36 of the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996, File No. 0-25530).
10.27 Agreement, dated March 28, 1997 between The Company and Atlanta
Cardiology Group, P.C. (Incorporated by reference to Exhibit
10.32 of the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996, File No. 0-25530).
10.28 Convertible Subordinated Promissory Note, dated March 28, 1997,
issued by the Company to The Atlanta Cardiology Group, PC.
(Incorporated by reference to Exhibit 10.33 of the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1996, File No. 0-25530).
10.29 Mutual Release, dated March 28, 1997, between the Company and
The Atlanta Cardiology Group, P.C. (Incorporated by reference to
Exhibit 10.34 of the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996, File No. 0-25530).
10.30 Note dated May 12, 1997 in the principal amount of $1,000,000
issued to Medtronic, Inc. (Incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1997, File No. 0-25530).
10.31 Employment Agreement, dated August 18, 1997, between the Company
and David J. Chinsky. (Incorporated by reference to Exhibit 10.6
of the Company's Current Report on Form 8-K dated November 26,
1997, File No. 0-25530).
10.32 Letter Agreement, dated November 10, 1997, among the Company,
APF, LLC and Anthony P. Furnary, M.D. (Incorporated by reference
to Exhibit 10.3 of the Company's Current Report on Form 8-K
dated November 26, 1997, File No. 0-25530).
10.33 Letter Agreement, dated November 10, 1997, between the Company
and the Atlanta Cardiology Group, P.C. (Incorporated by
reference to Exhibit 10.4 of the Company's Current Report on
Form 8-K dated November 26, 1997, File No. 0-25530).
10.34 Letter Agreement, dated November 10, 1997, between the Company
and Medtronic, Inc. (Incorporated by reference to Exhibit 10.5
of the Company's Current Report on Form 8-K dated November 26,
1997, File No. 0-25530).
10.35 Amendment to Employment Agreement, dated November 13, 1997,
between the Company and David J. Chinsky. (Incorporated by
reference to Exhibit 10.7 of the Company's Current Report on
Form 8-K dated November 26, 1997, File No. 0-25530).
<PAGE>
EXHIBIT DESCRIPTION (METHOD OF FILING)
NO.
- ---
10.36 Non-Statutory Stock Option Agreement, dated November 13, 1997,
between the Company and David J. Chinsky. (Incorporated by
reference to Exhibit 10.8 of the Company's Current Report on
Form 8-K dated November 26, 1997, File No. 0-25530).
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.
(Incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated November 26, 1997, File No.
0-25530).
23.1 Consent of Independent Auditors. (Filed herewith.)
27.1. Financial Data Schedule. (Filed herewith.)
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
LIFERATE SYSTEMS, INC.
These Amended and Restated Articles of Incorporation supersede the original
Articles of Incorporation and all amendments thereto, if any.
ARTICLE I.
The name of the Corporation is LifeRate Systems, Inc. (the "Corporation").
ARTICLE II.
The registered office of the Corporation in Minnesota is: 7210 Metro Boulevard,
Edina, Minnesota 55439.
ARTICLE III.
The Corporation shall be authorized to issue two classes of shares of capital
stock to be designated respectively, "common stock" and "preferred stock." The
total number of shares of all classes of capital stock which the Corporation
shall be authorized to issue is 76,000,000, consisting of 75,000,000 shares of
common stock and 1,000,000 shares of preferred stock. Shares of preferred stock
of the Corporation may be issued from time to time in one or more series, each
of which series shall have such distinctive designation or title and such number
of shares as shall be fixed by the Board of Directors prior to the issuance of
any shares thereof. Each such series of preferred stock shall have such voting
powers, full or limited, or no voting powers, and such preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof, as shall be stated and expressed in the
resolution or resolutions providing for the issue of such series of preferred
stock as may be adopted from time to time by the Board of Directors prior to the
issuance of any shares thereof pursuant to the authority hereby expressly vested
in it. The Board of Directors is further authorized to increase or decrease (but
not below the number of shares then outstanding) the number of shares of any
series of preferred stock subsequent to the issuance of shares of that series.
Except as provided in the resolution or resolutions of the Board of Directors
creating any series of preferred stock, the shares of common stock shall have
the exclusive right to vote for the election and removal of directors and for
all other purposes. Each holder of common stock shall be entitled to one vote
for each share held.
ARTICLE IV.
Shares of the Corporation acquired by the Corporation shall become authorized
but unissued shares and may be reissued as provided in these Articles of
Incorporation.
<PAGE>
ARTICLE V.
No shareholder of the Corporation shall have any cumulative voting rights.
ARTICLE VI.
No shareholder of the Corporation shall have any preemptive rights by virtue of
Section 302A.413 of the Minnesota Statutes (or similar provisions of future law)
to subscribe for, purchase or acquire any shares of the Corporation of any
class, whether unissued or now or hereafter authorized, or any obligations or
other securities convertible into or exchangeable for any such shares.
ARTICLE VII.
Any action required or permitted to be taken at a meeting of the Board of the
Corporation, other than an action requiring shareholder approval, may be taken
by written action signed by the number of directors that would be required to
take such action at a meeting of the Board of Directors at which all directors
are present.
ARTICLE VIII.
No director of the Corporation shall be personally liable to the Corporation or
its shareholders for monetary damages for breach of fiduciary duty by such
director as a director; provided, however, that this Article VIII shall not
eliminate or limit the liability of a director to the extent provided by
applicable law (i) for any breach of the director's duty of loyalty to the
Corporation or its shareholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 302.559 or 80A.23 of the Minnesota Statutes, as amended (iv) for any
transaction from which the director derived an improper personal benefit or (v)
for any act or omission occurring prior to the effective date of this Article
VIII. If the Minnesota Business Corporation Act hereafter is amended to
authorize the further elimination or limitation of the liability of directors,
then the liability of a director of the Corporation in addition to the
limitation and elimination of personal liability provided herein, shall be
eliminated or limited to the fullest extent permitted by the Minnesota Business
Corporation Act, as so amended. No amendment to or repeal of this Article VIII
shall apply to, or have any effect on, the liability or alleged liability of any
director for or with respect to any acts or omissions of such director occurring
prior to such amendment or repeal.
ARTICLE IX.
The Corporation shall indemnify to the fullest extent permissible under the
provisions of Chapter 302A of the Minnesota Statutes, as amended, (as now or
hereafter in effect) any person made or threatened to be made a party to or
witness in any threatened, pending, or completed civil, criminal,
administrative, arbitration, or investigative proceeding, including a proceeding
by or in the right of the Corporation, by reason of the fact that he, his
testator or intestate, is or was a director or officer of the Corporation, or by
reason of the fact that such director or officer, while a director or officer of
the Corporation, is or was serving at the request of the Corporation, or whose
duties in that position
<PAGE>
involved service as a director, officer, partner, trustee or agent of another
organization or employee benefit plan, against all judgments, penalties, fines,
including, without limitation, excise taxes assessed against the person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorneys' fees and disbursements. Nothing contained herein shall
affect any rights to indemnification to which employees or agents of the
Corporation other than directors and officers may be entitled under the
provisions of Chapter 302A of the Minnesota Statutes, as amended. Any repeal or
modification of this Article IX shall be prospective only, and shall not
adversely affect any right to indemnification or protection of a director or
officer of the Corporation existing at the time of such repeal or modification.
No amendment to or repeal of this Article IX shall apply to or have any effect
on the liability of or alleged liability of any director or the Corporation for
or with respect to any acts or omissions of such director occurring prior to
such amendment or repeal.
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-02856) pertaining to the LifeRate Systems, Inc. 1993 Stock
Option Plan, as amended, in the Registration Statement on Form S-8 (No.
333-06783) pertaining to the LifeRate Systems, Inc. Employee Stock Option Plan
and in the Registration Statement on Form S-3 (No. 333-04939) dated June 21,
1996, of our report dated February 27, 1998, with respect to the financial
statements of LifeRate Systems, Inc. included in the Annual Report on Form
10-KSB for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUNNARY 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>
