As filed with the Securities and Exchange Commission on November 10, 1998.
Registration No. 333-
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
LIFERATE SYSTEMS, INC.
(Name of small business issuer in its charter)
MINNESOTA 7373 41-1682994
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
7210 METRO BOULEVARD
MINNEAPOLIS, MINNESOTA 55439
(612) 844-0599
(Address and telephone number of principal executive offices
and principal place of business)
-----------------------------------------
MARK W. SHEFFERT
CHAIRMAN OF THE BOARD
7210 METRO BOULEVARD
MINNEAPOLIS, MINNESOTA 55439
(612) 844-0599
(Name, address and telephone number of agent for service)
---------------
COPIES TO:
THOMAS A. LETSCHER, ESQ.
OPPENHEIMER WOLFF & DONNELLY LLP
3400 PLAZA VII, 45 SOUTH SEVENTH STREET
MINNEAPOLIS, MN 55402
(612) 607-7000
---------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
----------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, please check the following box. [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
----------------------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================================
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED REGISTERED(1) OFFERING PRICE PER SHARE(2) AGGREGATE OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value......... 325,000 $.015625 $5,078.13 $1.41
==============================================================================================================================
</TABLE>
(1) The amount to be registered hereunder consists of an aggregate of 325,000
shares of Common Stock to be sold by selling shareholders.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
based upon the last sale of the Registrant's Common Stock on November 6,
1998, as reported in the over-the-counter market.
-----------------------
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE
PROSPECTUS WHICH CONSTITUTES PART OF THIS REGISTRATION STATEMENT ALSO RELATES TO
AN AGGREGATE OF 8,788,000 SHARES OF THE REGISTRANT'S COMMON STOCK REGISTERED ON
FORM SB-2, REGISTRATION NO. 333-42155, AS FILED WITH THE COMMISSION ON DECEMBER
12, 1997 AND DECLARED EFFECTIVE ON DECEMBER 19, 1997, PURSUANT TO WHICH A
REGISTRATION FEE OF $1,425.86 WAS PREVIOUSLY PAID, AND AN AGGREGATE OF 8,000,000
SHARES OF THE REGISTRANT'S COMMON STOCK REGISTERED ON FORM SB-2, REGISTRATION
NO. 333-47361, AS FILED WITH THE COMMISSION ON FEBRUARY 27, 1998 AND DECLARED
EFFECTIVE ON APRIL 29, 1998 FOR WHICH A REGISTRATION FEE OF $1,622.50 WAS
PREVIOUSLY PAID.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE>
PROSPECTUS
17,113,000 SHARES
LIFERATE SYSTEMS, INC.
COMMON STOCK
-----------------------
This Prospectus relates to the offer and sale of 17,113,000 shares of Common
Stock of LifeRate Systems, Inc. by certain shareholders of the Company as
described under the heading "Selling Shareholders." The shares being offered by
the Selling Shareholders hereunder consist of: (a) 8,394,000 outstanding shares
of Common Stock issued in connection with the Company's November 1997 equity
financing, (b) 8,394,000 shares of Common Stock issuable upon the exercise of
warrants issued in connection with the Company's November 1997 equity financing,
and (c) 325,000 outstanding shares of Common Stock issued in connection with the
settlement of a claim against the Company.
The Company will not receive any part of the proceeds from the sale of the
shares by the Selling Shareholders pursuant to this Prospectus. The Company
will, however, pay all the expenses of registering the shares, except for any
selling expenses incurred by the Selling Shareholders in connection with this
offering, such as fees and commissions the Selling Shareholders may pay to
broker-dealers. The Selling Shareholders may offer and sell the shares from time
to time directly or through agents or to or through broker-dealers. See "Use of
Proceeds," "Selling Shareholders" and "Plan of Distribution."
PURCHASING THE SHARES OF COMMON STOCK BEING OFFERED UNDER THIS PROSPECTUS
INVOLVES A HIGH DEGREE OF RISK AND MAY NOT BE APPROPRIATE FOR INVESTORS WHO
CANNOT AFFORD TO LOSE THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON
PAGE 5 OF THIS PROSPECTUS.
The Company's Common Stock is currently traded in the over-the-counter market on
the NASD "Electronic Bulletin Board" under the symbol "LRSI." As a result, there
may be a limited market for the shares which could adversely affect your ability
to sell the shares and the price at which you will be able to sell the Shares.
On November 6, 1998, the closing bid price of the Common Stock in the
over-the-counter market was $.015625 per share.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------------
THE DATE OF THIS PROSPECTUS IS ________, 1998.
<PAGE>
TABLE OF CONTENTS
WHERE YOU CAN GET MORE INFORMATION.............................................1
PROSPECTUS SUMMARY.............................................................1
RISK FACTORS...................................................................3
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................7
USE OF PROCEEDS................................................................7
CAPITALIZATION.................................................................8
SELECTED FINANCIAL DATA........................................................9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................10
BUSINESS......................................................................16
MANAGEMENT....................................................................18
COMPENSATION AND OTHER BENEFITS...............................................21
CERTAIN TRANSACTIONS..........................................................25
PRINCIPAL SHAREHOLDERS AND BENEFICIAL OWNERSHIP OF MANAGEMENT.................32
SELLING SHAREHOLDERS..........................................................34
PLAN OF DISTRIBUTION..........................................................37
DESCRIPTION OF SECURITIES.....................................................38
VALIDITY OF SHARES............................................................41
EXPERTS.......................................................................41
INDEX TO FINANCIAL STATEMENTS................................................F-1
INFORMATION NOT REQUIRED IN PROSPECTUS......................................II-1
i
<PAGE>
WHERE YOU CAN GET MORE INFORMATION
The Company is a reporting company under the Securities Exchange Act
of 1934 and, consequently, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "SEC"). You may read and copy
these reports, proxy statements and other information at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
You can request copies of these documents by writing to the SEC and paying a fee
for the copying costs. Please call the SEC at 1-800-SEC-0330 for more
information about the operation of the public reference rooms. The Company's SEC
filings are also available at the SEC's Web site at http://www.sec.gov.
This Prospectus is a part of a Registration Statement on Form SB-2
the Company filed with the SEC. You can obtain or examine the Registration
Statement without charge at the SEC's offices or on the SEC's Web site. You can
obtain copies of the Registration Statement from the SEC upon payment of a
prescribed fee. You can also download or print the Registration Statement from
the SEC's Web site for no charge.
In purchasing the shares under this Prospectus, you should rely only
on the information provided to you in this Prospectus. The Company has not
authorized anyone else to provide you with different information. Neither the
Company nor any of the Selling Shareholders is making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this Prospectus is accurate as of any date other than
the date on the front of the document.
<PAGE>
PROSPECTUS SUMMARY
BECAUSE THIS IS A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION
THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY
BEFORE YOU DECIDE TO PURCHASE THE SHARES OF COMMON STOCK BEING OFFERED HEREBY.
PURCHASING THE SHARES OF COMMON STOCK IS SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. THEREFORE, YOU SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER THE HEADING "RISK FACTORS."
THE COMPANY
LifeRate Systems, Inc. is a development stage company founded in
1990 to develop a computer system that could help physicians respond to the fee
discount demands from managed care organizations. Since 1990, the Company had
been developing a set of software-based information products designed to enable
healthcare providers to evaluate and demonstrate the quality and cost
effectiveness of the medical care they deliver. The Company had been marketing
these software products since late 1995. After eight years of continuing losses
from operations, the Company ceased its business operations in August 1998. The
Company's Chief Executive Officer resigned, and the Company reduced staff to
three full-time and one part-time employees. Although the Company is continuing
to service its existing customers, it is not marketing or selling its products.
Accordingly, the Company does not expect to generate any meaningful amount of
revenue. The Company is currently winding down its business, reducing expenses,
collecting receivables and negotiating the termination or satisfaction of all of
its remaining obligations. In August 1998, the Company retained Manchester
Financial Group, Inc., a local investment banking firm, to explore strategic
options for the Company. The Company is actively seeking buyers for its
technology and merger candidates. See "Business" and "Certain Transactions."
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.
RISK FACTORS
Purchasing the shares of Common Stock being offered hereby is
speculative and involves a high degree of risk. See "Risk Factors."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Selling Shareholders....... 17,113,000 shares (including 8,394,000 shares
issuable pursuant to the exercise of certain
warrants held by the Selling Shareholders)
Common Stock outstanding before the offering........... 13,272,000 shares
Common Stock to be outstanding after the offering...... 21,666,000 shares based on all shares offered
under this Prospectus (assuming exercise of all
of the warrants held by the Selling Shareholders
and no further issuances by the Company)
Use of Proceeds........................................ The Company will not receive any of the
proceeds from the sale of the shares offered
hereby. See "Use of Proceeds."
</TABLE>
1
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
JULY 18, 1990
(DATE OF
SIX MONTHS ENDED INCEPTION) TO
YEAR ENDED DECEMBER 31, JUNE 30, JUNE 30,
----------------------------------------------- ------------------------------ --------
1995 1996 1997 1997 1998 1998
---- ---- ---- ---- ---- ----
STATEMENT OF (RESTATED) (RESTATED) (RESTATED)
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Net revenues .......... $ 263,300 $ 615,700 $ 620,300 $ 243,600 $ 395,500 $ 2,206,100
Operating expenses .... 5,883,300 9,893,600 4,984,300 2,650,400 1,671,600 23,755,400
Interest income and
other, net ............ 97,000 261,900 34,000 24,000 46,000 447,600
Interest expense....... 29,300 6,300 299,300 71,700 19,600 355,900
Net loss from
continuing
operations........... $ (5,595,300) $ (9,873,500) $ (5,162,100) $ (2,975,100) $ (1,694,400) $(23,964,800)
Net loss per share
from continuing
operations -
basic and diluted ..... (2.66) (2.61) $ (1.18) $ (0.78) $ (0.14) $ (9.93)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------------- -------------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
BALANCE SHEET DATA: (RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C>
Working capital .............. $ 6,759,700 $ 1,833,600 $ 787,100 $ (847,700) $ 1,458,100
Total assets ................. 8,403,700 3,076,300 1,544,800 1,260,000 1,865,600
Total liabilities ............ 1,259,400 2,923,900 3,598,800 4,043,500 3,658,100
Shareholders' equity (deficit) 7,144,300 152,400 (2,054,000) (2,783,500) (1,792,500)
</TABLE>
2
<PAGE>
RISK FACTORS
PURCHASING THE SHARES OF COMMON STOCK OFFERED BY THE SELLING
SHAREHOLDERS UNDER THIS PROSPECTUS IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF
RISK AND MAY NOT BE APPROPRIATE FOR INVESTORS WHO CANNOT AFFORD TO LOSE THEIR
ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS OF THE SHARES OFFERED HEREBY SHOULD BE
FULLY AWARE OF THE FOLLOWING RISK FACTORS, AMONG OTHERS, AND SHOULD CAREFULLY
REVIEW THE INFORMATION AND FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS
PROSPECTUS.
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. FOR
THIS PURPOSE, ANY STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT
STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS.
WITHOUT LIMITING THE FOREGOING, WORDS SUCH AS "MAY," "WILL," "EXPECT,"
"BELIEVE," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER
VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL
RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW.
OPERATING LOSSES; ACCUMULATED DEFICIT. The Company was formed in
July 1990, and has had revenues of only approximately $2,206,100 to date. The
Company has experienced net losses from its operations since its inception. In
1995, 1996 and 1997, the Company experienced losses of $5,595,300, $9,873,500
and $4,962,100, respectively. In the six months ended June 30, 1998, the Company
experienced a loss of $1,694,400. These losses, and the losses incurred since
1990, have resulted in an accumulated deficit of approximately $23,764,800 as of
June 30, 1998. The report of the Company's independent auditors on the Company's
financial statements for the year ended December 31, 1997 contains an
explanatory paragraph which states that the Company's recurring losses and
negative cash flow from operations raises substantial doubt about its ability to
continue as a going concern. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
NO CURRENT OPERATIONS; DEPENDENT UPON SALE OR MERGER. After eight
years of continuing losses from operations, the Company ceased its business
operations in August 1998. The Company's Chief Executive Officer resigned, and
the Company reduced staff to three full-time and one part-time employees.
Although the Company is continuing to service its existing customers, it is not
marketing or selling its products. Accordingly, the Company does not expect to
generate any meaningful amount of revenue. The Company is currently winding down
its business, reducing expenses, collecting receivables and negotiating the
termination or satisfaction of all of its remaining obligations. In addition,
the Company is negotiating to convert outstanding indebtedness of approximately
$3,250,000 into Common Stock. In August 1998, the Company retained Manchester
Financial Group, a local investment banking firm, to explore strategic options
for the Company. The Company is actively seeking buyers for its technology and
merger candidates. There can be no assurance that the Company will be successful
in terminating or satisfying all of its obligations or converting any portion of
outstanding indebtedness into Common Stock. Further, there can be no assurance
that the Company will be successful in selling its technology or merging with
another entity. If the Company is unable to successfully complete these
activities, it may be forced to seek protection under the bankruptcy laws. At
September 30, 1998, the Company had $663,100 in cash and cash equivalents. The
Company estimates that its current cash balances will be sufficient to fund its
minimal operations for the foreseeable future. However, the Company's cash
balance will not be sufficient to meet its obligations unless it is able to
convert outstanding indebtedness into Common Stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
POTENTIAL CONFLICTS OF INTEREST. On August 20, 1998, the Company
entered into an Engagement Agreement with Manchester Financial Group, Inc.
("MFGI"), an affiliate of Manchester Companies, Inc.
3
<PAGE>
("MCI"). Mark W. Sheffert, the Chairman of the Board of Directors of the
Company, is the Chairman of the Board, Chief Executive Officer and controlling
shareholder of MCI. For this reason, the Engagement Agreement and the Retainer
Agreement described below were approved by the disinterested members of the
Company's Board of Directors. Under the Engagement Agreement, the Company has
retained MFGI for a minimum period of six months as the Company's exclusive
agent to assist it with a merger, sale, exchange, combination or any similar
transaction related to the Company. The Company has agreed to pay MFGI a
retainer of $10,000 per month and a success fee if the Company completes a
transaction. In addition, on August 22, 1998, the Company entered into a
Retainer Agreement with Manchester Business Services, Inc. ("MBSI"), an
affiliate of MCI. Under the Retainer Agreement, the Company retained MBSI to
provide an interim Chief Executive Officer and to oversee the wind-down of the
Company's operations pending the sale or merger of the Company. See "Certain
Transactions."
Minnesota law provides that a contract or other transaction between
a corporation and one of its directors, or between a corporation and an
organization in or of which one of its directors is a director, officer or legal
representative or has a material financial interest (a "Related Party Contract")
is not void or voidable if the material facts as to the contract or transaction
and as to the director's interest are fully disclosed or known to the Board of
Directors, and the Board in good faith authorizes the contract or transaction by
the affirmative vote of a majority of the disinterested directors, even though
the disinterested directors constitute less than a quorum. Management's current
policy is to permit the Company to enter into Related Party Contracts so long as
such contracts would not be void or voidable under Minnesota law. Accordingly,
with respect to each of the Related Party Contracts described above, the
Company's Board of Directors is fully aware of the relevant relationships and
financial interests involved, and the disinterested Board members have adopted
resolutions, in good faith, approving each of the Related Party Contracts.
Management may enter into additional Related Party Contracts in the future so
long as the Board of Directors is aware of the relationship and financial
interest of an officer and director in the contract and the contract is approved
by the disinterested directors in good faith. None of the Related Party
Contracts described above has been submitted to the shareholders for their
approval and the Company does not intend to submit such Related Party Contracts
to the shareholders for their approval in the future unless such approval is
required by law or by the rules of any regulatory authority (e.g., Nasdaq).
EFFECTS OF DELISTING FROM NASDAQ SMALL CAP MARKET. Effective with
the close of business July 3, 1997, the Company's Common Stock was no longer
quoted on the Nasdaq Stock Market because the Company no longer met, and
currently does not meet, the minimum net tangible assets and capital and surplus
requirements for continued quotation. The Company's Common Stock is currently
quoted in the "over-the-counter" market and is eligible to trade on the OTC
Bulletin Board. The public trading market for the Company's Common Stock may
have been, and may continue to be, adversely affected by this development. In
order for the Company's Common Stock to be quoted on the Nasdaq Small Cap
Market, the Company will be required to meet initial listing criteria. These
criteria require the Company to have at least:
* three market makers in the Common Stock,
* total net tangible assets of $4.0 million,
* a minimum bid price for the Common Stock of $4.00 per share,
* 300 holders of its Common Stock and
4
<PAGE>
* 1,000,000 shares of its Common Stock held by non-affiliates,
having a market value of $5,000,000 or more.
The Company does not expect to be able to achieve the total net tangible assets
qualification standard, the minimum bid price standard or the market value
standard in the future. Consequently, the ability of shareholders to sell their
shares of the Company's Common Stock may be further impaired, not only in the
number of shares which may be bought and sold, but also through delays in the
timing of transactions and reduction in security analysts' and the news media's
coverage, if any, of the Company.
APPLICABILITY OF "PENNY STOCK RULES." Federal regulations under the
Securities Exchange Act of 1934 regulate the trading of so-called "penny
stocks", which are generally defined as any security not listed on a national
securities exchange or the Nasdaq Stock Market, priced at less than $5.00 per
share and offered by an issuer with limited net tangible assets and revenues.
Because the Company's Common Stock trades below $5.00 per share and is not
listed on the Nasdaq Stock Market or any national securities exchange, trading,
if any, of the Company's Common Stock is subject to the full range of these
penny stock rules. Under these rules, broker-dealers must take certain steps
prior to selling a "penny stock," which steps include:
* obtaining financial and investment information from the
investor;
* obtaining a written suitability questionnaire and purchase
agreement signed by the investor; and
* providing the investor a written identification of the shares
being offered and the quantity of the shares.
If these penny stock rules are not followed by the broker-dealer, the investor
has no obligation to purchase the shares. The application of these rules makes
it more difficult for broker-dealers to sell the Company's Common Stock. In
addition, shareholders of the Company may have difficulty in selling their
shares in the future in the secondary trading market.
UNDESIGNATED PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. The Board of
Directors of the Company is authorized to issue undesignated preferred stock in
one or more series, and to determine the preferences, rights and limitations of
each series without any vote or action of the shareholders of the Company. To
date, the Board has not established or issued any undesignated preferred stock
and currently has no plan to do so in the foreseeable future. If, however, the
Board decides to issue preferred stock that has preferential rights over the
Common Stock, such issuance could adversely affect the voting power and other
rights of the holders of Common Stock. The Company is subject to certain
provisions of the Minnesota Business Corporation Act which limit the voting
rights of shares acquired in "control share acquisitions" and restrict certain
"business combinations." Additionally, pursuant to the purchase agreement
entered into by the Company in connection with the November 1997 equity
financing, so long as the investor parties to such agreement own or have the
right to acquire an aggregate of 20% or more of the then outstanding shares of
Common Stock, the Company may not, without the prior written consent of certain
of such investors enter into certain business combinations. The Board's ability
to issue undesignated preferred stock, the foregoing provisions of the Minnesota
Business Corporation Act and such provisions in the purchase agreement could, in
certain circumstances, have the effect of delaying or preventing a change in
control of the Company.
CONTROL BY CERTAIN PERSONS. Special Situations Private Equity Fund,
L.P., Special Situations Cayman Fund, L.P. and Special Situations Fund III, L.P.
(collectively, the "Funds") and Medtronic, Inc. currently beneficially own
approximately 56% and 5% of the Company's outstanding Common Stock,
5
<PAGE>
respectively. The Funds and Medtronic each have a designee who serves on the
Board of Directors. In addition, Miller, Johnson & Kuehn Incorporated has the
right to designate a person to serve on the Board of Directors. Accordingly,
these shareholders, individually and as a group, will be able to influence the
outcome of shareholder votes, including votes concerning election of directors,
the adoption or amendment of provisions in the Company's Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws and the approval of
certain mergers or other similar transactions. Such control by existing
shareholders could have the effect of delaying, deferring or preventing a change
in control of the Company. See "Principal Shareholders and Beneficial Ownership
of Management."
6
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock currently trades in the over-the-counter
market on the NASD "Electronic Bulletin Board" under the symbol "LRSI." From
January 1, 1996 to July 3, 1997, the Common Stock was traded on The Nasdaq Small
Cap Market. See "Risk Factors -- Effects of Delisting from Nasdaq Small Cap
Market." The following table shows the high and low bid and asked prices of the
Common Stock for the periods indicated as reported by Nasdaq from January 1,
1996 through July 3, 1997 and by the OTC Bulletin Board, thereafter. These
quotations reflect inter-dealer prices, without retail markup, markdown or
commission and may not necessarily represent actual transactions.
HIGH: LOW:
1996:
First quarter $ 11 7/8 $ 9 5/8
Second quarter $ 10 1/4 $ 7 15/32
Third quarter $ 8 $ 3 7/8
Fourth quarter $ 5 1/8 $ 1 3/4
1997:
First quarter $ 3 5/8 $ 2 1/2
Second quarter $ 2 5/8 $ 3/4
Third quarter $ 2 $ 3/8
Fourth quarter $ 1 3/16 $ 3/8
1998:
First quarter $ 3/4 $ 25/64
Second quarter $ 43/64 $ 15/64
Third quarter $ 27/64 $ 1/16
Fourth quarter (through October 15, 1998) $ 1/8 $ 1/32
As of October 15, 1998, there were approximately 137 record holders
of the Company's Common Stock. The Company has never paid cash dividends on the
Common Stock and has no plans to pay cash dividends in the future.
USE OF PROCEEDS
All of the shares of Common Stock offered hereby are being offered
by the Selling Shareholders for their own accounts. The Company will not receive
any proceeds from the sale of the shares by the Selling Shareholders.
7
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as
of June 30, 1998:
JUNE 30, 1998(1)
----------------
Long-term obligations: $3,106,500
Shareholders' equity:
Preferred Stock, no par value; 1,000,000 shares
authorized; no shares issued and outstanding --
Common Stock, no par value, 75,000,000 shares
authorized; 12,487,000 shares issued and outstanding 21,972,300
Accumulated deficit (23,764,800)
-----------
Total shareholders' equity (deficit) (1,792,500)
-----------
Total long-term obligations and shareholders' equity: $1,458,100
===========
- ------------------------
(1) Excludes an aggregate of (a) 11,355,118 shares of Common Stock issuable upon
exercise of options, warrants or conversion of convertible promissory notes
outstanding as of June 30, 1998, and (b) 785,000 shares of Common Stock issued
subsequent to June 30, 1998.
8
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
this Prospectus. The statement of operations data set forth below for the years
ended December 31, 1995, 1996 and 1997 and the period from July 18, 1990 (date
of inception) to December 31, 1997 and the balance sheet data at December 31,
1996 and 1997 are derived from the financial statements audited by Ernst & Young
LLP included elsewhere in this Prospectus. The balance sheet data set forth
below at December 31, 1995 are derived from audited financial statements not
included in this Prospectus. The selected financial data as of and for the six
months ended June 30, 1997 and 1998 have been derived from unaudited financial
statements of the Company which, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of such data. The results of operation for the six months ended
June 30, 1998 are not necessarily indicative of the results of operations to be
expected for the entire year ending December 31, 1998.
<TABLE>
<CAPTION>
JULY 18, 1990
YEAR ENDED SIX MONTHS ENDED (DATE OF
DECEMBER 31, JUNE 30, INCEPTION) TO
-------------------------------------------- ---------------------------- JUNE 30,
1995 1996 1997 1997 1998 1998
---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C> <C>
Net Revenues .................... $ 263,300 $ 615,700 $ 620,300 $ 243,600 $ 395,500 $ 2,206,100
Operating expenses:
Sales and marketing .......... 2,525,800 1,738,000 1,279,700 765,000 354,500 6,310,000
Research and development ..... 2,104,500 5,309,900 1,302,100 742,000 553,800 9,398,200
General and administrative ... 1,253,000 2,845,700 2,402,500 1,143,400 763,300 8,047,200
Interest income ................. 97,000 261,900 34,000 24,000 46,000 447,600
Interest expense and other, net . 29,300 6,300 299,300 71,700 19,600 355,900
Net loss from continuing
operations..................... $ (5,595,300) $ (9,873,500) $ (5,162,100) $ (2,975,100) $ (1,694,400) $(23,964,800)
Extraordinary item -
debt restructuring .............. -- -- 200,000 -- -- 200,000
Net loss ........................ $ (5,595,300) $ (9,873,500) $ (4,962,100) $ (2,975,100) $ (1,694,400) $(23,764,800)
Net loss per share from
continuing operations -
basic and diluted ............. $ (2.66) $ (2.61) $ (1.18) $ (0.78) $ (0.14) $ (9.93)
Net loss per share - basic
and diluted ................... $ (2.66) $ (2.61) $ (1.13) $ (0.78) $ (0.14) $ (9.84)
Weighted average number of
shares of common stock
outstanding ..................... 2,105,811 3,783,931 4,387,405 3,819,708 11,818,333 2,413,922
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------- -----------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
BALANCE SHEET DATA: (RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C>
Current assets ............... $ 7,915,900 $ 2,337,100 $ 1,102,200 $ 689,000 $ 1,473,100
Total assets ................. 8,403,700 3,076,300 1,544,800 1,260,000 1,865,600
Current liabilities .......... 1,156,200 503,500 315,100 1,536,700 407,500
Total liabilities ............ 1,259,400 2,923,900 3,598,800 4,043,500 3,658,100
Shareholders' equity (deficit) 7,144,300 152,400 (2,054,000) (2,783,500) (1,792,500)
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
LifeRate Systems, Inc. is a development stage company founded in
1990 to develop a computer system that could help physicians respond to the fee
discount demands from managed care organizations. Since 1990, the Company had
been developing a set of software-based information products designed to enable
healthcare providers to evaluate and demonstrate the quality and cost
effectiveness of the medical care they deliver. The Company had been marketing
these software products since late 1995. After eight years of continuing losses
from operations, the Company ceased its business operations in August 1998. The
Company's Chief Executive Officer resigned, and the Company reduced staff to
three full-time and one part-time employees. Although the Company is continuing
to service its existing customers, it is not marketing or selling its products.
Accordingly, the Company does not expect to generate any meaningful amount of
revenue. The Company is currently winding down its business, reducing expenses,
collecting receivables and negotiating the termination or satisfaction of all of
its remaining obligations. The Company's operating expenses are currently
approximately $110,000 per month.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues for the six-month period ended June 30, 1998 totaled
$395,500, an increase of $151,900, or 62%, over the same period one year ago.
Revenues consisted of $304,700 of installation and interface fees and $90,800 of
recurring license fees for the six months ended June 30, 1998. Revenues for the
six months ended June 30, 1997 totaled $243,600 and consisted of $150,000 of
development fees, recurring fees of $92,800 and miscellaneous revenue of $800.
During 1997, the Company implemented a cost reduction program to
reduce levels of expenditures and converse 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. During the second quarter of
1998, the Company decreased its employee head count further in order to more
effectively match expenses with revenue levels.
Cost of revenues was $444,700 and $520,600 for the six months ended
June 30, 1998 and 1997, respectively. Amortization of capitalized software
development costs included in cost of revenues was $16,200 and $50,400 for the
six months ended June 30, 1998 and 1997, respectively. Royalty expense included
in cost of sales was $0 and $14,900 for the six months ended June 30, 1998 and
1997, respectively.
Sales and marketing expense was $354,500 for the six months ended
June 30, 1998. This compares to $765,000 for the six months ended June 30, 1997.
Expenses for the six months ended June 30, 1998 have declined compared to the
same period last year due to the cost reduction program mentioned above which
resulted in reductions in payroll expenses, travel expenses and other sales and
marketing expenses.
Research and development expenses for the six months ended June 30,
1998 were $553,800 compared to $742,000 for the six months ended June 30, 1997.
The Company capitalizes software
10
<PAGE>
development costs after technological feasibility is achieved on new products
and enhancements to existing products. In the first quarter of 1998, the Company
capitalized $84,600 of development costs. No development costs were capitalized
in the second quarter of 1998 or for the first six months of 1997. Research and
development costs decreased from one year ago due to the cost reduction program
mentioned above. The cost reduction program resulted in reductions in payroll,
travel and other development expenses. These decreases were partially offset by
increased consulting expense related to new product development for the six
months ended June 30, 1998.
General and administrative expenses were $763,300 and $1,143,400 for
the six months ended June 30, 1998 and 1997, respectively. Expenses for 1998 are
lower in the areas of payroll and travel expenses due to the cost reduction
program mentioned above offset by the additional bad debt expense of $161,000
recorded in the second quarter.
Interest income and other income and expenses were $46,000 and
$24,000 for the six months ended June 30, 1998 and 1997, respectively. Changes
in interest income are due to fluctuations in the Company's cash balances. The
Company completed a significant equity financing in January 1998.
Interest expense was $9,900 and $71,700 for the six months ended
June 30, 1998 and 1997, respectively. The decrease is a result of the November
1997 restructuring of the convertible subordinated notes payable issued by the
Company during 1997 to be non-interest bearing notes.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Revenues in 1997 were $620,300 compared to revenues of $615,700 in
1996. Revenues of $275,000, or 44.3% of total revenue, were generated from
development work done for National Jewish Medical and Research Center. Revenues
of $100,200, or 16.1% of total revenue, were generated from National Allergy and
Asthma System ("NAAS"). Revenues of $97,500, or 15.7% of total revenue, were
generated from Washington Heart, a cardiovascular medical center. The remaining
$147,600 of 1997 revenues are related to the installation and monthly license
fees generated from the Company's cardiovascular outpatient product.
Revenues for 1996 were $615,700, a $352,400 increase from 1995.
Revenues of $349,800, or 56.8% of total revenue, were generated from NAAS.
Revenues of $68,200, or 11.1% of total revenue, were generated from two Pfizer,
Inc. related cardiovascular outpatient product installations and two Pfizer,
Inc. evaluation sites. The Company recognized $25,000, or 4.1% of total revenue,
in 1996 from National Jewish Medical & Research Center. The remaining $172,700
of 1996 revenues were related to the installation and monthly license fees
generated from the Company's cardiovascular outpatient product and other
development work. The revenue increase in 1996 was primarily due to fees from
NAAS and an increase in the number of customer installations of the Company's
products.
During the first quarter of 1997, the Company implemented a cost
reduction program to reduce levels of expenditures and conserve cash funds. As
part of this cost reduction program, the Company reduced employee head count
during 1997 in order to more effectively match expenses with revenues.
Cost of revenues in 1997 was $532,800, a $318,400 decrease from
1996. The 1997 expense consists of $50,500 in amortization of software
development costs, $36,500 of royalty expense and $445,800 of customer support
expenses. Customer support expenses declined in 1997 as a result of the cost
reduction program described above.
Cost of revenues in 1996 was $851,200, a $808,200 increase from
1995. The expense in 1996 consists of $100,800 in amortization of software
development costs, $46,100 in royalty expenses, and
11
<PAGE>
$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 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 capitalizes software development costs in accordance
with the provisions of Financial Accounting Standards Board Statement No. 86. In
the second quarter of 1995, the Company began capitalizing software development
costs after achieving technological feasibility on the core LifeRate system. A
total of $751,000 of development costs was capitalized during 1995. The Company
recorded a writedown of approximately $600,000 in the fourth quarter of 1995 due
to a decrease in the net realizable value of the capitalized costs because of
significant enhancements to the core system planned in 1996. These enhancements
have been released in 1996 as part of ongoing product maintenance. No software
development costs were capitalized in 1996 and 1997 for the core LifeRate
12
<PAGE>
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 $299,300, $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 $200,000 in 1997 relates to the
restructuring of the Company's convertible notes payable as described under
"Liquidity and Capital Resources". The extraordinary item represents $200,000 of
interest payable that was forgiven.
13
<PAGE>
RESTATEMENT
The Company has restated previously issued financial results for the
year ended December 31, 1997. The restated financial results reflect the
correction of an error related to the extraordinary gain recognized from its
troubled debt restructuring. The following summarizes the impact of the
restatement:
As reported Restated
Extraordinary item-debt
Restructuring $1,312,800 $200,000
Extraordinary item per share $ .30 $ .05
Net loss per share --
Basic and diluted $ (.88) $ (1.13)
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.
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. The Company is in the process of negotiating an
agreement with Medtronic to convert the Medtronic Note into Common Stock of the
Company.
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 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.
14
<PAGE>
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, the Company
sold an additional 4,000,000 shares of Common Stock at prices ranging from $.50
to $.56 per share and warrants to purchase an additional 4,000,000 shares of
Common Stock at an exercise price of $1.50 per share. The sale resulted in net
proceeds to the Company of $1,955,300. This sale of Common Stock completed the
final phase of the November 1997 securities purchase agreement whereby the
Company agreed to sell up to 9,000,000 shares of Common Stock and warrants.
At June 30, 1998 the Company had $1,251,400 in cash and cash
equivalents, an increase of $487,200 from December 31, 1997. The increase was
due to the sale of Common Stock in January 1998, which resulted in net proceeds
to the Company of $1,955,300. During the first six months of 1998, the Company
has used $1,356,800 of cash to fund operations, $84,600 to fund capitalized
software development costs, $22,900 to purchase capital equipment and $4,400 to
make payments on capital leases. The Company does not have significant capital
equipment purchase commitments.
The report of the Company's independent auditors on the Company's
financial statements for the year ended December 31, 1997 contains an
explanatory paragraph which states that the Company's recurring losses and
negative cash flow from operations raises substantial doubt about its ability to
continue as a going concern. The Company is in the process of negotiating the
termination or satisfaction of all its obligations, including without limitation
its customer contracts and lease. In addition, the Company is in the process of
negotiating agreements with Medtronic and ACG pursuant to which their promissory
notes would be converted into Common Stock of the Company. There can be no
assurance that the Company will be successful in terminating or satisfying all
of its obligations or converting any portion of outstanding indebtedness into
Common Stock. Further, there can be no assurance that the Company will be
successful in selling its technology or merging with another entity. If the
Company is unable to successfully complete these activities, it may be forced to
seek protection under the bankruptcy laws. At September 30, 1998, the Company
had $663,100 in cash and cash equivalents. The Company estimates that its
current cash balances will be sufficient to fund its minimal operations for the
foreseeable future. However, the Company cash balance will not be sufficient to
meet its obligations unless it is able to convert outstanding indebtedness into
Common Stock.
15
<PAGE>
BUSINESS
OVERVIEW
LifeRate Systems, Inc. is a development stage company founded in
1990 to develop a computer system that could help physicians respond to the fee
discount demands from managed care organizations. Since 1990, the Company had
been developing a set of software-based information products designed to enable
healthcare providers to evaluate and demonstrate the quality and cost
effectiveness of the medical care they deliver. The Company had been marketing
these software products since late 1995. After eight years of continuing losses
from operations, the Company ceased its business operations in August 1998. The
Company's Chief Executive Officer resigned, and the Company reduced staff to
three full-time and one part-time employees. Although the Company is continuing
to service its existing customers, it is not marketing or selling its products.
Accordingly, the Company does not expect to generate any meaningful amount of
revenue. The Company is currently winding down its business, reducing expenses,
collecting receivables and negotiating the termination or satisfaction of all of
its remaining obligations. In August 1998, the Company retained Manchester
Financial Group, Inc., a local investment banking firm, to explore strategic
options for the Company. The Company is actively seeking buyers for its
technology and merger candidates.
ARRANGEMENTS WITH MANCHESTER COMPANIES
On August 20, 1998, the Company entered into an Engagement Agreement
with Manchester Financial Group, Inc. ("MFGI"), an affiliate of Manchester
Companies, Inc. ("MCI"). Mark W. Sheffert, the Chairman of the Board of
Directors of the Company, is the Chairman of the Board, Chief Executive Officer
and controlling shareholder of MCI. For this reason, the Engagement Agreement
and the Retainer Agreement described below were approved by the disinterested
members of the Company's Board of Directors. Under the Engagement Agreement, the
Company has retained MFGI for a minimum period of six months as the Company's
exclusive agent to assist it with a merger, sale, exchange, combination or any
similar transaction related to the Company. After the initial six-month term,
the term of the Agreement will be month-to-month until the Company provides MFGI
with written 30-day notice of termination. In the event of a financing, sale,
exchange or other disposition of all or a material (more than 25%) portion of
the Company, whether accomplished by a sale of assets or stock, by or through
the Company and/or its shareholders, or a merger, tender or exchange offer,
joint venture equity investment or recapitalization, or any other transaction,
the effect of which is to change the control or ownership of the Company, MFGI
will be entitled to an accomplishment fee based on a percentage of the total
consideration of the transaction. In addition, the Company has agreed to pay
MFGI a monthly retainer of $10,000 for the term of the Agreement and to
reimburse MFGI for all reasonable out-of-pocket expenses incurred on behalf of
the Company. The retainer would be credited against any success fee.
On August 22, 1998, the Company entered into a Retainer Agreement
with Manchester Business Services, Inc. ("MBSI"), an affiliate of MCI. Under the
Retainer Agreement, the Company retained MBSI to provide an interim Chief
Executive Officer and to oversee the wind-down of the Company's operations
pending the sale of the business. F.G. Hamilton, the Company's Acting Chief
Executive Officer, is an associate of MBSI and is serving as the Company's
Acting Chief Executive Officer under the Retainer Agreement. The term of the
Retainer Agreement is month-to-month unless terminated in writing upon 30 days
notice by either party. In exchange for such services, the Company has agreed to
pay MBSI a monthly fee in the amount of $10,000 and reimburse MBSI for all
reasonable out-of-pocket expenses.
16
<PAGE>
PRODUCTS
Prior to suspending its operations, LifeRate developed and
marketed a set of software-based information products designed to enable
healthcare providers to evaluate and demonstrate the quality and cost
effectiveness of the medical care they deliver. LifeRate's product suite
comprised software-based, patient-centered clinical information tools and
services 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. In designing its products,
the Company focused on two medical specialties: cardiology and asthma and
allergy.
During 1996, LifeRate completed development of its core software
system, including outpatient modules for cardiovascular and asthma and allergy
specialties. Although LifeRate's cardiovascular outpatient system was at one
point in use by eight cardiovascular practice groups and the asthma and allergy
outpatient system was at one point in use by four asthma and allergy practice
groups, the Company has terminated most of these relationships and is in the
process of negotiating the termination of the remainder of these relationships.
EMPLOYEES
As of October 15, 1998, the Company had three full-time and one
part-time employees including two in management and administration and two in
customer support. In addition, F.G. Hamilton, the Company's Acting Chief
Executive Officer, has been retained by the Company as an independent contractor
under the Retainer Agreement with MBSI.
PROPERTIES
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. The Company
is in the process of negotiating the termination of this lease.
LEGAL PROCEEDINGS
In February 1998, Curran Partners L.P., John P. Curran and John P.
Curran Retirement Trust (collectively, the "Curran Entities") 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 complaint
contained 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. In September 1998, the
parties entered into a Settlement Agreement resolving the suit and releasing all
claims.
17
<PAGE>
MANAGEMENT
The directors and executive officers of the Company as of October
15, 1998 are as follows:
NAME AGE POSITION
---- --- --------
F.G. Hamilton 62 Acting Chief Executive Officer
Kenneth G. Tarr 41 Acting Chief Financial Officer
Mark W. Sheffert 51 Director and Chairman of the Board
Daniel A. Pelak 47 Director
Mark D. Dixon 32 Director
Robert N. Riner, M.D. 49 Director
F.G. HAMILTON. Mr. Hamilton has served as the Company's Acting Chief
Executive Officer since August 1998. Mr. Hamilton is serving as the Company's
Acting Chief Executive Officer pursuant to a Retainer Agreement between the
Company and Manchester Business Services, Inc. Mr. Hamilton has served as a
Senior Consultant with MBSI since January 1997. From September 1996 to March
1998, Mr. Hamilton served as President of Lake Country Incorporated, a plastic
injection molding company. From November 1994 to March 1996, Mr. Hamilton served
as President of Rolco Incorporated, a plastic injection molding company. From
October 1993 to March 1995, Mr. Hamilton served as President of Northgate
Computer Systems, Inc., a computer manufacturer. From October 1989 to October
1993, Mr. Hamilton served as President of Interlock Structures, Inc., a metal
manufacturing company. In addition to serving in these positions, Mr. Hamilton
has performed management consulting services for a variety of businesses. Mr.
Hamilton received his Bachelor's degree in business administration from the
University of Minnesota and is a graduate of the Executive Program at the
Graduate School of Business at the University of Minnesota.
KENNETH G. TARR. Mr. Tarr joined the Company as Controller in
September 1997 and became its Chief Financial Officer in April 1998. Prior to
joining LifeRate, Mr. Tarr was Controller at Ternes Register System from 1995 to
1997. Prior to that, Mr. Tarr was Controller at Minntech Corporation from 1990
to 1995. Mr. Tarr received his Bachelor of Science degree from the University of
Minnesota and became a Certified Public Accountant in 1980.
MARK W. SHEFFERT. Mr. Sheffert became a director and Chairman of the
Board of the Company in January 1998. Mr. Sheffert has over 25 years of
financing and financial services experience. He is the founder of Manchester
Companies, Inc. ("MCI") whose business is investment banking, corporate
restructuring, management consulting and commercial finance. Before founding
MCI, Mr. Sheffert was a senior executive with First Bank System, a $28 billion
bank holding company where he served in various high-level management capacities
and was eventually named one of two President's of First Bank System. Before
joining First Bank System, Mr. Sheffert was Chief Operating Officer and Director
of North Central Life Insurance Company. Mr. Sheffert serves and has served on
the Board of Directors of several public companies, including Telident, Inc. and
Medical Graphics Corporation, privately held corporations, and community
organizations. Mr. Sheffert is the designee of the Funds elected to the Board,
as required by the Purchase Agreement.
DANIEL A. PELAK. Mr. Pelak has been a director of the Company since
January 1996. Mr. Pelak is currently a Vice President of Medtronic, Inc., a
multi-national medical device manufacturer. He has been with Medtronic, Inc.
since 1976 and has held several key managerial positions. Mr. Pelak served as
the Vice President and General Manager of the Nortech Division of Medtronic from
1988 to 1992, and he is currently Vice President of Cardiovascular Marketing at
Medtronic. Mr. Pelak was elected to the Board as the designee of Medtronic. See
"Certain Transactions."
18
<PAGE>
MARK D. DIXON. Mr. Dixon became a director of the Company in April
1998. He is the Administrator of Abbott Northwestern Hospital. Mr. Dixon began
his career with Abbott Northwestern Hospital in 1984 serving as Operations Vice
President and as Executive Director of the Sister Kenny Institute. His
responsibilities have included planning, marketing, operations and overall
direction for the Cardiovascular, Rehabilitation, Neuroscience and Dialysis
programs, as well as numerous other ancillary departments and services. Mr.
Dixon received a Bachelor of Science Degree from the University of Minnesota in
1978 and a Master's Degree in Hospital and Health Care Administration in 1984
from the University of Minnesota.
RONALD N. RINER, M.D. Dr. Riner became a director of the Company in
April 1998. Dr. Riner is president of the Riner Group, Inc., an advisory and
consulting firm he founded in 1980. Dr. Riner currently serves as a member of
the Executive Management Team of the American College of Cardiology and is
responsible for business development and vendor relations in the College's
efforts at instituting a national data repository for clinical outcomes. A
graduate of Princeton University, Dr. Riner attended Cornell University Medical
College and received his internship and residency training at The New York
Hospital/Memorial Sloan Kettering Cancer Center.
ADDITIONAL INFORMATION ABOUT THE BOARD OF DIRECTORS
In November 1997, as a condition to the closing of an equity
financing transaction, the Company's Board of Directors was reduced from ten
directors to five directors, and all of the non-employee directors of the
Company, other than Daniel A. Pelak and Kevin L. Roberg, resigned from the
Board. In connection with the November 1997 equity financing, the Company also
agreed, so long as the Purchasers under the Purchase Agreement, own or have the
right to acquire at least 20% of the then outstanding shares of Common Stock,
that (a) the Company will maintain the number of directors who constitute the
Board of Directors at five; (b) so long as the Funds own at least 2.5% of the
then outstanding shares of Common Stock, the Company will maintain on the Board
one director nominee to be designated by the Funds; and (c) for a period of
three years from the date of the Purchase Agreement, the Company will maintain
on the Board of Directors one director nominee to be designated by MJK, which
nominee is to be mutually acceptable to the Company and MJK. The Funds
designated Mark W. Sheffert as their director under the Purchase Agreement. MJK
has not designated its director as of the date hereof. See "Certain Transactions
- -- November 1997 Equity Financing."
Kevin L. Roberg resigned from the Board in December 1997.
On January 21, 1998, the Board of Directors reconstituted the Audit
Committee of the Board of Directors to consist solely of Mark W. Sheffert and
Daniel A. Pelak, who will act as Chairman of the Audit Committee. In addition,
the Board of Directors established a Compensation Committee, which has the
responsibility for making recommendations to the Board of Directors concerning
the compensation of the Company's directors, determining compensation for the
Company's Chief Executive Officer and approving compensation for senior
management of the Company and acting on such other matters relating to
compensation of directors, officers and senior management. The Compensation
Committee is currently comprised of Mark D. Dixon and Dr. Robert N. Riner.
DIRECTOR COMPENSATION
Prior to 1998, the Company did not pay fees to directors of the
Company. The Company generally reimburses directors of the Company for
out-of-pocket expenses incurred while attending Board or committee meetings.
19
<PAGE>
Prior to March 1997, the Company generally granted options to
directors to purchase 13,333 shares of Common Stock upon their initial election
to the Board. In March 1997, the Company granted to each director options to
purchase 2,500 shares of Common Stock, exercisable at $3.00 per share in one
third increments on each of the three anniversaries following the March 1997
grant date. See "Report on Repricing of Options."
In November 1997, as a condition to the closing of the November,
1997 equity financing, all of the non-employee directors of the Company agreed
to cancel all options and warrants to purchase shares of Common Stock held by
them (except for certain options to purchase an aggregate of 236,333 shares held
by APF, LLC and Dr. Anthony P. Furnary and options to purchase 10,000 shares,
exercisable at $1.00 per share held by each of William W. Chorske and William D.
Knopf, M.D.). See "Certain Transactions -- November 1997 Equity Financing."
Mr. Chorske received $47,850 for acting as Chairman of the Board of
the Company during the period from May to November of 1997.
On August 7, 1998, the Board of Directors adopted the 1998
Non-Employee Director Stock Plan (the "Director Plan") and reserved an aggregate
of 300,000 shares of Common Stock under the Director Plan. The Director Plan has
not been implemented, and the Board is currently considering a proposal to
terminate the Director Plan without granting any awards thereunder, and paying
non-employee directors $1,000 for each Board meeting attended in person and $500
for each Board meeting attended by telephone.
20
<PAGE>
COMPENSATION AND OTHER BENEFITS
The following table sets forth the total compensation for each of
the last three fiscal years awarded to or earned by the Chief Executive Officer
of the Company and each executive officer of the Company whose total
compensation exceeded $100,000 in 1997 (the "Named Executive Officers"). All of
the Named Executive Officers are no longer affiliated with the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
- --------------------------- ---- ------ ----- --------------- ------- ------------
(2)
---
<S> <C> <C> <C> <C> <C> <C>
David J. Chinsky (3) 1997 $ 78,750 $108,000 $ 11,258 650,000 --
FORMER PRESIDENT AND CHIEF
EXECUTIVE OFFICER
William W. Chorske (4) 1997 $ 88,636 $150,000(5) $ 47,850 54,917(6) --
FORMER PRESIDENT AND CHIEF 1996 $166,667 -- $ 20,000 75,000 --
EXECUTIVE OFFICER AND FORMER
CHAIRMAN
John R. Goodrich (7) 1997 $ 77,000 -- -- -- --
FORMER INTERIM PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Paul D. Benson (8) 1997 $ 95,000 $ 7,754 -- 8,000 $ 2,450
FORMER SENIOR VICE PRESIDENT, 1996 $ 95,000 $ 20,000 -- -- --
STRATEGIC BUSINESS DEVELOPMENT 1995 $ 75,000 $ 20,000 -- -- --
</TABLE>
- ------------------------
(1) "Other Annual Compensation" paid to Mr. Chinsky is comprised of an
apartment and travel allowance. "Other Annual Compensation" paid to Mr.
Chorske in 1997 and 1996 was in connection with his services as Chairman
of the Board of the Company.
(2) "All Other Compensation" paid to Mr. Benson is comprised entirely of
matching contributions to the Company's 401(k) plan.
(3) David J. Chinsky served as President and Chief Executive Officer from
August 1997 through August 1998.
(4) William W. Chorske served as President and Chief Executive Officer from
May 1996 through April 1997. Mr. Chorske became Chairman of the Board in
May 1997 and resigned such position on November 14, 1997. See "Certain
Transactions -- November 1997 Equity Financing."
21
<PAGE>
(5) The $150,000 bonus for 1997 became payable under Mr. Chorske's employment
agreement upon termination of his employment, but had not been paid as of
December 31, 1997. See "Compensation and Other Benefits -- Employment
Agreements -- Chorske Employment Agreement."
(6) In March 1997, the Company granted Mr. Chorske options to purchase 2,500
and 52,417 shares of Common Stock each at an exercise price of $3.00 per
share and expiring five years from the date of grant, and canceled Mr.
Chorske's prior options covering 61,667 shares exercisable at $9.375 per
share. In November 1997, in connection with the November 1997 equity
financing Mr. Chorske agreed to cancel all outstanding options except that
he retained options to purchase 10,000 shares at an exercise price of
$1.00 per share. See "Report on Repricing of Options" below.
(7) John R. Goodrich served as interim President and Chief Executive Officer
from May 1997 to August 1997.
(8) Paul D. Benson resigned from the Company in February 1998.
OPTION GRANTS AND EXERCISES IN 1997
The following tables provide information for the year ended December
31, 1997 as to individual grants and exercises of options to purchase shares of
the Company's Common Stock by each of the Named Executive Officers of the
Company.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES TOTAL OPTIONS PERCENT OF MARKET
UNDERLYING GRANTED TO EXERCISE OR PRICE
OPTIONS GRANTED EMPLOYEES IN BASE ON DATE EXPIRATION
NAME (#)(1) FISCAL YEAR PRICE($/SH) OF GRANT DATE
- -------------------- --------------- ------------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
David J. Chinsky 650,000(2) 77.0% $ 0.50 $ 1.125 8/26/05
William W. Chorske 52,417(3) 6.2% $ 3.00 $ 3.00 3/7/02
2,500(3) 0.3% $ 3.00 $ 3.00 3/7/02
John R. Goodrich -- -- -- -- --
Paul D. Benson 8,000(4) 0.9% $ 3.00 $ 3.00 3/7/02
</TABLE>
- --------------------------
(1) Upon a defined "Change in Control" of the Company, all outstanding options
become immediately exercisable in full and will remain exercisable for the
remainder of their terms regardless of whether the holder remains in the
employ or service of the Company or any subsidiary. A "Change in Control"
of the Company for purposes of both options granted outside of as well as
under the 1993 Stock Option Plan includes (a) the sale, lease, exchange or
other transfer of all or substantially all of the assets of the Company to
a corporation that is not controlled by the Company, (b) the approval by
the Company's shareholders of any plan or proposal for the liquidation or
dissolution of the Company, (c) the acquisition by any person, directly or
indirectly, of 50% of more of the Company's Common Stock, excluding shares
acquired by Special Situation Fund (see "Certain Transactions-- November
1997 Equity Financing") or (d) any change in control of the Company of a
nature that would be required to be reported pursuant to Section 13 or
15(d) of the Exchange Act, whether or not the Company is then subject to
such reporting requirements.
22
<PAGE>
(2) Such options to Mr. Chinsky were not granted under any formal stock option
plan of the Company. Such options vest at the rate of one-third of the
shares covered by such options on the first three anniversaries of the
date Mr. Chinsky began his employment with the Company, provided that Mr.
Chinsky continues to provide services to the Company. The exercise price
of these options is equal to the per share price of the shares sold in the
November 1997 equity financing. At the time of the grant of these options,
Mr. Chinsky waived his right to any additional options to which he would
otherwise have been entitled pursuant to his employment agreement. See
"Compensation and Other Benefits -- Employment Agreements -- Chinsky
Employment Agreement" and "Certain Transactions -- November 1997 Equity
Financing."
(3) In March 1997, the Company granted Mr. Chorske options under the Company's
1993 Stock Option Plan to purchase 2,500 and 52,417 shares of Common Stock
each at an exercise price of $3.00 per share and expiring five years from
the date of grant, and canceled Mr. Chorske's prior options covering
61,667 shares exercisable at $9.375 per share. In November 1997, in
connection with the November 1997 equity financing, Mr. Chorske agreed to
cancel all outstanding options except that he retained options to purchase
10,000 shares at an exercise price of $1.00 per share. See "Report on
Repricing of Options" below.
(4) Such options to Mr. Benson were granted under the Company's 1993 Stock
Option Plan and are subject to the terms of such plan.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FY-END(#)(1) MONEY OPTIONS AT FY-END($)(2)
------------------------- -----------------------------
NAME (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
- ---- --------------------------- ---------------------------
<S> <C> <C>
David J. Chinsky 0/650,000 $0/$81,250
William W. Chorske 10,000/0 0/0
John G. Goodrich 0/0 0/0
Paul D. Benson 0/8,000 0/0
</TABLE>
- ------------------------
(1) The exercise price may be paid in cash or, in the Stock Option Committee's
discretion, in shares of the Company's Common Stock valued at fair market
value on the date of exercise.
(2) Based on the closing bid price on December 31, 1997 of $.625, as reported
by the OTC Bulletin Board.
23
<PAGE>
REPORT ON REPRICING OF OPTIONS
On March 7, 1997, the former Stock Option Committee of the Board of
Directors granted new options to all employees of the Company, including William
W. Chorske, the Company's President and Chief Executive Officer at that time, at
an exercise price of $3.00 per share, the fair market value of the Common Stock
on such date, and canceled all options previously granted to then current
employees. Prior to March 7, 1997, the exercise price of all options held by
employees ranged from $4.50 to $10.625 per share. In addition, the number of
shares covered by the new options granted to employees was reduced by 15% from
the number of shares covered by the canceled options. The vesting of the new
options was also extended so as to preserve a continuing equity incentive for
all employees to remain with the Company over the next several years. The new
options vested in one third increments on each of three anniversaries following
the March 7, 1997 grant. The Stock Option Committee granted these options
because it concluded that the grant was necessary to maintain an appropriate
future equity incentive for the employees of the Company.
EMPLOYMENT AGREEMENTS
CHINSKY EMPLOYMENT AGREEMENT. In August 1997, the Company and David
J. Chinsky entered into an employment agreement, which provided for the
employment of Mr. Chinsky as the Company's President and Chief Executive
Officer. The agreement had an initial term of one year and terminated in August
1998. The agreement provided for an annual base salary of $225,000 with a
guaranteed payment of a first year bonus of $100,000. The Company also agreed to
pay Mr. Chinsky $108,000 in February 1998 for a bonus that Mr. Chinsky would
have otherwise received from previous employment, provided that the Company
successfully completed an equity financing. In addition, the Company granted Mr.
Chinsky options to purchase an aggregate of 300,000 shares of Common Stock at an
exercise price of $.50 per share, which vest over a period of three years. The
Company also agreed to grant Mr. Chinsky options to purchase additional shares
of Common Stock such that after any equity financings completed within Mr.
Chinsky's first year of employment he will have been granted options covering a
total number of shares of Common Stock equal to 7.84% of the number of
outstanding shares of Common Stock. The agreement required Mr. Chinsky to assign
to the Company any inventions related to the Company's business and to keep the
Company's proprietary information confidential. Mr. Chinsky is also prohibited
from competing with the Company for a period of two years following termination
of his employment with the Company.
In connection with the closing of the November, 1997 equity
financing, Mr. Chinsky's employment agreement was amended to provide that: (a)
the transactions contemplated by the November 1997 equity financing did not
constitute a "change in control," as defined in the employment agreement; (b)
bonuses payable to Mr. Chinsky will be payable, at the option of the Company, in
cash or shares of Common Stock; (c) the payment of a certain bonus in the amount
of $108,000 was accelerated and paid in November 1997, (d) all prior stock
options granted to Mr. Chinsky were canceled and Mr. Chinsky was granted a
replacement option to purchase 650,000 shares of Common Stock at an exercise
price of $.50 per share, and (e) Mr. Chinsky waived his right to receive any
additional options upon completion of the November 1997 equity financing. See
"Certain Transactions."
In August 1998, the Company entered into a Separation Agreement with
David J. Chinsky, the former President and Chief Executive Officer and a
director of the Company, pursuant to which the Company agreed to provide Mr.
Chinsky with certain payments and benefits, including (a) payment of Mr.
Chinsky's base salary through August 31, 1998, (b) payment of $15,000 per month
through October 31, 1998, (c) payment of the $100,000 cash bonus required under
his Employment Agreement, $35,000 of which was paid in cash and the remaining
$65,000 paid by issuing 260,000 shares of the Company's Common Stock, and (d)
continuation of health and dental insurance coverage until October 31, 1998.
24
<PAGE>
The Company and Chinsky also agreed that with respect to a stock option to
purchase 650,000 shares of Common Stock, 216,666 shares have vested and such
option will remain exercisable through August 26, 2003, even though Chinsky will
not continue to be employed by the Company.
CHORSKE EMPLOYMENT AGREEMENT. Effective May 1, 1996, the Company and
William W. Chorske entered into a one-year employment agreement, which provided
for the employment of Mr. Chorske as the Company's President and Chief Executive
Officer. The agreement provided for an annual base salary of $250,000. In
addition, the Company granted Mr. Chorske an option to purchase 61,667 shares of
Common Stock at a price of $9.375 per share, which became exercisable in full
upon completion of one year of employment. In March 1997, this option was
replaced with an option to purchase 52,417 shares exercisable at $3.00 per
share. Mr. Chorske was also entitled to receive a bonus under the agreement
equal to $150,000 because the exercise price of the options was greater than the
fair market value of the Company's Common Stock at the time of termination of
his employment. Mr. Chorske has agreed to accept cash payments of $75,000 and
restricted stock with a fair market value of $75,000 as payment of this
obligation. In consideration for his service as a director, the Company also
granted Mr. Chorske an option under the Company's 1993 Stock Option Plan to
purchase 13,333 shares of Common Stock at price of $9.375, exercisable with
respect to one-third of such shares and will become exercisable with respect to
one-third of such shares on each of the first two anniversaries of his election
as a director, provided that Mr. Chorske remains a director of the Company. The
agreement also required Mr. Chorske to assign to the Company any inventions
related to the Company's business and to keep the Company's proprietary
information confidential. Mr. Chorske was prohibited from competing with the
Company for a period of two years following termination of his employment with
the Company. Mr. Chorske's employment and positions as President and Chief
Executive Officer ended April 30, 1997, and he resigned as a director in
November 1997. In connection with the November 1997 equity financing Mr. Chorske
agreed to cancel all outstanding options except that he retained options to
purchase 10,000 shares at $1.00 per share.
CERTAIN TRANSACTIONS
MANCHESTER COMPANIES
In August 1998, the Company entered into an Engagement Agreement with
Manchester Financial Group, Inc. ("MFGI"), an affiliate of Manchester Companies,
Inc. ("MCI") and a Retainer Agreement with Manchester Business Services, Inc.
("MBSI"), also an affiliate of MCI. Mark W. Sheffert, the Chairman of the Board
of Directors of the Company, is the Chairman of the Board, Chief Executive
Officer and controlling shareholder of MCI. For this reason, the Engagement
Agreement and the Retainer Agreement were approved by the disinterested members
of the Company's Board of Directors. For a discussion of these two agreements,
see "Business - Arrangements with Manchester Companies."
EMPLOYMENT AND SEPARATION AGREEMENTS
For a discussion of the employment agreements and separation
agreements entered into by the Company and certain executive officers, see
"Management -- Employment Agreements."
NOVEMBER 1997 EQUITY FINANCING
On November 14, 1997, the Company entered into the Purchase
Agreement with Special Situations Private Equity Fund, L.P., Special Situations
Cayman Fund, L.P., Special Situations Fund III, L.P. (collectively, the "Funds")
and the other purchasers named in the Purchase Agreement (the Funds and such
other purchasers are collectively referred to herein as the "Purchasers"),
pursuant to which the
25
<PAGE>
Company agreed to sell up to 9,000,000 shares of Common Stock of the Company at
prices ranging from $.50 to $.56 per share and warrants to purchase up to
9,000,000 shares of Common Stock, as well as an additional 104,000 shares of
Common Stock and warrants to purchase 104,000 shares of Common Stock for
cancellation of certain indebtedness. The warrants are exercisable for a period
of ten years at a price of $1.50 per share, subject to adjustment as provided in
the warrants. The first closing under the Purchase Agreement was held on
November 14, 1997, at which the Company sold an aggregate of 2,500,000 shares of
Common Stock at a price of $.50 per share and issued warrants to purchase an
aggregate of 2,500,000 shares of Common Stock to the Funds for an aggregate
purchase price of $1,250,000 and an aggregate of 104,000 shares of Common Stock
and warrants to purchase an aggregate of 104,000 shares of Common Stock for the
cancellation of $52,000 of indebtedness (the "First Closing"). An interim
closing was held on November 21, 1997 (the "Interim Closing"), at which the
Company sold an additional 1,790,000 shares of Common Stock at a price of $.56
per share and issued warrants to purchase an aggregate of 1,790,000 shares of
Common Stock to purchasers other than the Funds for an aggregate purchase price
of $1,002,400.
The Purchase Agreement also provided that, in the event the Company
fulfilled certain conditions by January 15, 1998 (the "Second Closing
Conditions"), the Company would issue up to an additional 4,500,000 shares of
Common Stock and warrants to purchase 4,500,000 shares of Common Stock at a
purchase price of between $.50 and $.56 per share on or before January 31, 1998
(the "Second Closing"). The Second Closing Conditions included (a) the approval
by the shareholders of the Company of an amendment to the Company's Amended and
Restated Articles of Incorporation to increase the total number of authorized
shares of Common Stock to an aggregate of 75,000,000 and (b) the attainment by
the Company no later than January 15, 1998, of the following milestones: (i) the
Company's net revenues derived from the sale of existing or new systems during
the period from October 1, 1997 through January 15, 1998, must be at least
$200,000; (ii) the Company must have executed letters of intent and/or sales
contracts, each with a minimum value of $5,000, with at least five new
(excluding current or previous) customers for the sale of any existing or new
systems during the period from October 1, 1997 through January 15, 1998; and
(iii) the Company must have made generally available for sale a commercially
marketable entry level cardiac catheterization laboratory product designed to
support the data requirements of the American College of Cardiology, with a
sales price range of $5,000 to $15,000.
The Company satisfied the Second Closing Conditions and a second
closing was held on January 30, 1998 (the "Second Closing"), at which the
Company sold an aggregate of 2,500,000 shares of Common Stock at a price of $.50
per share and issued warrants to purchase an aggregate of 2,500,000 shares of
Common Stock to the Funds for an aggregate purchase price of $1,250,000 and sold
an aggregate of 1,500,000 shares of Common Stock at a price of $.56 per share
and issued warrants to purchase an aggregate of 1,500,000 shares of Common Stock
to purchasers other than the Funds for an aggregate purchase price of $840,000.
Immediately after the Second Closing, the Funds beneficially owned approximately
57% of the Company's issued and outstanding Common Stock.
As a condition to the First Closing, the Company's Board of
Directors was reduced from ten directors to five directors, and all of the
non-employee directors of the Company, other than Daniel A. Pelak and Kevin L.
Roberg, resigned from the Board. In addition, all of the non-employee directors
of the Company agreed to cancel all of their outstanding options and warrants to
purchase shares of Common Stock held by them (except for certain options to
purchase an aggregate of 236,333 shares held by APF, LLC ("APF") and Dr. Furnary
and options to purchase 10,000 shares, exercisable at $1.00 per share, held by
each of William W. Chorske and William D. Knopf, M.D.). Under the Purchase
Agreement, the Company has also agreed, so long as the Purchasers own or have
the right to acquire at least 20% of the then outstanding shares of Common
Stock, that (a) the Company must maintain the number of directors who constitute
the Board of Directors at five; (b) so long as the Funds own at least
26
<PAGE>
2.5% of the then outstanding shares of Common Stock, the Company must maintain
on the Board of Directors one director nominee to be designated by the Funds;
and (c) for a period of three years form the date of the Purchase Agreement, the
Company must maintain on the Board of Directors one director nominee to be
designated by Miller Johnson & Kuehn, Incorporated ("MJK"), which nominee is to
be mutually acceptable to the company and MJK (the "MJK Director"). The Funds
have designated Mr. Mark W. Sheffert as their nominee to the Board. MJK has not
designated its nominee to the Board as of the date hereof.
The Company agreed to a number of covenants under the Purchase
Agreement. So long as the Purchasers own or have the right to acquire at least
20% of the outstanding shares of Common Stock of the Company, the Company has
agreed not to do any of the following without the consent of the Funds and the
MJK Director: (a) sell Common Stock or any rights or securities convertible into
or exercisable or exchangeable for Common Stock at a purchase, exercise or
conversion price, as the case may be, of less than $1.00 per share of Common
Stock for a period of three years from the date of the Purchase Agreement; (b)
issue any securities senior to the Common Stock; (c) effect any
reclassification, capital reorganization or other change of outstanding shares
of capital stock of the Company; (d) merge, consolidate or enter into any other
business combination of the Company with or into another entity (other than a
merger of a wholly owned subsidiary, in which merger the Company shall be the
surviving entity); (e) sell, lease or otherwise dispose of all or substantially
all of its assets; or (f) liquidate, dissolve or wind-up the Company.
As further conditions to the First Closing, the Company amended
certain agreements between the Company and certain officers, directors and
affiliated entities. These amendments are described above and under the heading
"Compensation and Other Benefits -- Employment Agreements."
NON-EMPLOYEE DIRECTOR LOANS
In October 1997, eight of the Company's then non-employee directors
loaned the Company $5,775, an aggregate of $46,200 in order for the Company to
continue operations pending completion of the November 1997 equity financing.
The Company repaid a total of $40,425, without interest, to seven of these
non-employee directors from the proceeds of the November 1997 equity financing,
and the balance of $5,775 owed to Mr. Wegmiller was converted into 11,550 shares
of Common Stock at a price of $.50 per share.
AGREEMENTS WITH MEDTRONIC, INC.
In May 1997, the Company issued a convertible promissory note in the
principal amount of $1,000,000 (the "Medtronic Note") to Medtronic, Inc.
("Medtronic"), a principal shareholder of the Company with a representative that
serves on the Company's Board of Directors. As originally issued, the Medtronic
Note accrued interest at the prime rate. Under its original terms, the Medtronic
Note would have become due upon the earlier of the completion by the Company of
an equity financing raising gross proceeds of at least $5,000,000 or November
30, 1997, and was convertible, at the option of Medtronic, into Common Stock at
a conversion price equal to the lower of $2.00 or the average per share price in
one or more rounds of equity financing raising gross proceeds to the Company of
at least $5,000,000. At the time of issuance of the original Medtronic Note, the
Company granted Medtronic a warrant to purchase 100,000 shares of Common Stock,
exercisable at the same price as the conversion price of the Medtronic Note (the
"Medtronic Warrant"). Under the original terms of the Medtronic Note, the
Company would have been obligated to grant an additional warrant to purchase a
number of shares of Common Stock equal to 5% of the principal amount of the
Medtronic Note if the note was not paid by November 30, 1997 and an additional
warrant to purchase a number of shares of Common Stock equal to 5% of the
principal amount of the Medtronic Note if the note was not paid by February 28,
1998. In
27
<PAGE>
connection with the November 1997 equity financing, the Medtronic Note was
amended to provide that: (a) no interest will accrue thereunder and accrued
interest will be forfeited; (b) principal will not become due until May 12,
2002; (c) the conversion price of the Medtronic Note is $1.50 per share; and (d)
the Company will not be obligated to issue any additional warrants to Medtronic
under the Medtronic Note. The Medtronic Warrant was also amended to provide that
the exercise price is $.50 per share and that there was no other adjustment to
the exercise price or the number of shares covered by the Medtronic Warrant as a
result of the November 1997 equity financing. The Company is in the process of
negotiating an agreement with Medtronic to convert the Medtronic Note into
Common Stock of the Company. There can be no assurance that the Company will be
successful in reaching any such agreement.
On December 26, 1995, the Company entered into an Investment
Agreement and a License and Development Agreement with Medtronic and a
Shareholder Voting Agreement with Medtronic and certain shareholders of the
Company. Pursuant to the Investment Agreement, the Company privately sold to
Medtronic 600,000 shares of Common Stock at a price of $8.00 per share for a
total price of $4.8 million. The Company granted to Medtronic certain rights of
first refusal to purchase capital stock and assets of the Company and to develop
or commercialize the Company's technology in one or more fields other than the
cardiovascular and neurological fields, certain rights to have shares of the
Company held by Medtronic and certain assignees of Medtronic registered for sale
to the public and the right to designate one person to be nominated and elected
to the Board of Directors of the Company. Daniel A. Pelak, a Vice President of
Medtronic, was elected to the Company's Board in January 1996 as Medtronic's
designee under this agreement. Pursuant to the License and Development
Agreement, the Company granted to Medtronic a 30-year world-wide, fully paid,
royalty free license granting Medtronic certain rights relating to the sale and
use of the Company's system in the cardiovascular and neurological fields. In
addition, the Company agreed to install the Company's system at certain clinical
sites specified by Medtronic on a preferred pricing basis, to install the system
at one site specified by Medtronic at no cost to Medtronic and to engage with
Medtronic in certain joint development of products and systems. Under the
Shareholder Voting Agreement, officers of the Company who are parties to the
agreement, including Paul D. Benson, agreed to vote their shares of Common Stock
of the Company for the person designated by Medtronic to be a member of the
Board of Directors of the Company. In connection with the November 1997 equity
financing, Medtronic waived the restrictions on registration rights contained in
the Investment Agreement, waived its right of first refusal to purchase
securities in the November 1997 equity financing, agreed not to exercise and to
otherwise waive any of its registration rights until January 1, 2000, waived its
superior position with respect to an underwriter's cutback of piggyback
registration rights and waived its right of first refusal on the sale of the
Company in certain circumstances.
AGREEMENTS WITH FURNARY AND APF, LLC
In July 1995, the Company entered into an agreement with Anthony P.
Furnary, M.D., an advisor to the Company at the time, and APF, an entity owned
by Dr. Furnary under which the Company acquired certain software developed by
Dr. Furnary and agreed to pay royalties to Dr. Furnary initially equal to 7.5%
of gross revenues. Dr. Furnary also received an option to purchase 26,000 shares
of Common Stock at an exercise price of $4.50 per share. During 1995, 1996 and
1997, the Company paid approximately $81,000 in royalties under this agreement
to Dr. Furnary. In March 1997, the Company and Dr. Furnary entered into an
agreement modifying the July 1995 agreement. Under the terms of the modified
agreement, beginning in 1999 the Company will pay royalties in the amount of 3%
on all gross revenues (as defined in the agreement) up to $100,000,000, and
thereafter, 3.6% on all gross revenues. The existing royalty rate of 7.5% of
gross revenues remained in place through March 31, 1997. In addition, among
other things, under the modification the Company agreed (a) to make certain
milestone payments totaling $450,000 when the Company reaches certain revenue
levels; (b) to issue options to
28
<PAGE>
APF, for services previously rendered to the Company, to purchase 550,000 shares
of Common Stock at an exercise price of $2.625 per share and to reprice
outstanding options to purchase 36,333 shares held by Dr. Furnary to $2.625 per
share (which represents the closing price of the Company's Common Stock on the
date the Company and Dr. Furnary reached agreement in principle on the
modification agreement); (c) to enter into a consulting agreement with Dr.
Furnary; and (d) to appoint Dr. Furnary to the Company's Board of Directors
within 90 days. The consulting agreement, which has an initial term of five
years, with two-year renewal rights upon mutual agreement, provided that Dr.
Furnary would provide consulting services to the Company in the area of system
design and development as the Senior Advisor and System Architect for an annual
fee of $100,000.
In connection with the November 1997 equity financing, the
Consulting Agreement between the Company and Dr. Furnary was terminated, and the
Company's obligation to make milestone royalty payments of $450,000 under the
modified agreement was terminated. The 550,000 share stock option agreement was
amended to reduce the number of shares to 200,000 and the exercise price to
$1.00 per share. APF and Furnary also agreed (a) not to exercise and to
otherwise waive any of their registration rights under the foregoing option or
the other options held by them to purchase an aggregate of an additional 36,333
shares until January 1, 2000; (b) not to sell or otherwise transfer any shares
of Common Stock purchased upon exercise of any of such options prior to January
1, 2000; and (c) that there was no other adjustment to the exercise price of
such options or the number of shares issuable upon exercise of the foregoing
options thereof as a result of the November 1997 equity financing. Furnary also
waived his right to be appointed to the Company's Board of Directors and agreed
that his observer status is only exercisable by him personally.
AGREEMENTS WITH THE ATLANTA CARDIOLOGY GROUP, P.C.
In September 1994, The Atlanta Cardiology Group, P.C. ("ACG") and
the Company entered into an agreement for the joint development of practice
guidelines and clinical outcomes for cardiology, under which ACG agreed to pay
the Company a fee for system design and implementation and ACG was to receive
royalties on sales of the cardiology system over the next ten years. During
1995, the Company paid (or accrued) $150,000 for all services rendered by ACG
and the Company received $50,000 in revenues from the sale of products and
services to ACG. In early 1996, the Company and ACG agreed to restructure their
relationship. Among other things, the Company agreed to pay ACG a royalty equal
to 10% of gross sales of the Company's cardiology system and a 2% royalty on all
database sales. In 1996, the Company received no revenues from ACG and accrued
$60,052 in fees to ACG for all services rendered in 1996, including royalties
under the prior agreement. In March 1997, the Company entered into an agreement
with ACG to replace the prior agreements. Under the revised agreement, the
Company issued a convertible subordinated note to ACG in the principal amount of
$2,250,000, maturing on April 1, 2002 (the "ACG Note"). The note accrued
interest at a rate of 10% per annum, and interest was payable at the rate of 5%
per year, with the balance of accrued interest payable at the maturity date. Up
to $2,000,000 of the principal amount of the note is convertible by ACG into
shares of Common Stock at the rate of $3.32 per share. As long as the note is
outstanding, ACG had the right to designate an individual to attend all board
meetings. In connection with the November 1997 equity financing, the ACG Note
was amended to provide that no interest will accrue thereunder and that any
accrued interest shall be forfeited. In addition, ACG agreed that there was no
adjustment to the conversion price of the ACG Note or the number of shares
issuable upon conversion of the ACG Note as a result of the November 1997 equity
financing. ACG also agreed not to exercise and to otherwise waive any of its
registration rights prior to January 1, 2000 and waived its right to designate a
person to attend meetings of the Board. The Company is in the process of
negotiating an agreement with ACG to convert the ACG Note into Common Stock of
the Company. There can be no assurance that the Company will be successful in
reaching any such agreement.
29
<PAGE>
KNOPF AGREEMENT
In September 1996, the Company entered into an agreement with
William D. Knopf, M.D., a former director of the Company, relating to the
termination of Dr. Knopf's employment by the Company. Pursuant to this
agreement, the Company entered into a consulting agreement with Dr. Knopf, under
which Dr. Knopf agreed to provide certain consulting and advisory services to
the Company in exchange for an annual consulting fee of $60,000. The consulting
agreement also included a non-competition covenant for 12 months following the
expiration of the term of the consulting agreement, which expired by its terms
on September 1, 1997. In addition, Dr. Knopf received an option to purchase
50,000 shares at an exercise price equal to the fair market value on the date of
grant, which was $6.625 per share. This option was exercisable with respect to
one-third of such shares on the date of grant and will become exercisable with
respect to one-third of such shares on each of the first two anniversaries of
the date of grant. The option is exercisable for a period of ten years from the
date of grant. The Company and Dr. Knopf also executed mutual releases of any
and all claims relating to Dr. Knopf's employment by the Company or the
termination of his employment.
EDMONDS AGREEMENT
In September 1996, the Company entered into an agreement with Donna
J. Edmonds, a former director and executive officer of the Company, whose
employment with the Company terminated effective April 24, 1996. Pursuant to
such agreement, the Company agreed to pay Ms. Edmonds an aggregate of $190,000
and granted Ms. Edmonds an option to purchase 80,000 shares of the Company's
Common Stock, at an exercise price of $5.00 per share, which was the closing bid
price on September 12, 1996. This option is exercisable for a period of ten
years following the date of grant. The Company and Ms. Edmonds also executed a
stipulation of dismissal with prejudice to resolve the then pending litigation
brought by Ms. Edmonds against the Company. The Company and Ms. Edmonds also
executed mutual releases of any and all other claims relating to Ms. Edmonds'
employment by the Company or the termination of her employment.
HASKIN AGREEMENT
In June 1996, the Company entered into an agreement with David W.
Haskin, a former director and Chief Executive Officer of the Company, whose
employment with the Company terminated effective April 24, 1996. Pursuant to the
terms of this agreement, the Company agreed to pay or reimburse Mr. Haskin up to
$10,000 per year for premiums on health insurance coverage for himself and his
spouse until Mr. Haskin reaches age 65. In addition, the Company agreed to use
its reasonable efforts to cause the release of shares owned by Mr. Haskin from
the "cheap stock" escrow with the Commissioner of Commerce for the State of
Minnesota and certain lock-up arrangements with MJK and granted Mr. Haskin
certain registration rights with respect to certain shares of the Company's
Common Stock. The Company and Mr. Haskin also executed mutual releases of any
and all claims relating to Mr. Haskin's employment by the Company or the
termination of his employment.
COMER AGREEMENT
In June 1996, the Company entered into an agreement with Jeffrey B.
Comer, a former executive officer of the Company, whose employment with the
Company terminated effective April 24, 1996. Pursuant to the terms of this
agreement, the Company entered into a consulting agreement with Mr. Comer,
pursuant to which Mr. Comer provided consulting services for a period of six
months and received an aggregate of $160,000 for such consulting services. The
consulting agreement also included a non-competition covenant for 12 months
following the expiration of the term of the consulting agreement, which occurred
on December 1, 1996. In addition, Mr. Comer received an option to purchase
30
<PAGE>
51,000 shares of the Company's Common Stock for an exercise price of $8.625 per
share and the Company granted him certain registration rights with respect to
certain shares owned or subject to options held by Mr. Comer. The Company and
Mr. Comer also executed mutual releases of any and all claims relating to Mr.
Comer's employment by the Company or the termination of his employment.
31
<PAGE>
PRINCIPAL SHAREHOLDERS AND BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Common Stock of the Company as of October 15, 1998, unless
otherwise indicated, by (a) each shareholder who is known by the Company to own
beneficially more than 5% of the outstanding Common Stock, (b) each director,
(c) each of the Named Executive Officers and (d) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
NAME BENEFICIALLY OWNED(1)
- ---- -------------------------------------
AMOUNT PERCENT OF CLASS(2)
------ -------------------
<S> <C> <C>
Special Situations Funds(3)............. 10,040,000(3) 56.4%
John R. Albers.......................... 1,288,333(4) 9.6%
Aaron Boxer Rev. Trust.................. 885,000(5) 6.7%
Medtronic Inc........................... 700,000(6) 5.4%
F.G. Hamilton........................... 0 *
Daniel A. Pelak......................... 0(7) 0
Mark W. Sheffert........................ 0 0
Mark D. Dixon........................... 0 0
Robert N. Riner......................... 0 0
Paul D. Benson.......................... 60,000 *
William W. Chorske...................... 10,000(8) *
David J. Chinsky........................ 0 0
John R. Goodrich........................ 0 0
All directors and executive
officers as a group (6 persons) 0(7) 0
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares
(1) Unless otherwise noted, all of the shares are held by individuals
possessing sole voting and dispositive power with respect to the shares
shown. Shares not outstanding, but deemed beneficially owned by virtue of
the right of a person or member of a group to acquire them within 60 days,
are treated as outstanding only when determining the amount and percent
owned by such person or group.
(2) Based upon 12,812,000 outstanding shares of Common Stock as of October 15,
1998. Excludes 460,000 shares issued subsequent to October 15, 1998.
32
<PAGE>
(3) As set forth in a Schedule 13D/A filed with the Securities and Exchange
Commission on February 10, 1998, this amount consists of: (i) 2,000,000
shares of Common Stock held by Special Situations Private Equity Fund,
L.P.; (ii) 2,000,000 shares of Common Stock issuable to Special Situations
Private Equity Fund, L.P. pursuant to outstanding warrants; (iii)
2,200,000 shares of Common Stock held by Special Situations Fund III,
L.P.; (iv) 2,200,000 shares of Common Stock issuable to Special Situations
Fund III, L.P. pursuant to outstanding warrants; (v) 840,000 shares of
Common Stock held by Special Situations Cayman Fund, L.P.; and (vi)
800,000 shares of Common Stock issuable to Special Situations Cayman Fund,
L.P. pursuant to outstanding warrants. Austin W. Marxe and David M.
Greenhouse, principals of the investment advisors to the Funds, are deemed
to beneficially own the securities held by the Funds as reported herein
The address of Special Situations Funds is 153 East 53rd Street, 51st
Floor, New York, New York 10022.
(4) Based upon records available to the Company, such shares include 638,333
shares that Mr. Albers has the right to acquire within 60 days pursuant to
the exercise of warrants. Mr. Albers' address is 3825 Gillon Avenue,
Dallas, Texas 75205.
(5) Based upon records available to the Company, such shares include 427,500
shares that the Aaron Boxer Rev. Trust has the right to acquire within 60
days pursuant to the exercise of warrants. The address of the Aaron Boxer
Rev. Trust is 7287 Sidonia Court, Boca Raton, Florida 33433.
(6) Includes 100,000 shares that Medtronic, Inc. has the right to acquire
within 60 days pursuant to the exercise of warrants. The address of
Medtronic, Inc. is 7000 Central Avenue, N.E., Minneapolis, Minnesota
55432.
(7) Does not include any shares beneficially owned by Medtronic, Inc. Mr.
Pelak is an employee of Medtronic and its designee for election to the
Board of Directors.
(8) Includes 10,000 shares that Mr. Chorske has the right to acquire within 60
days pursuant to the exercise of stock options.
33
<PAGE>
SELLING SHAREHOLDERS
In connection with the Company's November 1997 equity financing and
the settlement of a claim against the Company, the Company agreed to register
the Shares offered hereby. The registration of the Shares does not necessarily
mean that the Selling Shareholders will sell all or any of the Shares. The
following table sets forth certain information, as of October 15, 1998, and as
adjusted to reflect the sale of the Shares offered hereby, with respect to the
beneficial ownership of the Common Stock by the Selling Shareholders. The
information provided in the table below with respect to each Selling Shareholder
has been obtained from such Selling Shareholder. Except as otherwise disclosed
below, none of the Selling Shareholders has, or within the past three years has
had, any position, office or other material relationship with the Company.
Because the Selling Shareholders may sell all or some portion of the shares of
Common Stock beneficially owned by them, only an estimate (assuming each Selling
Shareholder sells all of their Shares offered hereby) can be given as to the
number of shares of Common Stock that will be beneficially owned by the Selling
Shareholders after this offering. In addition, the Selling Shareholders may have
sold, transferred or otherwise disposed of, or may sell, transfer or otherwise
dispose of, at any time or from time to time since the date on which they
provided the information regarding the shares of Common Stock beneficially owned
by them, all or a portion of the shares of Common Stock beneficially owned by
them in transactions exempt from the registration requirements of the Securities
Act. Unless otherwise indicated below, the Selling Shareholders possess sole
voting and investment power with respect to the shares shown.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER
SHARES OF COMMON NUMBER OF COMPLETION OF
STOCK BENEFICIALLY SHARES THE OFFERING(2)
OWNED PRIOR TO THE BEING ---------------------------
SELLING SHAREHOLDER OFFERING(1) OFFERED NUMBER % OF CLASS(3)
- ------------------- ------------ ------- ------ -------------
<S> <C> <C> <C> <C>
Special Situations Fund III, L.P.(4)............... 4,400,000 (5) 4,400,000 0 0
Special Situations Private Equity
Fund, L.P.(4)...................................... 4,000,000 (5) 4,000,000 0 0
Special Situations Cayman
Fund, L.P.(4)...................................... 1,600,000 (5) 1,600,000 0 0
John R. Albers..................................... 1,288,333 (6) 1,200,000 88,333 *
Aaron Boxer Rev. Trust............................. 885,000 (7) 790,000 95,000 *
June Lawrence 4th RGI Trust........................ 400,000 (5) 400,000 0 0
James N. Owens Rev. Trust.......................... 400,000 (5) 400,000 0 0
David B. Johnson Family Foundation................. 400,000 (8) 400,000 0 0
Kenneth Cheng...................................... 353,077 (9) 300,000 53,077 *
Lee Wesley......................................... 350,000 (5) 350,000 0 0
Curran Partners L.P................................ 359,134 243,750 115,384
Betty Johnson...................................... 210,000(10) 200,000 10,000 *
Lawrence A. Laukka IRA............................. 200,000 (5) 200,000 0 0
Mary J. Laukka IRA................................. 200,000 (5) 200,000 0 0
Steve Romanek...................................... 200,000 (5) 200,000 0 0
Kenneth M. Viste................................... 200,000 (5) 200,000 0 0
John O. Hanson..................................... 163,500(11) 100,000 63,500 *
Thomas Petters..................................... 160,000 (5) 160,000 0 0
Wallace S. Wells................................... 160,000 (5) 160,000 0 0
David B. Johnson(12)............................... 138,090(13) 62,400 75,690 *
Paul R. Kuehn(12).................................. 138,090(14) 62,400 75,690 *
Jeff Dobbs......................................... 138,000(15) 90,000 48,000 *
Robert W. Clark Self-Declared Trust................ 103,000(16) 100,000 3,000 *
Mike J. Brings..................................... 100,000 (5) 100,000 0 0
Isadore J. Goldstein Rev. Living Trust............. 100,000 (5) 100,000 0 0
Judy Peterson...................................... 100,000 (5) 100,000 0 0
</TABLE>
34
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
VBS General Partnership............................ 100,000 (5) 100,000 0 0
John L. Von Gunten and Jeanette Von
Gunten Trust dated 10/18/91........................ 100,000 (5) 100,000 0 0
Ila M. Waseka Rev. Living Trust.................... 100,000 (5) 100,000 0 0
Eldon C. Miller (12)............................... 87,630(17) 62,400 25,230 *
Kenneth G. Benson.................................. 50,000 (5) 50,000 0 0
Alton B. Meyer, Jr. Rev. Trust..................... 50,000 (5) 50,000 0 0
Linda Kintzel...................................... 50,000 (5) 50,000 0 0
John S. and David B. Rydberg....................... 50,000 (5) 50,000 0 0
Donal C. Thomas Trust.............................. 50,000 (5) 50,000 0 0
Leola J. Vidger.................................... 50,000 (5) 50,000 0 0
Frank E. Walton.................................... 50,000 (5) 50,000 0 0
Michael W. Wright 1993 Irrev. GST Family Trust..... 50,000 (5) 50,000 0 0
First Trust NA As TTEE for the Dorsey & Whitney
Master Investment Trust-Wright..................... 50,000 (5) 50,000 0 0
John P. Curran Retirement Trust.................... 71,827 48,750 23,077 *
Stanley D. Rahm(12)................................ 46,031(18) 20,800 25,231 *
John P. Curran..................................... 47,885 32,500 15,385 *
Jeffrey D. Rahm & Susan Rahm Jt/Ten................ 30,000 (5) 30,000 0 0
Claude Tihon & Berengere Tihon Jt/Ten.............. 30,000 (5) 30,000 0 0
David Heytman & Hazeldell Heytman Jt/Ten........... 20,000 (5) 20,000 0 0
</TABLE>
- --------------------------------------
* Less than one percent (1%)
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or member of a group to acquire them within 60 days are treated as
outstanding only when determining the amount and percentage owned by such person
or group.
(2) This assumes all shares being offered and registered hereunder are sold,
although the Selling Shareholders are not obligated to sell any shares.
(3) Based upon 12,812,000 shares of Common Stock outstanding as of October 15,
1998. Excludes 460,000 shares issued subsequent to October 15, 1998.
(4) Pursuant to the Purchase Agreement, so long as Special Situations Private
Equity Fund, L.P., Special Situations Fund III, L.P. and Special Situations
Cayman Fund, L.P. (collectively, the "Funds"), individually or in the aggregate,
own 2.5% of the then outstanding shares of Common Stock of the Company, the
Funds have the right to nominate one director on the Board of Directors of the
Company.
(5) One-half of all shares of Common Stock beneficially owned by such Selling
Shareholder is issuable upon the exercise of outstanding warrants.
(6) Includes 638,333 shares issuable to Mr. Albers within 60 days upon the
exercise of warrants.
(7) Includes 427,500 shares issuable to the Aaron Boxer Rev. Trust within 60
days upon the exercise of warrants.
35
<PAGE>
(8) Includes 200,000 shares issuable to the David B. Johnson Family Foundation
within 60 days upon the exercise of warrants. Excludes 138,090 shares
beneficially owned by David B. Johnson.
(9) Includes 150,000 shares issuable to Mr. Cheng within 60 days upon the
exercise of warrants.
(10) Includes 50,000 shares issuable to Ms. Johnson within 60 days upon the
exercise of warrants.
(11) Includes 3,800 shares held by the John O. Hanson IRA and 70,000 shares
issuable to Mr. Hanson within 60 days upon the exercise of warrants.
(12) Such individual is a principal of Miller, Johnson & Kuehn, Incorporated
("MJK"), which has acted as the Company's placement agent in connection with
private sales of the Company's Common Stock. MJK also makes a market in the
Company's Common Stock. Pursuant to the Purchase Agreement, MJK has the right to
nominate one director on the Board of Directors of the Company, which nominee is
to be mutually acceptable to the Company and MJK, for a period of three years
from the date of the Purchase Agreement.
(13) Includes 106,890 shares issuable to Mr. Johnson within 60 days upon the
exercise of warrants. Excludes 400,000 shares beneficially owned by the David B.
Johnson Family Foundation.
(14) Includes 106,890 shares issuable to Mr. Kuehn within 60 days upon the
exercise of warrants.
(15) Includes 58,000 shares issuable to Mr. Dobbs within 60 days upon the
exercise of warrants.
(16) Includes 3,000 shares held by the Robert W. Clark Trust and 50,000 shares
issuable to the Robert W. Clark Self-Declared Trust within 60 days upon the
exercise of warrants. Mr. Robert W. Clark is trustee for both such trusts.
(17) Includes 56,430 shares issuable to Mr. Miller within 60 days upon the
exercise of warrants.
(18) Includes 35,631 shares issuable to Mr. Rahm within 60 days upon the
exercise of warrants.
36
<PAGE>
PLAN OF DISTRIBUTION
The Selling Shareholders have advised the Company that sales of the
Shares offered hereunder by them, or by their respective pledgees, donees,
transferees or other successors in interest, may be made from time to time in
the over-the-counter market, through negotiated transactions or otherwise, at
market prices prevailing at the time of sale or at negotiated prices. The Shares
may be sold by one or more of the following methods: (a) a block trade in which
the broker or dealer so engaged will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; and (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers.
Sales may be made pursuant to this Prospectus to or through broker-dealers who
may receive compensation in the form of discounts, concessions or commissions
from the Selling Shareholders or the purchasers of Common Stock for whom such
broker-dealer may act as agent or to whom they may sell as principal, or both
(which compensation as to a particular broker-dealer may be in excess of
customary commissions). To the extent required, one or more supplemental
prospectuses will be filed pursuant to Rule 424 under the Securities Act to
describe any material arrangements for the sales of the Shares offered hereunder
when such arrangements are entered into by the Selling Shareholders and any
other broker-dealers that participate in the sale of the Shares. In addition,
any Shares that qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than pursuant to this Prospectus. No period of
time has been fixed within which the Shares covered by this Prospectus may be
offered or sold.
The Selling Shareholders and any broker-dealers or other persons
acting on its behalf in connection with the sale of Common Stock hereunder may
be deemed to be an "underwriter" within the meaning of the Securities Act, and
any commissions received by the Selling Shareholders and any profit realized by
them on the resale of Common Stock as principals may be deemed to be
underwriting commissions under the Securities Act. As of the date hereof, there
are no special selling arrangements between any broker-dealer or other person
and any of the Selling Shareholders.
The Company will pay all the expenses of registering the Shares
offered hereby, except for selling expenses incurred by the Selling Shareholders
in connection with this offering, including any fees and commissions payable to
broker-dealers or other persons, which will be borne by the Selling
Shareholders. In addition, the Company has agreed to indemnify the Selling
Shareholders against certain liabilities, including certain liabilities arising
under the Securities Act.
37
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 75,000,000
shares of Common Stock (the "Common Stock"), and 1,000,000 shares of
undesignated preferred stock (the "Undesignated Stock"). As of the date of this
Prospectus, there were 13,272,000 shares of Common Stock issued and outstanding,
held by approximately 137 holders of record, and no shares of Undesignated Stock
issued and outstanding. In addition, as of October 15, 1998, 11,523,327 shares
of Common Stock were reserved for issuance under the Company's 1993 Stock Option
Plan, Employee Stock Purchase Plan and outstanding options, warrants and
convertible securities.
COMMON STOCK
All outstanding shares of Common Stock, including the Shares offered
hereby, are fully paid and nonassessable. Each share of the outstanding Common
Stock is entitled to participate equally in dividends as and when declared by
the Board of Directors and is entitled to participate equally in any
distribution of net assets made to the shareholders upon liquidation of the
Company. There are no redemption, sinking fund, conversion or preemptive rights
with respect to the shares of Common Stock. All shares of Common Stock have
equal rights and preferences. The holders of Common Stock are entitled to one
vote for each share held of record on all matters voted upon by shareholders and
may not cumulate votes for the election of directors. Accordingly, the owners of
a majority of the shares of Common Stock outstanding may elect all of the
directors if they choose to do so, subject to the rights of the Funds and MJK to
designate directors to be nominated under the Purchase Agreement, and the owners
of the balance of such shares would not be able to elect any directors.
UNDESIGNATED STOCK
Under applicable Minnesota law, no action by the Company's
shareholders is necessary, and only action of the Board of Directors is
required, to authorize the issuance of any Undesignated Stock. The Board of
Directors is empowered to establish, and to designate the name of, each class or
series of the shares of Undesignated Stock and to set the terms of such shares
(including terms with respect to redemption, sinking fund, dividend,
liquidation, preemptive, conversion and voting rights and preferences). The
Board of Directors can issue shares of such class or series to, among other
individuals, the holders of another class or series of preferred stock or to the
holders of Common Stock. Accordingly, the Board of Directors, without
shareholder approval, can issue preferred stock with voting or conversion rights
which could adversely affect the voting power of the holders of the Common
Stock. The Undesignated Stock may have the effect of discouraging an attempt,
through acquisition of a substantial number of shares of Common Stock, to
acquire control of the Company with a view to effecting a merger, sale or
exchange of assets or a similar transaction. For example, the Board of Directors
could issue such shares as a dividend to holders of Common Stock or place such
shares privately with purchasers who may side with the Board of Directors in
opposing a takeover bid.
OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES
The Company has reserved 750,000 shares of Common Stock under the
1993 Stock Option Plan. As of October 15, 1998, the Company had outstanding
options to purchase an aggregate of 221,897 shares under the plan and options to
purchase an aggregate of 522,666 shares that were not issued under any formal
plan. The weighted average exercise price of outstanding options was $2.29. As
of October 15, 1998, the Company also had warrants to purchase an aggregate of
8,901,395 shares of Common Stock at a weighted average exercise price of $1.64
per share, which are exercisable at various times, the earliest of which expire
in December 1999 and the latest of which expire in January, 2008.
38
<PAGE>
The outstanding options and warrants provide for anti-dilution adjustments in
the event of certain mergers, consolidations, reorganizations,
recapitalizations, stock dividends, stock splits or other changes in the
corporate structure of the Company. In addition, certain of the warrants are
subject to a weighted-average anti-dilution adjustment for issuances of Common
Stock (including options, warrants and other rights to acquire Common Stock) at
a price of less than $1.50 per share. Holders of the outstanding warrants have
certain demand and incidental registration rights with respect to the shares
issuable upon exercise of the warrants. See "Description of Securities --
Registration Rights."
The Company also has outstanding a subordinated convertible
promissory note in the principal amount of $2,250,000. Up to $2,000,000
principal amount of this note is convertible, at the option of the holder, into
shares of Common Stock at a conversion price of $3.32 per share. The conversion
price of this note is subject to a weighted-average anti-dilution adjustment for
issuances of Common Stock (including options, warrants and other rights to
acquire Common Stock) at a price of less than $3.32 per share. Additionally, the
Company has outstanding a convertible promissory bridge note in the principal
amount of $1,000,000 that is convertible, at the option of the holder, into
shares of Common Stock at a conversion price of $1.50 per share.
REGISTRATION RIGHTS
All of the shares of Common Stock issuable upon exercise of options
granted or to be granted under the Company's 1993 Stock Option Plan and Employee
Stock Purchase Plan have been registered under the Securities Act. The Company
has filed previous Registration Statements covering the resale of an aggregate
of 8,788,000 shares of Common Stock and warrants to purchase an aggregate of
8,000,000 shares of Common Stock issued in connection with the Company's
November 1997 equity financing. The Company has filed this Registration
Statement covering the resale of an aggregate of 325,000 shares of Common Stock
issued in connection with the Settlement Agreement with the Curran Entities. In
addition, holders of certain options, warrants and convertible promissory notes
have certain demand and incidental registration rights with respect to the
shares issuable upon exercise of such options and warrants and conversion of
such notes. In connection with the Company's November 1997 equity financing, the
holders of substantially all of these securities agreed not to exercise and to
otherwise waive their registration rights until January 1, 2000.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION
The Company's Amended and Restated Articles of Incorporation provide
the Company's Board of Directors with the power and authority to limit the
liability of its directors to the fullest extent permitted by the Minnesota
Business Corporation Act. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of fiduciary duty as
directors, except liability for (a) any breach of the duty of loyalty to the
Company or its shareholders, (b) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (c) dividends or
other distributions of corporate assets that are in contravention of certain
statutory or contractual restrictions, (d) violations of certain Minnesota
securities laws, or (e) any transaction from which the director derives an
improper personal benefit. Liability under federal securities law is not limited
by the Amended and Restated Articles of Incorporation or action by the Company's
Board of Directors.
The Minnesota Business Corporation Act requires that the Company
indemnify any director, officer or employee made or threatened to be made a
party to a proceeding, by reason of the former or present official capacity of
the person, against judgments, penalties, fines, settlements and reasonable
expenses incurred in connection with the proceeding if certain statutory
standards are met. "Proceeding" means a threatened, pending or completed civil,
criminal, administrative, arbitration or investigative proceeding, including a
derivative action in the name of the Company. Reference is made to the detailed
39
<PAGE>
terms of Section 302A.521 of the Minnesota Business Corporation Act for a
complete statement of such indemnification rights. The Company's Bylaws also
require the Company to provide indemnification to the fullest extent of the
Minnesota Business Corporation Act.
The Company maintains directors' and officers' liability insurance,
including a reimbursement policy in favor of the Company.
Pursuant to the purchase agreement entered into by the Company in
connection with the November 1997 equity financing, the directors and officers
of the Company are indemnified against certain civil liabilities that they may
incur under the Securities Act in connection with this Prospectus and the
related Registration Statement.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company is aware that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company is subject to the provisions of Sections 302A.671 and
302A.673 of the Minnesota Business Corporation Act. These anti-takeover
provisions may eventually operate to deny shareholders the receipt of a premium
on their Common Stock and may also have a depressive effect on the market price
of the Company's Common Stock. In general, Section 302A.671 provides that the
shares of a corporation acquired in a "control share acquisition" have no voting
rights unless voting rights are approved by the shareholders in a prescribed
manner. A "control share acquisition" is defined as an acquisition of beneficial
ownership of shares that would, when added to all other shares beneficially
owned by the acquiring person, entitle the acquiring person to have voting power
of 20% or more in the election of directors. Section 302A.673 prohibits a public
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of four years after the date of the transaction in
which the person became an interested shareholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions. An "interested
shareholder" is a person who is the beneficial owner, of 10% or more of the
corporation's voting stock. Reference is made to the detailed terms of Sections
302A.671 and 302A.673 of the Minnesota Business Corporation Act.
Pursuant to the purchase agreement entered into by the Company in
connection with the November 1997 equity financing, so long as the investor
parties to such agreement own or have the right to acquire an aggregate of 20%
or more of the then outstanding shares of Common Stock, the Company shall not,
without the prior written consent of certain of such investors, (a) effect any
reclassification, capital reorganization or other change of outstanding shares
of capital stock of the Company, (b) merge, consolidate or enter into any
business combination of the Company with or into another entity (other than a
merger of a wholly owned subsidiary, in which merger the Company shall be the
surviving entity), (c) sell, lease or otherwise dispose of all or substantially
all of its assets or (d) liquidate, dissolve or wind-up the Company.
TRANSFER AGENT
The transfer agent for the Company's Common Stock is Norwest Bank
Minnesota, N.A.
40
<PAGE>
VALIDITY OF SHARES
Certain legal matters with respect to the Shares offered hereby have
been passed upon for the Company by Oppenheimer Wolff & Donnelly LLP,
Minneapolis, Minnesota. Michel A. LaFond, a partner of Oppenheimer Wolff &
Donnelly LLP, is the Secretary of the Company and owns approximately 6,000
shares of Common Stock and options to purchase 13,000 shares of Common Stock.
EXPERTS
The financial statements of LifeRate Systems, Inc. as of December
31, 1997, and 1996 and 1995, and for each of the three years in the period ended
December 31, 1997, included in this prospectus and in the Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The following Financial Statements and Independent Auditors' Report
thereon are included herein on the pages indicated:
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS: PAGE(S)
- --------------------- -------
<S> <C>
Report of Independent Auditors............................................... F-1
Balance Sheets as of December 31, 1997 and 1996.............................. F-2 - F-3
Statements of Operations for the years ended December 31, 1997, 1996
and 1995 and the period from July 18, 1990 (date of inception) to
December 31, 1997............................................................ F-4
Statements of Changes in Shareholders' Equity (deficit) for the period
from July, 1990 to December 31, 1997......................................... F-5 - F-7
Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995 and the period from July 18, 1990 (date of inception)
to December 31, 1997......................................................... F-8
Notes to Financial Statements................................................ F-9 - F-17
Condensed Balance Sheets as of June 30, 1998 and 1997........................ F-18
Statements of Operations for the six months ended June 30, 1998 and 1997
and the period from July 18, 1990 (date of inception) to
June 30, 1998................................................................ F-19
Condensed Statements of Cash Flow for the six months ended June 30,
1998 and 1997 and the period from July 18, 1990 (date of inception)
to June 30, 1998............................................................. F-20
Notes to Condensed Financial Statements...................................... F-21
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
LifeRate Systems, Inc.
We have audited the accompanying balance sheets of LifeRate Systems,
Inc. (a development stage company) as of December 31, 1997 and 1996 and the
related statements of operations, shareholders' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1997, and for the
period from July 18, 1990 (inception) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of LifeRate Systems,
Inc. (a development stage company) at December 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997 and for the period from July 18, 1990 (inception)
to December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 3 to the financial statements, the Company's
recurring losses and negative cash flow from operations raise substantial doubt
about its ability to continue as a going concern. The 1997 financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 27, 1998, except for
Note 4 as to which date is November 2, 1998
F-1
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---------- ----------
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 764,200 $ 2,072,000
Accounts receivable, less allowance of $62,850
in 1997 and $60,350 in 1996 278,200 142,400
Prepaid expenses and other
current assets 59,800 122,700
------------ ------------
Total current assets 1,102,200 2,337,100
Furniture and fixtures 177,600 177,400
Computer equipment 872,000 837,200
------------ ------------
1,049,600 1,014,600
Less accumulated depreciation 635,600 325,900
------------ ------------
414,000 688,700
Software development costs, net
of accumulated amortization of
$100,800 in 1996 28,600 50,500
------------ ------------
Total assets $ 1,544,800 $ 3,076,300
============ ============
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------ ------------
RESTATED
<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 3,106,500 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 (22,070,400) (17,108,300)
------------ ------------
Total shareholders' equity (deficit) (2,054,000) 152,400
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 1,544,800 $ 3,076,300
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
JULY 18, 1990
(DATE OF
INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1997 1996 1995 1997
------------ ------------ ------------ ------------
RESTATED RESTATED
<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 299,300 6,300 29,300 336,300
------------ ------------ ------------ ------------
Net loss before extraordinary
item (5,162,100) (9,873,500) (5,595,300) (22,270,400)
Extraordinary item - debt
restructuring 200,000 -- -- 200,000
------------ ------------ ------------ ------------
Net loss $ (4,962,100) $ (9,873,500) $ (5,595,300) $(22,070,400)
============ ============ ============ ============
Net loss per share before
extraordinary item $ (1.18) $ (2.61) $ (2.66) $ (12.63)
Extraordinary item per share 0.05 -- -- .11
------------ ------------ ------------ ------------
Net loss per share - basic and diluted $ (1.13) $ (2.61) $ (2.66) $ (12.52)
============ ============ ============ ============
Weighted average number of
common shares outstanding 4,387,405 3,783,931 2,105,811 1,762,514
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ISSUED DURING STOCK
-------------------- DEVELOPMENT SUBSCRIPTIONS
SHARES AMOUNTS STAGE RECEIVABLE TOTAL
------ ------- ----- ---------- -----
<S> <C> <C> <C> <C> <C>
Founder's common stock issued during July 1990 444,400 $ 1,000 $ -- $ -- $ 1,000
Net loss for the period -- -- (200) -- (200)
--------- --------- --------- --------- ---------
Balance December 31, 1990 444,400 1,000 (200) -- 800
Net loss -- -- (3,400) -- (3,400)
--------- --------- --------- --------- ---------
Balance December 31, 1991 444,400 1,000 (3,600) -- (2,600)
Common stock issued 392,254 29,400 -- (14,400) 15,000
Net loss -- -- (188,600) -- (188,600)
--------- --------- --------- --------- ---------
Balance December 31, 1992 836,654 30,400 (192,200) (14,400) (176,200)
Sale of common stock 32,000 2,400 -- (1,900) 500
Private placement of common stock, net of offering costs of $30,700 99,999 269,400 -- (25,000) 244,400
Conversion of debt into common stock 25,000 75,000 -- -- 75,000
Repurchase of common stock (17,733) (1,300) -- -- (1,300)
Canceled stock subscriptions (140,000) (10,500) -- 10,500 --
Payments on stock subscription -- -- -- 2,600 2,600
Net loss -- -- (574,800) -- (574,800)
--------- --------- --------- --------- ---------
Balance December 31, 1993 (carried forward) 835,920 365,400 (767,000) (28,200) (429,800)
</TABLE>
F-5
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Statements of Shareholders' Equity (Deficit) (continued)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ISSUED DURING STOCK
-------------------------- DEVELOPMENT SUBSCRIPTIONS
SHARES AMOUNTS STAGE RECEIVABLE TOTAL
---------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1993 (brought forward) 835,920 $ 365,400 $ (767,000) $ (28,200) (429,800)
Private placement of common stock, net of offering costs of
$30,700 71,557 183,900 -- -- 183,900
Payments on stock subscriptions -- -- -- 26,000 26,000
Common stock issued for services 19,331 58,000 -- -- 58,000
Canceled stock subscriptions (1,600) (100) -- 100 --
Common stock issued in connection with bridge financing 155,555 700,000 -- -- 700,000
Conversion of accrued salaries into common stock 66,664 300,000 -- -- 300,000
Conversion of notes payable and other indebtedness to
related parties into common stock 26,652 120,000 -- -- 120,000
Sale of common stock 79,997 310,000 -- (125,000) 185,000
Net loss -- -- (872,500) -- (872,500)
---------- ------------ ------------ ------------ ----------
Balance December 31, 1994 1,254,076 2,037,200 (1,639,500) (127,100) 270,600
Sale of common stock, net of offering costs of $1,393,744 2,209,353 12,297,400 -- -- 12,297,400
Common stock issued for services 17,665 79,500 -- -- 79,500
Stock subscription canceled as consideration for services
provided -- -- -- 50,000 50,000
Stock subscription canceled (6,666) (30,000) -- 30,000 --
Payments on stock subscriptions -- -- -- 42,100 42,100
Net loss -- -- (5,595,300) -- (5,595,300)
---------- ------------ ------------ ------------ ----------
Balance December 31, 1995 (carried forward) 3,474,428 14,384,100 (7,234,800) (5,000) 7,144,300
</TABLE>
F-6
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Statements of Shareholders' Equity (Deficit) (continued)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ISSUED DURING STOCK
------------------------- DEVELOPMENT SUBSCRIPTIONS
SHARES AMOUNTS STAGE RECEIVABLE TOTAL
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1995 (brought forward) 3,474,428 $ 14,384,100 $ (7,234,800) $ (5,000) $ 7,144,300
Private placement of common stock, net of offering costs
of $253,846 295,546 1,667,200 -- -- 1,667,200
Payments on stock subscriptions -- -- -- 5,000 5,000
Stock options exercised 41,665 235,400 -- -- 235,400
Value of stock options granted for services rendered -- 974,000 -- -- 974,000
Net loss -- -- (9,873,500) -- (9,873,500)
---------- ------------ ------------ ------------ ------------
Balance December 31, 1996 3,811,639 17,260,700 (17,108,300) -- 152,400
Private placement of common stock, net of offering costs
of $177,700 4,290,000 1,964,400 -- -- 1,964,400
Conversion of notes payable to common stock, net of
unamortized discount of $31,800 365,550 525,900 -- -- 525,900
Value of warrants issued to holders of notes -- 204,500 -- -- 204,500
Stock options exercised 17,811 33,400 -- -- 33,400
Value of stock options granted for services rendered -- 27,500 -- -- 27,500
Net loss - restated -- -- (4,962,100) -- (4,962,100)
---------- ------------ ------------ ------------ ------------
Balance December 31, 1997 8,485,000 $ 20,016,400 $(22,070,400) $ -- $ (2,054,000)
========== ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
JULY 18, 1990
(DATE OF
INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31,
1997 1996 1995 1997
---- ---- ---- ----
RESTATED RESTATED
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,962,100) $ (9,873,500) $ (5,595,300) $(22,070,400)
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 49,400 -- -- 49,400
Value of stock options granted for services rendered 27,500 974,000 -- 1,001,500
Value of warrants issued to note holders 43,500 -- -- 43,500
Convertible subordinated note issued for services
rendered -- 2,250,000 -- 2,250,000
Writedown of software development costs to net
realizable value -- -- 599,600 599,600
Stock issued for services -- -- 129,500 187,500
Changes in operating assets and liabilities:
Accounts receivable (135,800) (38,000) (80,900) (278,200)
Advances to agent -- -- 108,000 --
Prepaid and other current assets 68,200 (61,700) (61,000) (54,500)
Other assets -- 11,800 (1,200) --
Accounts payable (180,100) (247,700) 381,400 96,400
Accrued compensation 159,400 (200,900) (34,700) 503,300
Accrued consulting fees (81,100) (296,500) 333,400 5,000
Accrued royalties (16,400) 36,100 -- 19,700
Other current liabilities (70,700) 72,400 (1,500) 14,200
Deferred revenue 20,500 90,900 (29,600) 172,300
Deferred rent (11,900) (11,900) (8,600) 4,900
------------ ------------ ------------ ------------
Net cash used in operating activities (4,729,400) (6,955,600) (4,199,800) (16,668,300)
INVESTING ACTIVITIES
Software development costs (28,600) -- (750,900) (779,500)
Purchase of furniture and equipment (20,100) (602,600) (332,400) (992,500)
------------ ------------ ------------ ------------
Net cash used in investing activities (48,700) (602,600) (1,083,300) (1,772,000)
FINANCING ACTIVITIES
Payments on notes payable and capital leases (265,000) (27,900) (55,900) (426,400)
Stock subscription received -- 5,000 -- 5,000
Proceeds from issuance of notes payable 1,737,500 -- 51,800 2,027,700
Proceeds from issuance of common stock 1,997,800 1,902,600 12,424,500 17,598,200
------------ ------------ ------------ ------------
Net cash provided by financing activities 3,470,300 1,879,700 12,420,400 19,204,500
------------ ------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (1,307,800) (5,678,500) 7,137,300 764,200
Cash and cash equivalents at beginning of period 2,072,000 7,750,500 613,200 --
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 764,200 $ 2,072,000 $ 7,750,500 $ 764,200
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
1. DESCRIPTION OF BUSINESS
LifeRate Systems, Inc. (the Company) is a development stage enterprise
engaged in marketing a proprietary software operating system to healthcare
providers and payors throughout the United States to produce information to
measure and quantify the quality and cost of healthcare.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
FURNITURE AND EQUIPMENT
Furniture and equipment, principally computer equipment, is stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets ranging from 3 to 7 years.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No.
128, "Earnings Per Share." FASB Statement No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share under the
previous rules. Earnings per share amounts for all periods have been presented,
and where necessary, restated to conform to the FASB Statement No. 128
requirements.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with the
provisions of FASB Statement No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." Capitalization of software
development costs, including significant product enhancements, begins upon the
establishment of technological feasibility for the product and concludes when
the product is available for release to customers. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic life and changes in software and hardware
technology. During 1995, the Company recorded writedowns to the net realizable
value of software development costs totaling $599,600 due to pending product
upgrades.
REVENUE RECOGNITION
Revenues derived from software licenses are recognized upon execution of a
license agreement, delivery of the software product, reasonable assurance of
customer acceptance of the software and fulfillment of any other significant
contract obligations. Revenues derived from customer service and support
activities are deferred and recognized ratably over the term of the contract.
Revenues derived from software development contracts will be recognized using a
percentage of completion
F-9
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
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.
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.
F-10
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
3. CONTINUED EXISTENCE
The company has incurred losses since inception and has an accumulated deficit
of $22,070,400 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 Medtronic, Inc. note (146,400) --
Current portion - long-term debt (12,300) (11,800)
----------- -----------
$ 3,106,500 $ 2,251,800
=========== ===========
</TABLE>
Future payments of long-term debt and capital lease obligations are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1998 $13,900
1999 3,100
2002 3,250,000
-----------
3,267,000
Less amount representing interest (1,800)
-----------
$ 3,265,200
===========
</TABLE>
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. The note is
convertible into shares of the Company's common stock at the conversion rate of
$3.32 per share.
F-11
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
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 was determined to have a
value of $161,000 and is being amortized over the life of the note. The warrant
expires in 2002. In November 1997, the terms of the note were changed to be
non-interest bearing, accrued interest of approximately $44,000 was forgiven,
and the term of the note was extended to 2002. 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 $200,000 in 1997 relates to the cancellation of
$200,000 in interest due on various notes from the time of issuance until
November 1997, when the terms of the notes were restructured. The Company has
restated previously issued financial results for the year ended December 31,
1997. The restated financial results reflect the correction of an error related
to the extraordinary gain recognized in a transaction recorded as a troubled
debt restructuring. The Company had previously reported an extraordinary amount
of $1,312,800 for the year ended December 31, 1997. In restating the amount of
the extraordinary item, the Company is reversing the discounts previously
provided and accounted for on the restructured notes. Future operations will be
positively impacted by the restatement since the discount would have resulted in
interest expense being recorded over the life of the notes. The following
summarizes the impact of the restatement on operations for the year ended
December 31, 1997:
As reported Restated
----------- --------
Extraordinary item-debt
restructuring $1,312,800 $200,000
Extraordinary item per share $ 0.30 $ 0.05
Net loss per share --
basic and diluted $ (0.88) $ (1.13)
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 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.
F-12
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
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 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:
F-13
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
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.
Pro forma information regarding net loss and loss per share is required by FASB
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. For
purpose of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss $(5,332,400) $(11,094,600) $(5,931,700)
Pro forma loss per share - basic and diluted $(1.22) $(2.93) $(2.82)
</TABLE>
The pro forma effect on the net loss for 1997, 1996 and 1995 is not
representative of the pro forma effect on net income (loss) in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995.
The fair value of options granted during 1997, 1996 and 1995 was estimated using
the Black-Scholes option pricing model with the following assumptions: no
dividend yield; a risk free interest rate of 5.5%, 6.0% and 6.0% during 1997,
1996 and 1995, respectively; expected volatility of the market price of the
Company's common stock of 71%, 64% and 64% during 1997, 1996 and 1995,
respectively; and expected option lives ranging from three to five years. The
weighted average fair value of plan options granted at market prices during the
years ended December 31, 1997, 1996 and 1995 was $1.05, $5.19 and $3.33 per
share, respectively. The weighted average fair value of non-plan options granted
at market prices during the years ended December 31, 1997, 1996 and 1995 was
$.90, $3.09 and $2.68 per share, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-14
<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 $8,688,800 $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 8,818,600 6,790,800
Valuation allowance 8,818,600 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 $21,721,900 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
========
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.
F-15
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
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 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.
F-16
<PAGE>
LifeRate Systems, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
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:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
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 -- --
</TABLE>
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.
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.
17. SUBSEQUENT EVENT (UNAUDITED)
In August 1998, the Company ceased operations and began winding down its
business, reducing expenses, collecting receivables and negotiating the
termination or satisfaction of all of its remaining obligations. The Company
adopted the liquidation basis of accounting as of August 1998.
F-17
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
Restated Restated
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,251,400 $ 764,200
Accounts receivable, less allowance of $62,500
at June 30, 1998 and $62,850 at December 31, 1997 163,600 278,200
Prepaid expenses and other current assets 58,100 59,800
------------ ------------
Total current assets 1,473,100 1,102,200
Furniture and fixtures 177,600 177,600
Computer equipment 861,800 872,000
------------ ------------
1,039,400 1,049,600
Less accumulated depreciation 743,900 635,600
------------ ------------
295,500 414,000
Software development costs, net of amortization
of $16,200 at June 30, 1998 97,000 28,600
------------ ------------
Total Assets $ 1,865,600 $ 1,544,800
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and other accrued liabilities $ 396,200 $ 299,600
Other current liabilities 3,400 3,200
Current portion of long-term debt
and capitalized lease obligations 7,900 12,300
------------ ------------
Total current liabilities 407,500 315,100
Long-term debt and capital lease obligations 3,120,300 3,106,500
Deferred rent -- 4,900
Deferred revenue 130,300 172,300
Shareholders' equity (deficit):
Preferred stock, no par value:
Authorized shares - 1,000,000
Issued and outstanding shares-none in 1998 and 1997 -- --
Common stock, no par value:
Authorized shares - 75,000,000
Issued and outstanding shares - 12,487,000 at June 30,
1998 and 8,485,000 at December 31, 1997 21,972,300 20,016,400
Deficit accumulated during the development stage (23,764,800) (22,070,400)
------------ ------------
Total shareholders' equity (deficit) (1,792,500) (2,054,000)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 1,865,600 $ 1,544,800
============ ============
</TABLE>
Note: The December 31, 1997 balance sheet has been derived from the restated
December 31, 1997 audited financial statements.
F-18
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
JULY 18, 1990
THREE MONTHS SIX MONTHS (DATE OF
ENDED JUNE 30 ENDED JUNE 30 INCEPTION) TO
1998 1997 1998 1997 JUNE 30, 1998
------------ ------------ ------------ ------------ -------------
RESTATED RESTATED RESTATED
<S> <C> <C> <C> <C> <C>
Net revenues $ 121,600 $ 44,800 $ 395,500 $ 243,600 $ 2,206,100
Cost of revenues 222,400 220,900 444,700 520,600 2,507,200
------------ ------------ ------------ ------------ ------------
Gross profit (100,800) (176,100) (49,200) (277,000) (301,100)
Operating expenses:
Sales and marketing 151,700 387,200 354,500 765,000 6,310,000
Research and development 332,300 360,900 553,800 742,000 9,398,200
General and administrative 462,500 655,100 763,300 1,143,400 8,047,200
------------ ------------ ------------ ------------ ------------
Total operating expenses 946,500 1,403,200 1,671,600 2,650,400 23,755,400
------------ ------------ ------------ ------------ ------------
Loss from operations (1,047,300) (1,579,300) (1,720,800) (2,927,400) (24,056,500)
Interest income and other income, net 21,000 9,000 46,000 24,000 447,600
Interest expense 9,900 71,400 19,600 71,700 355,900
------------ ------------ ------------ ------------ ------------
Net loss before extraordinary item (1,036,200) (1,641,700) (1,694,400) (2,927,100) (23,964,800)
Extraordinary item - debt restructuring -- -- -- -- 200,000
------------ ------------ ------------ ------------ ------------
Net loss $ (1,036,200) $ (1,641,700) $ (1,694,400) $ (2,975,100) $(23,764,800)
============ ============ ============ ============ ============
Net loss per share - basic and diluted $ (0.08) $ (0.43) $ (0.14) $ (0.78) $ (9.84)
============ ============ ============ ============ ============
Weighted average number of common shares
outstanding 12,485,000 3,819,708 11,818,333 3,819,708 2,413,922
============ ============ ============ ============ ============
</TABLE>
See accompanying notes
F-19
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
JULY 18, 1990
(DATE OF
SIX MONTHS INCEPTION) TO
ENDED JUNE 30, JUNE 30,
1998 1997 1998
------------ ------------ ------------
RESTATED RESTATED
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,694,400) $ (2,975,100) $(23,764,800)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 141,400 148,400 777,600
Amortization of software development costs 16,200 50,500 167,500
Amortization of discounts on long-term debt 13,800 -- 63,200
Value of stock options granted for services rendered -- 8,300 1,001,500
Value of warrants issued to note holders -- -- 43,500
Convertible subordinated note issued for services rendered -- -- 2,250,000
Writedown of software development costs to net realizable value -- -- 599,600
Stock issued for services -- -- 187,500
Changes in operating assets and liabilities:
Accounts receivable 114,600 (94,200) (163,600)
Prepaid and other current assets 1,700 13,200 (52,800)
Accounts payable and other accrued liabilities 96,800 59,000 735,400
Deferred revenue (42,000) 58,700 130,300
Deferred rent (4,900) (5,900) --
------------ ------------ ------------
Net cash used in operating activities (1,356,800) (2,737,100) (18,025,100)
INVESTING ACTIVITIES
Software development costs (84,600) -- (864,100)
Purchase of furniture and equipment (23,800) (30,700) (1,016,300
Proceeds from equipment sales 900 -- 900
------------ ------------ ------------
Net cash used in investing activities (107,500) (30,700) (1,879,500)
FINANCING ACTIVITIES
Payments on notes payable and capital lease obligations (4,400) (9,700) (430,800)
Stock subscription received -- -- 5,000
Proceeds from issuance of notes payable -- 1,017,500 2,027,700
Proceeds from issuance of common stock 1,955,900 30,900 19,554,100
------------ ------------ ------------
Net cash provided by financing activities 1,951,500 1,038,700 21,156,000
------------ ------------ ------------
Increase in cash and cash equivalents 487,200 (1,729,100) 1,251,400
Cash and cash equivalents at beginning of period 764,200 2,072,000 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,251,400 $ 342,900 $ 1,251,400
============ ============ ============
</TABLE>
See accompanying notes
F-20
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
June 30, 1998
1. Organization and Description of Business
LifeRate Systems, Inc. is a development stage enterprise engaged in
marketing proprietary clinical software systems to health care providers
and payors to produce information to measure and quantify the quality and
cost of health care.
2. Basis of Presentation
The financial information presented as of June 30, 1998 and 1997 has been
prepared from the books and records without audit. Financial information
as of December 31, 1997 is based on audited financial statements of
LifeRate Systems, Inc. but does not include all disclosures required by
generally accepted accounting principles. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments necessary
for a fair presentation of the financial information for the periods
indicated have been included. For further information regarding the
Company's accounting policies, refer to the financial statements and
attached notes included in the Company's Form 10-KSB for the fiscal year
ended December 31, 1997 as filed with the Securities and Exchange
Commission.
3. Significant Accounting Policies
In October 1997, the American Institute of Certified Public Accountants
approved Statement of Position 97-2, "Software Revenue Recognition" ("SOP
97-2"), which supersedes Statement of Position 91-1, "Software Revenue
Recognition." SOP 97-2 was effective for transactions entered into in the
first quarter of 1998. The adoption of the standards in SOP 97-2 did not
have a significant impact on the Company's financial statements.
4. Reclassified
Certain prior year amounts have been reclassified to conform to the
current year presentation.
5. Restatement
The Company has restated previously issued financial results for the year
ended December 31, 1997. The restated financial results reflect the
correction of an error related to the extraordinary gain recognized in a
transaction recorded as a troubled debt restructuring. The following
summarizes the impact of the restatement on operations for the six months
ended June 30, 1998:
As reported Restated
----------- -----------
Net loss $(1,799,500) $(1,694,400)
Net loss per share --
basic and diluted $ (0.15) $ (0.14)
F-21
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article IX of the Company's Amended and Restated Articles of Incorporation
provides the Company's Board of Directors with the power and authority to limit
the liability of its directors to the fullest extent permitted by the Minnesota
Business Corporation Act. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of fiduciary duty as
directors, except liability for (i) any breach of the duty of loyalty to the
Company or its shareholders, (ii) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) dividends or
other distributions of corporate assets that are in contravention of certain
statutory or contractual restrictions, (iv) violations of certain Minnesota
securities laws, or (v) any transaction from which the director derives an
improper personal benefit. Liability under federal securities law is not limited
by the Amended and Restated Articles of Incorporation or action by the Company's
Board of Directors.
The Minnesota Business Corporation Act requires that the Company indemnify
any director, officer or employee made or threatened to be made a party to a
proceeding, by reason of the former or present official capacity of the person,
against judgments, penalties, fines, settlements and reasonable expenses
incurred in connection with the proceeding if certain statutory standards are
met. "Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including a derivative
action in the name of the Company. Reference is made to the detailed terms of
Section 302A.521 of the Minnesota Business Corporation Act for a complete
statement of such indemnification rights. The Company's Bylaws also require the
Company to provide indemnification to the fullest extent of the Minnesota
Business Corporation Act.
The Company maintains directors' and officers' liability insurance,
including a reimbursement policy in favor of the Company.
Pursuant to the Purchase Agreement, the directors and officers of the
Company are indemnified against certain civil liabilities that they may incur
under the Securities Act in connection with this Registration Statement and the
related Prospectus.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company is aware that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth estimated expenses incurred by the Company
in connection with the issuance and distribution of the Shares being registered.
All such expenses are estimated except for the SEC registration fee.
SEC registration fee...................................... $2.82
Printing expenses......................................... 2,500.00
Fees and expenses of counsel for the Company.............. 5,000.00
Fees and expenses of accountants for Company.............. 5,000.00
Blue sky fees and expenses................................ 500.00
Miscellaneous............................................. 5,000.00
*Total........................................ $18,002.82
- -----------------------
* None of the expenses listed above will be borne by the Selling
Shareholders.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since October 15, 1995, the Company has issued the following securities
without registration under the Securities Act:
1. In December 1995, the Company issued to Medtronic, Inc. 600,000 shares of
Common Stock at a price of $8.00 per share for a total purchase price of
$4,800,000.
2. In December 1995, the Company issued an aggregate of 562,853 shares of
Common Stock to accredited investors at a price of $6.50 per share for a
total purchase price of approximately $3,658,545. In connection therewith,
the Company issued to a selling agent a warrant to purchase 56,286 shares
of Common Stock and paid commissions to the selling agent equal to 10% of
gross proceeds and reimbursed certain expenses.
3. In January 1996, the Company issued an aggregate of 295,546 shares of
Common Stock to accredited investors at a price of $6.50 per share for a
total purchase price of $1,921,049. In connection therewith, the Company
issued to a selling agent a warrant to purchase 29,555 shares of Common
Stock and paid commissions to the selling agent equal to 10% of gross
proceeds and reimbursed certain expenses.
4. In March 1997, the Company issued a convertible subordinated promissory
note to The Atlanta Cardiology Group, P.C. ("ACG") in the principal amount
of $2,250,000, maturing on April 1, 2002. As originally issued, the note
accrued interest at the rate of 10% per year and interest was payable at
the rate of 5% per year, with the remainder payable at the maturity date.
Up to $2,000,000 of the principal amount of the note is convertible by ACG
into Common Stock at the rate of $3.32 per share, subject to adjustment in
certain cases to protect ACG from certain dilutive events. This note was
issued in exchange for the cancellation of a royalty agreement with ACG.
In connection with the November, 1997 equity financing, this note was
amended to be non-interest bearing.
5. In May 1997, the Company issued to Medtronic, Inc. a convertible
promissory note in the principal amount of $1,000,000 and a warrant to
purchase 100,000 shares of Common Stock at
II-2
<PAGE>
an exercise price of the lower of $2.00 per share or the average price per
share of Common Stock paid by all purchasers of Common Stock in the
Company's next equity financing. In connection with the November, 1997
equity financing, the warrant was amended to reflect an exercise price of
$.50 per share. As originally issued, the note was convertible, at the
option of Medtronic, Inc., into Common Stock at a conversion price of
$2.00 per share and bore interest at the prime rate. In connection with
the November, 1997 equity financing, the note was amended to reflect a
conversion rate of $1.50 per share and to be non-interest bearing.
6. In July 1997, the Company issued to accredited investors warrants to
purchase an aggregate of 50,000 shares of Common Stock exercisable at a
price of $2.00 per share and convertible promissory notes in an aggregate
principal amount of $500,000. In connection therewith, the Company issued
to a selling agent a warrant to purchase 25,000 shares of Common Stock and
paid the selling agent commissions equal to 10% of gross proceeds and
reimbursed certain expenses. In November, 1997, these notes were converted
into an aggregate of 250,000 shares of Common Stock a conversion rate of
$2.00 per share.
7. In October 1997, the Company issued a convertible promissory note to each
of the Company's then non-employee directors in the principal amount of
$5,775 and in the aggregate of $46,200. The Company repaid a total of
$40,425, without interest, to seven of these non-employee directors from
the proceeds of the November, 1997 equity financing, and the balance of
$5,775 owed to one director was converted into 11,550 shares of Common
Stock at a price of $.50 per share.
8. In November 1997, the Company issued an aggregate of 4,394,000 shares of
Common Stock to accredited investors. An aggregate of 2,500,000 shares
were sold at a price of $.50 per share, an aggregate of 1,790,000 shares
were sold for $.56 per share, and an aggregate of 104,000 shares were
issued upon cancellation of promissory notes at $.50 per share. In
addition, each investor was issued a warrant to purchase one share of
Common Stock at a price of $1.50 per share for each share purchased. In
connection therewith, the Company paid a selling agent commissions equal
to 10% of gross proceeds and reimbursed certain expenses.
9. In January 1998, the Company issued an aggregate of 4,000,000 shares of
Common Stock to accredited investors. An aggregate of 2,500,000 shares
were sold at a price of $.50 per share and an aggregate of 1,500,000
shares were sold for $.56 per share. In addition, each investor was issued
a warrant to purchase one share of Common Stock at a price of $1.50 per
share for each share purchased. In connection therewith, the Company paid
a selling agent commissions equal to 10% of gross proceeds and reimbursed
certain expenses.
10. In September 1998, the Company issued an aggregate of 325,000 shares of
Common Stock to three accredited investors in connection with the
settlement of a claim against the Company.
11. In October 1998, the Company issued 200,000 shares of Common Stock to a
former officer and director of the Company in lieu of a cash bonus of
$75,000.
12. In October 1998, the Company issued 260,000 shares of Common Stock to a
former officer and director in lieu of a cash bonus in the amount of
$65,000 pursuant to a Separation and Release Agreement between the Company
and such individual.
Except as set forth above, no underwriting commissions or discounts were
paid with respect to the sales of the unregistered securities described above.
In addition, all of the above sales were made in reliance on either Section 4(2)
of the Securities Act as transactions by an issuer not involving any public
II-3
<PAGE>
offering or Regulation D of the Securities Act. In all such transactions,
certain inquiries were made by the Company to establish that such sales
qualified for such exemption from the registration requirements. In particular,
the Company confirmed that with respect to the exemption claimed under Section
4(2) of the Securities Act (i) all offers of sales and sales were made by
personal contact from officers and directors of the Company or other persons
closely associated with the Company, (ii) each investor made representations
that he or she was sophisticated in relation to this investment (and the Company
has no reason to believe that such representations were incorrect), (iii) each
purchaser gave assurance of investment intent and the certificates for the
shares bear a legend accordingly, and (iv) offers and sales within any offering
were made to a limited number of persons.
ITEM 27. EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Amended and Restated Articles of Incorporation, as amended.
3.2 Amended and Restated Bylaws, as amended.
4.1 Form of the Company's Common Stock Certificate.
4.2 Amended and Restated Articles of Incorporation, as amended. (See
Exhibit 3.1).
4.3 Amended and Restated Bylaws, as amended. (See Exhibit 3.2).
4.4 Form of Warrant dated December 1994 to purchase shares of Common
Stock issued to investors in connection with the Company's December
1994 Private Placement.
4.5 Form of Warrant dated March 1995 to purchase 91,000 shares of Common
Stock issued to Principals of Miller Johnson & Kuehn, Inc. in
connection with the Company's Initial Public Offering.
4.6 Form of Warrant dated December 1995 to purchase 56,286 shares of
Common Stock issued to Principals of Miller Johnson & Kuehn, Inc. in
connection with the Company's December, 1995 Private Placement.
4.7 Form of Warrant dated January 1996 to purchase 29,555 shares of
Common Stock issued to Principals of Miller Johnson & Kuehn, Inc. in
connection with the Company's January, 1996 Private Placement.
4.8 Warrant dated May 12, 1997 to purchase 100,000 shares of Common
Stock issued to Medtronic, Inc.
4.9 Form of Warrant to purchase shares of Common Stock of the Company
issued to investors in connection with the July 1997 Bridge
Financing.
4.10 Form of Warrant dated July 21, 1997 to purchase 29,555 shares of
Common Stock to Principals of Miller Johnson & Kuehn, Inc. in
connection with the Company's July 1997 Bridge Financing.
II-4
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.11 Form of Warrant to Purchase Common Stock of the Company issued in
connection with the November 1997 Equity Financing.
5.1 Opinion and Consent of Oppenheimer Wolff & Donnelly LLP.
10.1 1993 Stock Option Plan, as amended.
10.2 Form of Incentive Stock Option Agreement for Employees.
10.3 Form of Non-Statutory Stock Option Agreement for Non-Employees.
10.4 Employee Stock Purchase Plan, as amended.
10.5 Form of Employment Agreement.
10.6 Lease Agreement with Alpha Associates, Inc. dated April 30, 1993.
10.7 Computer Software Purchase Agreement, dated July 2, 1995, between
the Company, Anthony Furnary, M.D. and APF, LLC.
10.8 Investment Agreement, dated as of December 26, 1995 between the
Company and Medtronic, Inc.
10.9 License and Development Agreement, dated as of December 26, 1995
between the Company and Medtronic, Inc.
10.10 Shareholder Voting Agreement, dated as of December 26, 1995, by and
among the Company, Medtronic, Inc., Donna J. Edmonds, Jeffrey B.
Comer, David W. Haskin and Paul D. Benson.
10.11 Employment Agreement, dated April 29, 1996, between the Company and
William W. Chorske.
10.12 Stock Option Agreement, dated April 29, 1996, between the Company
and William W. Chorske.
10.13 Agreement, dated June 4, 1996, between the Company and Jeffrey B.
Comer.
10.14 Non-Statutory Stock Option Agreement, dated June 6, 1995, between
the Company and Jeffrey B. Comer.
10.15 Agreement, dated June 5, 1996, between the Company and David W.
Haskin.
10.16 Agreement, dated September 1, 1996, between the Company and William
Knopf, M.D.
10.17 Non-Statutory Stock Option Agreement, dated September 1, 1996,
between the Company and William Knopf, M.D.
II-5
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.18 Non-Statutory Stock Option Agreement, dated September 1, 1996,
between the Company and Donna J. Edmonds.
10.19 Agreement, dated September 25, 1996, between the Company and Donna
J. Edmonds.
10.20 Agreement, dated December 18, 1996, between the Company and National
Jewish Center (confidential portions have been omitted and filed
with the Secretary of the Commission).
10.21 Technical Support Agreement, dated as of December 18, 1996, between
the Company and National Jewish Center.
10.22 Non-Statutory Stock Option Agreement, dated March 4, 1997, covering
26,000 shares between the Company and APF, LLC.
10.23 Non-Statutory Stock Option Agreement, dated March 4, 1997, covering
10,333 shares between the Company and APF, LLC.
10.24 Non-Statutory Stock Option Agreement, dated March 24, 1997, covering
550,000 shares between the Company and APF, LLC.
10.25 Master Agreement, dated March 25, 1997, among the Company, Anthony
Furnary, M.D. and APF, LLC.
10.26 Modification Agreement, dated March 25, 1997, among the Company,
Anthony Furnary, M.D. and APF, LLC.
10.27 Agreement, dated March 28, 1997, between the Company and The Atlanta
Cardiology Group, P.C.
10.28 Convertible Subordinated Promissory Note, dated March 28, 1997,
issued by the Company to The Atlanta Cardiology Group, PC.
10.29 Mutual Release, dated March 28, 1997, between the Company and The
Atlanta Cardiology Group, P.C.
10.30 Note dated May 12, 1997 in the principal amount of $1,000,000 issued
to Medtronic, Inc.
10.31 Employment Agreement, dated August 18, 1997, between the Company and
David J. Chinsky.
10.32 Letter Agreement, dated November 10, 1997, among the Company, APF,
LLC and Anthony P. Furnary, M.D.
10.33 Letter Agreement, dated November 10, 1997, between the Company and
the Atlanta Cardiology Group, P.C.
II-6
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.34 Letter Agreement, dated November 10, 1997, between the Company and
Medtronic, Inc.
10.35 Amendment to Employment Agreement, dated November 13, 1997, between
the Company and David J. Chinsky.
10.36 Non-Statutory Stock Option Agreement, dated November 13, 1997,
between the Company and David J. Chinsky.
10.37 Securities Purchase Agreement, dated as of November 14, 1997, among
the Company and the Purchasers. Omitted from this Exhibit, as filed,
are the exhibits and schedules referenced in such agreement. The
Company will furnish supplementally a copy of any such exhibits and
schedules to the Commission upon request.
10.38 Agreement, dated August 17, 1998, between the Company and William W.
Chorske.
10.39 Restricted Stock Agreement, dated August 17, 1998, between the
Company and William W. Chorske.
10.40 Separation and Release Agreement, dated as of August 26, 1998,
between the Company and David J. Chinsky.
10.41 Engagement Agreement, dated as of August 20, 1998, between the
Company and Manchester Financial Group, Inc.
10.42 Retainer Agreement, dated as of August 22, 1998, between the Company
and Manchester Business Services, Inc.
23.1 Consent of Oppenheimer Wolff & Donnelly LLP. (Included in Exhibit
5.1).
23.2 Consent of Independent Auditors.
24.1 Power of Attorney. (Included on Part II-9 of this Registration
Statement).
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
II-7
<PAGE>
ITEM 28. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 24 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Registration Statement
on Form SB-2 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis and State of Minnesota, on November 5,
1998.
LIFERATE SYSTEMS, INC.
By /s/ F.G. Hamilton
-----------------------------------------
F.G. Hamilton
Acting Chief Executive Officer
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints F.G. Hamilton and Kenneth G. Tarr, and either of them,
as his true and lawful attorney-in-fact and agent, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments (including post-effective
amendments) to this Registration Statement, and any additional Registration
Statements filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on November 5, 1998.
Signatures Title
---------- -----
/s/ F.G. Hamilton Acting Chief Executive Officer
---------------------------- (principal executive officer)
F.G. Hamilton
/s/ Kenneth G. Tarr Acting Chief Financial Officer
---------------------------- (principal financial and accounting officer)
Kenneth G. Tarr
/s/ Mark W. Sheffert Director and Chairman of the Board
----------------------------
Mark W. Sheffert
Director
----------------------------
Mark D. Dixon
/s/ Daniel A. Pelak Director
----------------------------
Daniel A. Pelak
/s/ Robert N. Riner, M.D. Director
----------------------------
Robert N. Riner, M.D.
II-9
<PAGE>
LIFERATE SYSTEMS, INC.
REGISTRATION STATEMENT ON FORM SB-2
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
NO.
- ---
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation, Incorporated by reference to
as amended........................................... Exhibit 3.1 of the Company's
Registration Statement on Form
SB-2 (File No. 33-89016C).
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 Incorporated by reference to
shares of Common Stock issued to investors in Exhibit 10.17 of the Company's
connection with the Company's December, 1994 Registration Statement on Form
Private Placement................................... SB-2 (File No. 33-89016C).
4.5 Form of Warrant dated March 1995 to purchase Incorporated by reference to
91,000 shares of Common Stock issued to Exhibit 4.5 of the Company's
Principals of Miller Johnson & Kuehn in connection Registration Statement on Form
with the Company's Initial Public Offering.......... SB-2 (File No. 333-42155).
4.6 Form of Warrant dated December 1995 to purchase Incorporated by reference to
56,286 shares of Common Stock issued to Principals Exhibit 4.6 of the Company's
of Miller Johnson & Kuehn in connection with the Registration Statement on Form
Company's December, 1995 Private Placement.......... SB-2 (File No. 333-42155).
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
NO.
- ---
<S> <C> <C>
4.7 Form of Warrant dated January 1996 to purchase Incorporated by reference to
29,555 shares of Common Stock issued to Principals Exhibit 4.7 of the Company's
of Miller Johnson & Kuehn in connection with the Registration Statement on Form
Company's January, 1996 Private Placement........... SB-2 (File No. 333-42155).
4.8 Warrant dated May 12, 1997 to purchase 100,000 Incorporated by reference to
shares of Common Stock issued to Medtronic, Inc..... 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 Incorporated by reference to
of the Company issued to investors in connection Exhibit 4.9 of the Company's
with the July 1997 Bridge Financing................. Registration Statement on Form
SB-2 (File No. 333-42155).
4.10 Form of Warrant dated July 21, 1997 to purchase Incorporated by reference to
29,555 shares of Common Stock to Principals of Exhibit 4.10 of the Company's
Miller Johnson & Kuehn in connection with the Registration Statement on Form
Company's July 1997 Bridge Financing................ SB-2 (File No. 333-42155).
4.11 Form of Warrant to Purchase Common Stock of the Incorporated by reference to
Company issued in connection with the November Exhibit 10.2 of the Company's
1997 Equity Financing............................... Current Report on Form 8-K
dated November 26, 1997 (File
No. 0-25530).
5.1 Opinion and Consent of Oppenheimer Wolff &
Donnelly LLP........................................ Filed herewith.
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 Incorporated by reference to
Employees........................................... 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 Incorporated by reference to
Non-Employees....................................... 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-
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
NO.
- ---
<S> <C> <C>
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 Incorporated by reference to
April 30, 1993...................................... 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, Incorporated by reference to
1995, between the Company, Anthony Furnary, M.D. Exhibit 10.28 of the Company's
and APF, LLC........................................ 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, Incorporated by reference to
1995, between the Company and Medtronic, Inc........ 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 Incorporated by reference to
December 26, 1995, between the Company and Exhibit 10.3 of the Company's
Medtronic, Inc...................................... Current Report on Form 8-K
dated December 22, 1995 (File
No. 0-25530).
10.10 Shareholder Voting Agreement, dated as of December Incorporated by reference to
26, 1995, by and among the Company, Medtronic, Exhibit 10.1 of the Company's
Inc., Donna J. Edmonds, Jeffrey B. Comer, David W. Current Report on Form 8-K
Haskin and Paul D. Benson........................... dated December 22, 1995 (File
No. 0-25530).
10.11 Employment Agreement, dated April 29, 1996, Incorporated by reference to
between the Company and William W. Chorske.......... Exhibit 10.2 of the Company's
Quarterly Report on Form
10-QSB for the quarter ended
March 30, 1996 (File No.
0-25530).
10.12 Stock Option Agreement, dated April 29, 1996, Incorporated by reference to
between the Company and William W. Chorske.......... Exhibit 10.1 of the Company's
Quarterly Report on Form
10-QSB for the quarter ended
March 30, 1996 (File No.
0-25530).
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
NO.
- ---
<S> <C> <C>
10.13 Agreement, dated June 4, 1996, between the Incorporated by reference to
Company and Jeffrey B. Comer........................ 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 Incorporated by reference to
6, 1995, between the Company and Jeffrey B. Comer... 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 Incorporated by reference to
Company and David W. Haskin......................... 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 Incorporated by reference to
Company and William Knopf, M.D...................... 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 Incorporated by reference to
September 1, 1996, between the Company and Exhibit 10.3 of the Company's
William Knopf, M.D.................................. 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 Incorporated by reference to
September 1, 1996, between the Company and Donna Exhibit 10.29 of the Company's
J. Edmonds.......................................... 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 Incorporated by reference to
Company and Donna J. Edmonds....................... 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 Incorporated by reference to
Company and National Jewish Center (confidential Exhibit 10.30 of the Company's
portions have been omitted and filed with the Annual Report on Form 10-KSB
Secretary the Commission)........................... for the year ended December
31, 1996 (File No. 0-25530).
</TABLE>
II-13
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
NO.
- ---
<S> <C> <C>
10.21 Technical Support Agreement, dated as of December Incorporated by reference to
18, 1996, between the Company and National Jewish Exhibit 10.31 of the Company's
Center.............................................. 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 Incorporated by reference to
4, 1997, covering 26,000 shares between the Exhibit 10.39 of the Company's
Company and APF, LLC................................ 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 Incorporated by reference to
4, 1997, covering 10,333 shares between the Exhibit 10.40 of the Company's
Company and APF, LLC................................ 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 Incorporated by reference to
24, 1997, covering 550,000 shares between the Exhibit 10.38 of the Company's
Company and APF, LLC................................ Annual Report on Form 10-KSB
for the year ended December
31, 1996 (File No. 0-25530).
10.25 Master Agreement, dated March 25, 1997, among the Incorporated by reference to
Company, Anthony Furnary, M.D. and APF, LLC......... 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, Incorporated by reference to
among the Company, Anthony Furnary, M.D. and Exhibit 10.36 of the Company's
APF, LLC............................................ 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 Incorporated by reference to
Company and The Atlanta Cardiology Group, P.C....... 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 Incorporated by reference to
March 28, 1997, issued by the Company to The Exhibit 10.33 of the Company's
Atlanta Cardiology Group, P.C....................... 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 Incorporated by reference to
</TABLE>
II-14
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
NO.
- ---
<S> <C> <C>
Company and The Atlanta Cardiology Group, P.C....... 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 Incorporated by reference to
of $1,000,000 issued to Medtronic, Inc.............. 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, Incorporated by reference to
between the Company and David J. Chinsky............ 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, Incorporated by reference to
among the Company, APF, LLC and Anthony P. Exhibit 10.3 of the Company's
Furnary, M.D........................................ Current Report on Form 8-K
dated November 26, 1997 (File
No. 0-25530).
10.33 Letter Agreement, dated November 10, 1997, Incorporated by reference to
between the Company and the Atlanta Cardiology Exhibit 10.4 of the Company's
Group, P.C.......................................... Current Report on Form 8-K
dated November 26, 1997 (File
No. 0-25530).
10.34 Letter Agreement, dated November 10, 1997, Incorporated by reference to
between the Company and Medtronic, Inc.............. 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 Incorporated by reference to
November 13, 1997, between the Company and Exhibit 10.7 of the Company's
David J. Chinsky.................................... Current Report on Form 8-K
dated November 26, 1997 (File
No. 0-25530).
10.36 Non-Statutory Stock Option Agreement, dated Incorporated by reference to
November 13, 1997, between the Company and Exhibit 10.8 of the Company's
David J. Chinsky.................................... 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
</TABLE>
II-15
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
NO.
- ---
<S> <C> <C>
Purchasers. Omitted from this Exhibit, as filed, are Incorporated by reference to
the exhibits and schedules referenced in such Exhibit 10.1 of the Company's
agreement. The Company will furnish Current Report on Form 8-K
supplementally a copy of any such exhibits and dated November 26, 1997 (File
schedules to the Commission upon request............ No. 0-25530).
10.38 Agreement, dated August 17, 1998, between the
Company and William W. Chorske...................... Filed herewith.
10.39 Restricted Stock Agreement, dated August 17,
1998, between the Company and William W. Chorske.... Filed herewith.
10.40 Separation and Release Agreement, dated as of
August 26, 1998, between the Company and David J.
Chinsky............................................. Filed herewith.
10.41 Engagement Agreement, dated as of August 20,
1998, between the Company and Manchester
Financial Group, Inc................................ Filed herewith.
10.42 Retainer Agreement, dated as of August 22, 1998,
between the Company and Manchester Business
Services, Inc....................................... Filed herewith.
23.1 Consent of Oppenheimer Wolff & Donnelly LLP......... Included in Exhibit 5.1.
23.2 Consent of Independent Auditors..................... Filed herewith.
24.1 Power of Attorney................................... Included on page II-9 of this
Registration Statement.
27.1. Financial Data Schedule............................. Filed herewith.
27.2 Financial Data Schedule ............................ Filed herewith.
</TABLE>
II-16
EXHIBIT 5.1
November 5, 1998
Board of Directors
LifeRate Systems, Inc.
7210 Metro Boulevard
Minneapolis, MN 55439
RE: REGISTRATION STATEMENT ON FORM SB-2
Ladies and Gentlemen:
We have acted as counsel to LifeRate Systems, Inc., a Minnesota corporation (the
"Company"), in connection with the registration by the Company of the resale of
an aggregate of 325,000 shares (the "Shares") of the Company's common stock, no
par value (the "Common Stock"), pursuant to the Company's Registration Statement
on Form SB-2 filed with the Securities and Exchange Commission on November 5,
1998 (the "Registration Statement") on behalf of certain selling shareholders
named therein (the "Selling Shareholders").
In acting as counsel for the Company and arriving at the opinions expressed
below, we have examined and relied upon originals or copies, certified or
otherwise identified to our satisfaction, of such records of the Company,
agreements and other instruments, certificates of officers and representatives
of the Company, certificates of public officials and other documents as we have
deemed necessary or appropriate as a basis for the opinions expressed herein. In
connection with our examination, we have assumed the genuiness of all
signatures, the authenticity of all documents tendered to us as originals, the
legal capacity of all natural persons and the conformity to original documents
of all documents submitted to us as certified or photostatic copies.
Based on the foregoing, and subject to the qualifications and limitations stated
herein, it is our opinion that:
1. The Company had the corporate authority to issue the Shares in the manner
and under the terms set forth in the Registration Statement.
2. The Shares being registered for resale by the Selling Shareholders under
the Registration Statement have been duly authorized and are validly
issued, fully paid and nonassessable.
We express no opinion with respect to laws other than those of the State of
Minnesota and the federal laws of the United States of America, and we assume no
responsibility as to the applicability thereto, or the effect thereon, of the
laws of any other jurisdiction.
<PAGE>
Board of Directors
LifeRate Systems, Inc.
November 5, 1998
Page 2
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement, to its use as part of the Registration Statement, and to
the use of our name under the caption "Validity of Shares" in the Prospectus
constituting a part of the Registration Statement.
We are furnishing this opinion to the Company solely for its benefit in
connection with the Registration Statement as described above. It is not to be
used, circulated, quoted or otherwise referred to for any other purpose. Other
than the Company, no one is entitled to rely on this opinion.
Very truly yours,
/s/ OPPENHEIMER WOLFF & DONNELLY LLP
OPPENHEIMER WOLFF & DONNELLY LLP
Plaza VII
45 South Seventh Street
Suite 3400
Minneapolis, MN 55402
EXHIBIT 10.38
AGREEMENT
THIS AGREEMENT ("Agreement") is entered into and effective as of August
17, 1998, between LifeRate Systems, Inc., a Minnesota corporation (the
"Company"), and William W. Chorske ("Chorske").
RECITALS:
A. The Company and Chorske entered into an Employment Agreement, dated
April 29, 1996 (the "Employment Agreement"), pursuant to which Chorske was
employed as the Chief Executive Officer and President of the Company from May 1,
1996 through April 30, 1997.
B. The Company is obligated to pay Mr. Chorske a cash bonus of $150,000
pursuant to Section 5(c) of the Employment Agreement.
C. Due to the Company's financial condition and limited cash resources,
the Company desires to provide for payment of the Company's $150,000 obligation
in accordance with the terms and conditions of this Agreement.
Accordingly, the parties hereby agree as follows:
1. Cash Payment. The Company shall pay Chorske the sum of $75,000 in equal
quarterly installments of $18,750 in April 1998, July 1998, October 1998 and
January 1999. Chorske acknowledges receipt of the first two installments of
$18,750.
2. Restricted Stock Grant. The Company shall grant Chorske an aggregate of
200,000 shares of Common Stock (the "Restricted Shares"), which have a market
value on the date this Agreement was approved by the Company's Board of
Directors (based on the closing bid price of the Common Stock on the business
day immediately preceding such date) equal to $75,000. The Company and Chorske
shall enter into a restricted stock agreement in the form attached hereto as
Exhibit A evidencing the terms and conditions of the grant of the Restricted
Share. The Restricted Shares shall be subject to restrictions and forfeiture in
the event that the Company does not achieve certain milestones as set forth in
Exhibit A.
3. Representations and Warranties. Chorske represents and warrants to the
Company as follows:
(a) The Restricted Shares are being acquired for investment for his
own account and not with the view to, or for resale in connection with,
any distribution or public offering thereof. Chorske understands that the
Restricted Shares have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), or any state securities laws by
reason of their contemplated issuance in transactions exempt from the
registration requirements of the Securities Act and applicable state
securities laws and that the reliance of the Company upon these exemptions
is predicated in part upon this representation by Chorske. Chorske further
understands that the Restricted Shares may not be transferred or resold
without registration under the Securities Act and any applicable state
securities laws, or an exemption from the requirements of the Securities
Act and applicable state securities laws.
<PAGE>
(b) Chorske is a resident of the State of New Hampshire and
qualifies as an "accredited investor," as defined in Rule 501 of
Regulation D under the Securities Act. Chorske acknowledges that the
Company has made available to him at a reasonable time prior to the
execution of this Agreement the opportunity to ask questions and receive
answers concerning the business, operations and financial condition of the
Company and to obtain any additional information (which the Company
possesses or can acquire without unreasonable effort or expense) as may be
necessary to verify the accuracy of information furnished to such
Investor. Chorske is able to bear the loss of his entire investment in the
Restricted Shares without any material adverse affect on his personal
financial condition, and has such knowledge and experience of financial
and business matters that he is capable of evaluating the merits and risks
of the acquisition of the Restricted Shares.
4. Full Satisfaction. Chorske acknowledges and agrees that upon payment of
the cash described in Section 1 and the grant of Restricted Shares described in
Section 2, the Company shall have satisfied all of its obligations pursuant to
Section 5(c) of the Employment Agreement, and the Company shall have no further
liability or obligation to Chorske under Section 5(c) of the Employment
Agreement.
5. Binding Effect. This Agreement shall be binding upon the heirs,
executors, administrators and successors of the parties hereto.
6. Governing Law. This Agreement and all rights and obligations hereunder
shall be construed in accordance with and governed by the laws of the State of
Minnesota.
7. Entire Agreement. This Agreement, including Exhibit A hereto,
supercedes all previous and contemporaneous oral negotiations, commitments,
writings and understandings among the parties hereto concerning the matters in
this Agreement.
8. Counterparts. This Agreement may be executed in two or more
counterparts, each of which will constitute an original, but all of which, when
taken together, will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.
LIFERATE SYSTEMS, INC.
By: /s/ David J. Chinsky
-------------------------------------
David J. Chinsky
President and Chief Executive Officer
/s/ William W. Chorske
-------------------------------------
William W. Chorske
EXHIBIT 10.39
RESTRICTED STOCK AGREEMENT
THIS AGREEMENT is entered into and effective as of this 17th day of
August, 1998 (the "Date of Grant"), by and between LifeRate Systems, Inc. (the
"Company") and William W. Chorske (the "Grantee").
A. The Company and the Grantee have entered into an agreement, dated the
date hereof, providing for the discharge of certain obligations of the Company
to the Grantee pursuant to Section 5(c) of the Employment Agreement, dated April
26, 1996, between the Company and the Grantee.
B. Such agreement provides that the Company and the Grantee shall enter
into this Agreement.
Accordingly, the parties agree as follows:
1. Grant of Restricted Shares.
The Company hereby grants to the Grantee Two Hundred Thousand (200,000)
restricted shares (the "Restricted Shares") of the Company's common stock, no
par value (the "Common Stock"), according to the terms and subject to the
restrictions and conditions hereinafter set forth. Reference to the Restricted
Shares in this Agreement will be deemed to include the Dividend Proceeds (as
defined in Section 3.3 of this Agreement).
2. Grant Restriction.
2.1 Restriction and Forfeiture. The Grantee's right to retain the
Restricted Shares will be subject to the Company achieving any of the milestone
events set forth in Sections 2.2 and 2.3 (the "Milestones") within five (5)
years of the date of this Agreement. If the Company does not achieve any of the
Milestones within such five-year period all of the Restricted Shares shall be
automatically forfeited and returned to the Company.
2.2 Listing on Exchange or Nasdaq. If the Common Stock of the Company
becomes listed, admitted to unlisted trading privileges or reported on any
national securities exchange, the Nasdaq National Market or the Nasdaq Small Cap
Market within five (5) years of the date of this Agreement, all Restricted
Shares will become immediately fully vested and non-forfeitable.
2.3 Change in Control. If a Change in Control (as defined below) of the
Company occurs within five (5) years of the date of this Agreement, all
Restricted Shares will become immediately fully vested and non-forfeitable. For
purposes of this Agreement, a "Change in Control" is any of the following:
<PAGE>
(a) the sale, lease, exchange or other transfer, directly or
indirectly, of substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to any person;
(b) a merger or consolidation to which the Company is a party if the
shareholders of the Company immediately prior to effective date of such
merger or consolidation have "beneficial ownership" (as defined in Rule
13d-3 under the Exchange Act) immediately following the effective date of
such merger or consolidation of securities of the surviving company
representing (i) more than 50%, but not more than 80%, of the combined
voting power of the surviving corporation's then outstanding securities
ordinarily having the right to vote at elections of directors, unless such
merger or consolidation has been approved in advance by the Incumbent
Directors, or (ii) 50% or less of the combined voting power of the
surviving corporation's then outstanding securities ordinarily having the
right to vote at elections of directors (regardless of any approval by the
Incumbent Directors);
(c) any person becomes after the effective date of this Agreement
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of (i) 20% or more, but not 50% or more, of the
combined voting power of the Company's outstanding securities ordinarily
having the right to vote at elections of directors, unless the transaction
resulting in such ownership has been approved in advance by the Incumbent
Directors, or (ii) 50% or more of the combined voting power of the
Company's outstanding securities ordinarily having the right to vote at
elections of directors (regardless of any approval by the Incumbent
Directors);
(d) the Incumbent Directors cease for any reason to constitute at
least a majority of the Board of Directors of the Company (the "Board");
or
(e) a change in control of the Company of a nature that would be
required to be reported pursuant to Section 13 or 15(d) of the Exchange
Act, whether or not the Company is then subject to such reporting
requirements.
2.4 Incumbent Directors. For purposes of this Section 2, the Incumbent
Directors will mean any individuals who are members of the Board on the
effective date of this Agreement, any individual who is elected to the Board
pursuant to the Securities Purchase Agreement, dated as of November 14, 1997,
among the Company and the investors named therein, and any individual who
subsequently becomes a member of the Board whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least a
majority of the Incumbent Directors then in office (either by specific vote or
by approval of the Company's proxy statement in which such individual is named
as a nominee for director without objection to such nomination).
2.5 Special Situations Fund. Notwithstanding any other provision of this
Agreement, if Special Situations Private Equity Fund, L.P., Special Situations
Fund III, L.P. or Special Situations Cayman Fund, L.P. (collectively, "Special
Situations Fund") is or becomes, individually or collectively,
<PAGE>
in one or more transactions, the "beneficial owner", of any of the Company's
securities, such ownership, regardless of the percentage of the Company's
combined voting power owned or controlled, shall not constitute a "Change in
Control", whether or not the issuance of such securities by the Company to
Special Situations Fund would be required to be reported pursuant to Section 13
or 15(d) of the Exchange Act.
3. Issuance of Restricted Shares.
3.1 Privileges of a Shareholder; Transferability. As soon as practicable
after the execution and delivery of this Agreement, the Grantee will be recorded
on the books of the Company as the owner of the Restricted Shares, and the
Company will issue one or more duly issued and executed stock certificates
evidencing the Restricted Shares. The Grantee will have all voting, dividend,
liquidation and other rights with respect to the Restricted Shares in accordance
with their terms upon becoming the holder of record of such Restricted Shares;
provided, however, that prior to achievement of either of the Milestones, the
Restricted Shares will not be assignable or transferable by the Grantee, either
voluntarily or involuntarily, and may not be subjected to any lien, directly or
indirectly, by operation of law or otherwise. Any attempt to transfer, assign or
encumber the Restricted Shares other than in accordance with this Agreement will
be null and void.
3.2 Enforcement of Restrictions. To enforce the Restrictions imposed by
this Agreement, the Comp may place a legend on the stock certificates referring
to the restrictions and/or the Milestones and may require the Grantee, until
either of the Milestones has been achieved, to keep the stock certificates
evidencing the Restricted Shares, together with duly endorsed stock powers, in
the custody of the Company or its transfer agent or to maintain evidence of
stock ownership of the Restricted Shares, together with duly endorsed stock
powers, in a certificateless book-entry stock account with the Company's
transfer agent.
3.3 Dividends and Other Distributions. Any dividends or distributions
(other than regular quarterly cash dividends) paid with respect to Restricted
Shares prior to achievement of either of the Milestones ("Dividend Proceeds")
will be subject to the same restrictions as the Restricted Shares to which such
or distributions relate.
4. Withholding Taxes.
The Company may require the Grantee promptly to pay all legally required
amounts necessary to satisfy any federal, state or local withholding and
employment-related tax requirements attributable to the receipt of the
Restricted Shares, the receipt of dividends or distributions on Restricted
Shares, or the lapse or termination of the restrictions applicable to Restricted
Shares. In the event that the Company is unable to withhold such amounts, for
whatever reason, the Grantee agrees to pay to the Company an amount equal to the
amount the Company would otherwise be required to withhold under federal, state
or local law.
5. Adjustments.
<PAGE>
In the event of any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering or divestiture (including a spin-off) or
any other change in the corporate structure or shares of the Company, the Board
(or, if the Company is not the surviving corporation in any such transaction,
the board of directors of the surviving corporation), in order to prevent
dilution or enlargement of the rights of the Grantee, will make appropriate
adjustment (which determination will be conclusive) as to the number and kind of
securities or other property (including cash) subject to this Agreement.
6. Miscellaneous.
6.1 Binding Effect. This Agreement will be binding upon the heirs,
executors, administrators and successors of the parties to this Agreement.
6.2 Governing Law. This Agreement and all rights and obligations under
this Agreement will be construed in accordance with governed by the laws of the
State of Minnesota, without regard to conflicts of laws provisions. Any legal
proceeding related to this Agreement will be brought in an appropriate Minnesota
court, and the parties to this Agreement consent to the exclusive jurisdiction
of the court for this purpose.
6.3 Entire Agreement. This Agreement sets forth the entire agreement and
understanding of the parties to this Agreement with respect to the grant and
vesting of the Restricted Shares and supersede all prior agreements,
arrangements, plans and understandings relating to the grant and vesting of the
Restricted Shares.
6.4 Amendment and Waiver. This Agreement may be amended, waived, modified
or canceled only by a written instrument executed by the parties to this
Agreement or, in the case of a waiver, by the party waiving compliance.
The parties hereto have executed this Agreement effective the day and year
first above written.
LIFERATE SYSTEMS, INC.
By /s/ David J. Chinsky
-----------------------------
Its President
-----------------------------
GRANTEE
/s/ William W. Chorske
--------------------------------
WILLIAM W. CHORSKE
EXHIBIT 10.40
SEPARATION AND RELEASE AGREEMENT
This Separation and Release Agreement (the "Agreement"), dated as of
August 26, 1998, is by and between LifeRate Systems, Inc., a Minnesota
corporation (the "Company"), and David J. Chinsky ("Chinsky").
A. The Company and Chinsky entered into an employment agreement, dated as of
August 18, 1997, as amended on November 13, 1997 (as so amended, the
"Employment Agreement"), which expires on August 26, 1998.
B. Chinsky and the Company wish to acknowledge the expiration of the
Employment Agreement and their respective continuing rights and
obligations thereunder and to provide for the termination of Chinsky's
employment with the Company in a final and binding way that settles and
resolves all existing and potential disputes between them, as provided in
this Agreement.
Accordingly, in consideration of the mutual covenants and promises
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Chinsky and the Company agree as
follows:
1. Expiration of Employment Agreement. The Company and Chinsky hereby agree that
the Employment Agreement, and all rights and obligations of either the Company
or Chinsky thereunder, will expire on August 26, 1998, except that Chinsky shall
continue to be bound by the terms of Sections 8, 9, 10 and 11 of the Employment
Agreement as provided therein after such date.
2. Resignation. Chinsky reaffirms his resignation as an employee, officer,
including the offices of Chief Executive Officer and President, and a director
of the Company effective August 19, 1998.
3. Payments and Benefits. Subject to the terms and conditions of this Agreement,
including the release set forth in Section 7, the Company will:
(a) continue to pay Chinsky at his annual base salary as provided in the
Employment Agreement of $225,000 through August 31, 1998, in accordance
with the standard payroll practices of the Company;
(b) pay Chinsky $15,000 per month, subject to applicable federal, state or
local withholding and employment tax requirements, through October 31,
1998, in accordance with the standard payroll practices of the Company;
(c) pay Chinsky the $100,000 bonus required under Section 5(c) of the
Employment Agreement, subject to applicable federal, state or local
withholding and employment tax requirements, payable as follows: (i)
$35,000 in cash to be paid upon expiration of the fifteen-day rescission
period set forth in Section 7, and (ii) the remaining $65,000 to be paid
to Chinsky by issuing 260,000 shares of the Company's Common Stock, based
on
<PAGE>
the closing price of the Common Stock on August 19, 1998, as soon as
reasonably practical after the expiration of such fifteen-day rescission
period.
(d) pay or reimburse Chinsky for all reasonable expenses incurred through
August 28, 1998 while performing his duties under the Employment
Agreement, provided that Chinsky accounts properly for such expenses to
the Company in accordance with Company policies;
(e) continue to provide Chinsky with his current car allowance of $455 per
month through October 31, 1998; and
(f) continue to provide group medical and dental insurance coverage for
Chinsky and his family through October 31, 1998 on the same terms as
provided prior to the date hereof; provided, however, that the Company
will not be obligated to continue to provide group medical or dental
insurance coverage if Chinsky becomes covered under a policy provided by a
subsequent employer with comparable benefits and at a comparable cost to
Chinsky. The Company and Chinsky acknowledge and agree that Chinsky's
COBRA rights shall begin on November 1, 1998.
The Company's obligations under this Section 3 shall terminate if Chinsky
rescinds this Agreement or any part hereof. The Company shall withhold and
deduct from payments made under this Section 3 all legally required
amounts necessary to satisfy applicable federal, state or local
withholding and employment tax requirements and the employee's portion of
insurance premiums for the Company's group medical and dental insurance
policies.
4. Stock Options. The Company and Chinsky acknowledge and agree that options
previously granted to Chinsky under the Non-Statutory Stock Option Agreement,
dated November 13, 1997, covering 650,000 shares of the Company's Common Stock
shall vest with respect to 216,666 shares. The foregoing Option Agreement is
hereby amended to the extent necessary to provide that such option shall remain
exercisable with respect to 216,666 shares through August 26, 2003, even though
Chinsky will not continue to employed by the Company. Except as modified in this
Agreement, the terms and conditions of the foregoing Option Agreement shall
remain in full force and effect. Chinsky acknowledges that he does not have any
other options or rights to acquire any other shares of Common Stock from the
Company, except as set forth in Section 3.
5. Reference Letter. As further consideration for the terms of this Agreement,
the Company will provide Chinsky with a letter of reference which is mutually
acceptable to both parties. No other reference will be given by the Company
regarding Chinsky or his employment, except that the Company may respond to
requests for references by only confirming the dates of Chinsky's employment
with the Company and Chinsky's last job title.
6. Records, Documents and Property. Chinsky will return to the Company all its
records, correspondence, documents and property as well as all keys in his
possession at the time he signs this Agreement.
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<PAGE>
7. Release. Chinsky agrees to give up and forever relinquish all claims which he
has or may have against the Company in exchange for the consideration set forth
in this Agreement. This is a full and complete release and waiver of any and all
claims, complaints, causes of action or demands of whatever kind Chinsky may
have against the Company for events occurring up to the date of his signature on
this Agreement, whether known or unknown, foreseen or unforeseen, including, but
not limited to, all claims which relate in any way to the Employment Agreement,
employment or termination of employment with the Company. Chinsky will not bring
any lawsuits, file any charges, complaints or notices, or make any other demands
against the Company based on any claim he may have against the Company. Chinsky
agrees that the consideration set forth above is valuable consideration above
and beyond what is otherwise due to him from the Company.
Chinsky acknowledges and further agrees that by giving up all of his
claims against the Company, he also gives up any claims he may have against its
predecessors, successors, subsidiaries and affiliates and any and all officers,
directors, shareholders, employees and agents of the Company and all
predecessors, successors, subsidiaries and affiliates arising out of any
actions, conduct, decisions, behavior, omissions or events occurring up to the
date hereof. This Release extends to all claims which Chinsky may have for age
discrimination or any other form of employment discrimination prohibited under
Title VII of the Federal Civil Rights Act of 1964, the Federal Age
Discrimination in Employment Act, The Americans with Disabilities Act, The
Minnesota Human Rights Act and all other state and federal laws. It also extends
to but is not limited to all claims that Chinsky may have for wrongful
discharge, breach of contract, breach of any express or implied promise,
interference with contract, misrepresentation, fraud, retaliation, breach of
public policy, infliction of emotional distress, defamation, promissory
estoppel, invasion of privacy, or any other theory, whether legal or equitable.
This Release may be rescinded by Chinsky within fifteen (15) calendar days
of the date on which it is signed. To be effective, such rescission must be in
writing and delivered to the Company in the care of Mark W. Sheffert, Chairman
of the Board, Manchester Financial Group, IDS Center, 80 South Eighth Street,
Minneapolis, Minnesota 55402, either delivered by hand or properly addressed,
certified mail, return receipt requested, postmarked within the 15-day period.
8. Effect of Non-Execution or Rescission. Chinsky agrees that if he does not
execute this Agreement or if he rescinds the Release, this Agreement is null and
void and the Company has no obligations whatsoever under this Agreement.
9. Additional Representations and Covenants.
(a) Voluntary Action. Chinsky represents and agrees that he: (a) has
carefully read and understands all of the provisions of this Agreement;
(b) has been given the opportunity to consult with legal and tax counsel
of his choice, and has in fact consulted with such legal and tax counsel
regarding the terms of this Agreement; and (c) fully understands that by
signing this Agreement, he is giving up all rights to pursue any claims
against the Company and others mentioned in the Release contained in
Section 7 for any reason arising prior to the date of this Agreement.
3
<PAGE>
(b) Adequate Time. Chinsky has had at least twenty-one (21) days to
consider whether or not he should enter into this Agreement or waives such
right, and has been advised to consult with legal counsel of his choice
prior to entering into this Agreement.
(c) Non-Disclosure. This Agreement is confidential. Neither the Company
nor Chinsky will reveal the terms of the Agreement except as may be
necessary to effect its terms or as required by law, including without
limitation the federal securities laws, court order or valid legal
proceedings. Chinsky may also disclose the terms to his immediate family,
legal counsel, investment advisor or banks, and accountant or tax advisor.
The Company may disclose the terms to its officers and directors, outside
auditors, tax advisors and legal counsel.
(d) Investment Representations. Chinsky represents and warrants to the
Company the following with respect to the shares of Common Stock to be
issued to him under Section 3(c) of this Agreement (the "Shares"):
(i) Chinsky confirms that he is fully informed regarding the
financial condition of the Company, the administration of its
business affairs and its prospects for the future, and that the
Company makes no assurance whatsoever concerning the present and
prospective value of the Shares to be acquired.
(ii) The Shares as an investment, are speculative and involve a high
degree of risk. Chinsky believes that an investment in the Shares is
suitable for him based upon his investment objectives and financial
needs, and he has the financial means to undertake the risks of an
investment in the Shares, to hold the Shares for an indefinite
period of time, and to withstand a complete loss of his investment
in the Shares.
(iii) Chinsky has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and
risks of an investment in the Shares. Chinsky has obtained, to the
extent deemed necessary, personal professional advice with respect
to the risks inherent in, and the suitability of, an investment in
the Shares in light of his financial condition and investment needs.
(iv) The Shares are being acquired by Chinsky for investment
purposes in his name solely for his own beneficial interest and not
as nominee for, or for the beneficial interest of, or with the
intention to transfer to, any other person, trust or organization.
(v) Chinsky acknowledges that (a) he must bear the economic risk of
an investment in the Shares for an indefinite period of time because
the Shares have not been registered under the Securities Act of 1933
or any applicable state securities laws and therefore may not be
sold, transferred, assigned or otherwise disposed of unless such
disposition is subsequently registered under such laws or exemptions
from such registrations are available, and (b) a legend will be
placed on the certificate evidencing the Shares stating that the
Shares have not been
4
<PAGE>
registered under the Securities Act of 1933 and referencing the
restrictions on the transferability of the Shares.
10. Miscellaneous.
(a) Entire Agreement. Except for Sections 8, 9, 10 and 11 of the
Employment Agreement that remain in force, this Agreement constitutes the
entire agreement between the parties. No modification, amendment or change
of any kind to this Agreement shall be effective unless it is in writing
and signed by both parties.
(b) Indemnification. To the extent permitted by and in accordance with
Section 302A.521 of the Minnesota Business Corporation Act, or any
successor provision, the Company shall indemnify and hold Chinsky harmless
from any loss or damage incurred by Chinsky directly as a result of his
acting or failing to act within his "official capacity," as defined in
Section 302A.521.
(c) Governing Law. This Agreement will be construed in accordance with the
laws of the State of Minnesota. The parties agree that any dispute arising
hereunder shall be submitted only to a state or federal court of competent
jurisdiction in Minnesota, to whose jurisdiction all parties hereto
consent.
(d) Severability. Wherever possible, each provision of this Agreement will
be interpreted so that it is valid under applicable law. If any provision
of this Agreement is to any extent invalid under applicable law, that
provision will still be effective to the extent that it remains valid. The
remainder of this Agreement also will continue to be valid, and the entire
Agreement will continue to be valid in other jurisdictions.
(e) Non-admission. Nothing in this Agreement is intended to be, nor will
be deemed to be, an admission of liability by the Company or Chinsky that
either of them has violated any state or federal statute, local ordinance,
or principle of common law, or that either party has engaged in any
wrongdoing.
(f) Successors and Assigns. This Agreement is binding on and inures to the
benefit of the Company's successors and assigns, all of which are included
in the term the "Company" as it is used in this Agreement. This Agreement
is also binding on Chinsky's heirs, spouse, successors, assigns and legal
representatives.
(g) Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which will be deemed to be an original, but all
of which together will constitute one and the same instrument.
5
<PAGE>
The parties have duly executed this Agreement as of the date first written
above.
LIFERATE SYSTEMS, INC.
Date: By /s/ Mark W. Sheffert
------------------- ----------------------------------
Mark W. Sheffert
Chairman of the Board
Date: /s/ David J. Chinsky
------------------- ----------------------------------
David J. Chinsky
EXHIBIT 10.41
ENGAGEMENT AGREEMENT
LIFERATE SYSTEMS, INC.
(the "COMPANY")
This Engagement Agreement (the "Agreement") confirms the COMPANY's retention of
Manchester Financial Group, Inc. ("MFGI"), for a minimum period of six months
from the date hereof, as its exclusive agent to assist it with a merger, sale,
exchange, combination, or any similar transaction related to the COMPANY, and as
its non-exclusive agent with respect to financing transactions. After six
months, MFGI will proceed on a month-to-month basis until the COMPANY provides
MFGI with written 30-day notice of termination of this Agreement.
Notwithstanding the foregoing, this Agreement will terminate upon completion of
a Transaction, as defined below.
1. MFGI'S PERFORMANCE. Throughout the course of its engagement, MFGI will
follow all Process Guidelines set forth in Exhibit A.
2. TYPES OF TRANSACTIONS COVERED. Transactions covered under this Agreement
(individually, a "Transaction" and collectively, "Transactions") include
any financing, sale, exchange or other disposition of all or a material
(more than 25 percent) portion of the COMPANY, whether accomplished by a
sale of assets or stock by or through the COMPANY and/or its shareholders
(in a single transaction or one or more series of related transactions),
and shall include without limitation any merger, tender or exchange offer,
joint venture, equity investment, or recapitalization, or any other
transaction, the effect of which is to change the control or ownership of
the COMPANY. If a Transaction is completed during the term of this
Agreement, MFGI shall be entitled to its Accomplishment Fee provided
herein.
3. EQUITABLE AGENCY PROTECTION PERIOD. If within a period of twelve (12)
months following termination of this Agreement, the COMPANY or its
shareholders enter into an agreement in principle to consummate a
Transaction with an MFGI Prospect, MFGI Accomplishment Fee shall be due
and payable in full upon closing of such Transaction pursuant to section 6
below. For purposes of record keeping and monitoring only, within
approximately 30 days of the expiration of this Agreement, MFGI will
provide the COMPANY with a protective list of MFGI Prospects.
4. MFGI PROSPECT DEFINED. For purposes of this Agreement, "MFGI Prospect"
includes any party or parties: (i) whom MFGI contacts on the COMPANY's
behalf hereunder; (ii) with whom the COMPANY or its shareholders have any
discussions relative to a possible Transaction during the term of this
Agreement or the one-year period prior to the date of the Agreement; or
(iii) who participate in a Transaction wherein the services of MFGI are
utilized by the COMPANY or its shareholders. MFGI Prospects also include
companies and individuals affiliated with any party
<PAGE>
described in (i), (ii), (iii) above. The COMPANY agrees to provide to MFGI
the names of all parties who have contacted the COMPANY or, to the
COMPANY's knowledge, any of its shareholders have contacted relative to a
possible Transaction in the one-year term prior to the date of this
Agreement, or during the period of this Agreement for the purpose of
pursuing a Transaction.
5. ACCOMPLISHMENT FEE AND TOTAL CONSIDERATION. The Accomplishment Fee payable
by COMPANY to MFGI at closing of a Transaction shall be calculated as
provided on Exhibit B. The retainer paid pursuant to Section 7 shall be
credited against the Accomplishment Fee. MFGI's Accomplishment Fee shall
be based upon the total consideration ("Total Consideration") provided,
paid or payable directly or indirectly to the COMPANY and/or its
shareholders (including holders of options or other stock rights), in
connection with, or in anticipation of, the Transaction, regardless of how
allocated or the form of consideration, and shall specifically include
without limitation:
(e) Cash paid and securities transferred to the COMPANY and/or its
shareholders at closing;
(f) In the case of a sale of stock by the COMPANY'S shareholders,
all long-term debt and capital lease obligations of the
COMPANY including the current portions thereof. In the case of
a sale of assets, all liabilities of the COMPANY, other than
trade payables and accrued operating expenses, which are
assumed by the buyer;
(g) In the case of a Joint Venture, the COMPANY's pro rata equity
interest in the enterprise value of the joint Venture
calculated as the sum of (i) the Joint Venture's debt and (ii)
the fair market value of the partners' capital contributions
to the Joint Venture. For purposes of this section, "Joint
Venture" shall mean any joint undertaking between the COMPANY
and a MFGI Prospect involving the pooling of assets of efforts
for a shared economic goal;
(h) In the case of a Reverse Merger in which the stockholders of
the COMPANY continue to own shares of the COMPANY, the product
of the fully diluted shares held by those shareholders of the
COMPANY who were shareholders of the COMPANY at the time of
the Transaction and the average closing price of those shares
during the four weeks (20 trading days) immediately following
the closing of the Transaction. For purposes of this section,
"Reverse Merger" shall mean the statutory combination of one
or more entities with and into the COMPANY, with the surviving
entity being the COMPANY;
(i) The net present value (applying a discount rate equal to the
then prevailing prime rate as quoted in THE WALL STREET
JOURNAL) of scheduled payments provided for in any leases by
the purchaser of assets owned and retained by the COMPANY, its
shareholders, or any affiliates thereof;
(j) All deferred installments of the purchase price including
promissory notes;
(k) Any portion of the Total Consideration held in escrow
subsequent to closing;
(l) All non-compete compensation and the like;
2
<PAGE>
(m) Future payments that are contingent on the future earning or
operations of the COMPANY, with such payments included in
Total Consideration based on the net present value of such
payment stream by application of a 15 percent per annum
discount rate;
(n) The value of any retained or acquired interest in the COMPANY
or its successor, or the right to acquire such interest; and
(o) Any extraordinary compensation to be paid to COMPANY and/or
its shareholders or affiliates thereof for services rendered
subsequent to closing.
6. PAYMENT OF ACCOMPLISHMENT FEE. Except as otherwise provided below, MFGI's
Accomplishment Fee shall be paid in cash at closing. In the event that all
or a portion of the Total Consideration includes capital stock, securities
or other property (other than installment notes), the portion of MFGI's
Accomplishment Fee attributable thereto, shall be payable at closing in
cash, based on the fair market value of such non-cash items as determined
by mutual agreement of the parties. In the event the parties are unable to
agree on the fair market value, MFGI shall have the option to receive
payment in like kind, or to cause an independent appraiser acceptable to
the COMPANY to determine fair market value, the expense of which appraisal
shall be shared equally by the parties. In the event the Transaction is a
Reverse Merger, payment of the estimated Accomplishment Fee (based on the
closing price for those shares on the date of closing), shall be made at
closing, with a final adjustment to occur 30 days following the closing of
the Transaction.
7. RETAINERS AND EXPENSES. The COMPANY shall pay MFGI a retainer, monthly in
advance, of $10,000 per month for the term of this Agreement. The COMPANY
shall also reimburse MFGI monthly for all reasonable out-of-pocket
expenses incurred on behalf of the COMPANY within 30 days of request by
MFGI. MFGI shall provide detailed monthly itemized summaries of expenses
and supporting documents for which reimbursement is requested by MFGI. The
COMPANY agrees that any unpaid payment (or portion thereof) of any fee,
expense, retainer, or other amount payable to MFGI shall bear interest
payable at the highest rate of interest permissible by law, but not to
exceed 12 percent per annum, from the date that such payment is due
hereunder to the date that said payment is paid in full.
8. INDEMNIFICATION. The COMPANY agrees not to assert claims against or
recover from MFGI (which term, for purposes of this paragraph, includes
its affiliates, directors, officers, shareholders and employees) for
losses, claims, damages or liability to the COMPANY or its shareholders,
arising out of or in connection with this engagement or performance by
MFGI of services hereunder, and to indemnify and hold MFGI harmless
against and from all losses, claims, damages or liabilities, and all
actions, claims, proceedings and investigations in respect thereof
(collectively, "Losses"), arising out of or in connection with this
engagement or the performance by MFGI of services hereunder, and to
reimburse MFGI for all reasonable legal and other out-of-pocket expenses
as incurred by MFGI in connection with investigating, preparing or
defending any such Losses, whether or not MFGI is names as a party
3
<PAGE>
thereto; provided, however, that the COMPANY shall not be liable to the
extent such Losses are finally determined by arbitration as herein
provided to have arisen out of MFGI gross negligence or willful
misconduct. If such indemnification is insufficient or unavailable, the
COMPANY agrees to make contributions to any Losses paid or payable such
that MFGI will not be liable for more than the Accomplishment Fee paid to
MFGI.
9. RELIANCE AND CONFIDENTIALITY. In performing its services hereunder, MFGI
shall be entitled to rely without investigation upon all information that
is available from public sources as well as all other information supplied
to it by or on behalf of the COMPANY or its advisors and shall not in any
respect be responsible for the accuracy or completeness of, or have any
obligation to verify, the same or to conduct any appraisal of assets. To
the extent consistent with legal requirements, all information given to
MFGI by the COMPANY, unless publicly available or otherwise available to
MFGI without restriction or breach of any CONFIDENTIALITY AGREEMENT, will
be held by MFGI in confidence and will not be disclosed to anyone other
than MFGI and MFGI's advisors without the COMPANY's prior approval or used
for any purpose other than those referred to in this Agreement.
10. ARBITRATION. The COMPANY and MFGI both agree that any dispute between them
in any way relating to this Agreement shall be determined and settled by
binding arbitration in accordance with the rules of the American
Arbitration Association by a single arbitrator. All costs associated with
any such disputes (including both parties' legal fees) shall be allocated
between the parties by the arbitrators. All decisions and awards of the
arbitrators shall be final and binding on both parties, and may be
enforced by any court with jurisdiction.
11. CONFLICT OF INTEREST. The COMPANY hereby acknowledges that the Chairman of
its Board of Directors is Chairman and Chief Executive Officer of
Manchester Companies, Inc. which is the majority shareholder of MFGI. The
COMPANY further acknowledges that it has consulted with its legal counsel
regarding this potential conflict of interest.
12. REPRESENTATIONS. The COMPANY will in good faith use its best efforts to
conduct any offer, offer for sale, and sale of securities in a manner
intended to be in compliance with federal and state securities laws, rules
and regulations. It is expressly intended that MFGI shall not be acting as
a broker-dealer but is assisting the COMPANY in the management of its
business affairs. MFGI is not a member of the National Association of
Securities Dealers, Inc. and is not licensed as a broker-dealer in any
state.
13. MISCELLANEOUS. This Agreement is transferable and assignable by MFGI to
any corporation under common control and ownership with MFGI. Further,
MFGI shall have the right to assign all or any part of its obligations
under this Agreement with the consent of the COMPANY, such consent not to
be unreasonably withheld, in the
4
<PAGE>
event MFGI determines that part of the functions to be performed under
this Agreement are required to be performed by a broker-dealer registered
pursuant to federal or state law. Except as set forth in the preceding
sentences, MFGI may not transfer or assign this Agreement. All questions
arising hereunder shall be determined according to Minnesota Law.
Facsimile copies of the Agreement signed in counterpart shall be
considered for all purposes, including delivery, as originals. Any term or
provision of this Agreement that is invalid or unenforceable in any
situation in any jurisdiction shall not affect the validity or
enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. The provisions of this paragraph
and Paragraphs 3, 6, 8, 9 and 10 will survive the termination of this
Agreement.
Executed and agreed to this 20th day of August, 1998 by:
LIFERATE SYSTEMS, INC. MANCHESTER FINANCIAL GROUP, INC.
By: /s/ Daniel A. Pelak By: /s/ Kenneth Wittz
--------------------------------- ---------------------------------
Its: Board of Directors Its: Managing Director
--------------------------------- ---------------------------------
5
<PAGE>
EXHIBIT A
to
Engagement Agreement
MANCHESTER FINANCIAL GROUP, INC.
and
LIFERATE SYSTEMS, INC.
PROCESS GUIDELINES
I. ALL SERVICES:
(a) Maintain strict confidentiality of all financial and other
proprietary information, data, and materials relating to the COMPANY
except as provided below.
(b) Familiarize itself with the business, operations, physical assets,
financial condition and prospects of the COMPANY.
(c) Not share with any MFGI Prospect any confidential information
relating to the COMPANY unless the MFGI Prospect has executed a
CONFIDENTIALITY AGREEMENT in a form pre-approved by the COMPANY.
(d) Prepare an EXECUTIVE SUMMARY for the COMPANY, and other analyses and
data as may be reasonably requested by MFGI Prospects, the final
drafts of which will be presented to the COMPANY for its approval;
provided, however, that the EXECUTIVE SUMMARY prepared by MFGI is
the sole property of MFGI and may not be reproduced or distributed
to parties other than the COMPANY's shareholder, officers,
directors, employees and representatives without Agents prior
written consent.
(e) Not make any representations regarding the COMPANY or provide any
written information regarding the COMPANY, with the exception of
documents filed with the Securities and Exchange Commission, without
the prior approval of the COMPANY.
II. SALE SERVICES:
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<PAGE>
(a) Assist the COMPANY in developing a list of potential buyers whom is
believed in good faith to be financially qualified and potentially
interested in participating in a Transaction.
(b) Contact MFGI Prospects on the COMPANY's behalf and, as appropriate,
arrange for and orchestrate meetings between MFGI Prospects and the
COMPANY.
(c) Work in the capacity outlined above with the COMPANY's legal
counsel, accountants, and other advisors as reasonably requested and
directed by the COMPANY.
(d) Present to the COMPANY all proposals from MFGI Prospects and make
recommendations as to the COMPANY's appropriate negotiating strategy
and course of conduct.
(e) Assist in all negotiations and in all document review as reasonably
requested and directed by the COMPANY.
(f) THE COMPANY OR ITS SHAREHOLDERS HAVE THE RIGHT TO REJECT ANY AND ALL
OFFERS SUBMITTED TO MFGI.
III. FINANCING SERVICES:
(a) Assist the COMPANY in identifying prospective institutional
lenders/investors.
(b) Contact institutional lenders/investors on the COMPANY's behalf and,
as appropriate, arrange for and orchestrate meetings between the
COMPANY and the institutional lenders/investors.
(c) Work with the COMPANY's legal counsel, accountants, and other
advisors as reasonable requested and directed by the COMPANY.
(d) Present to the COMPANY all proposals from institutional
lenders/investors and make recommendations as to the COMPANY's
appropriate negotiating strategies and course of conduct.
(e) Assist in negotiations, due diligence and document review as
reasonable directed and requested by the COMPANY.
(f) THE COMPANY OR ITS SHAREHOLDERS HAVE THE RIGHT TO REJECT ANY AND ALL
PROPOSAL SUBMITTED TO MFGI.
7
<PAGE>
EXHIBIT B
to
ENGAGEMENT AGREEMENT
MANCHESTER FINANCIAL GROUP, INC.
and
LIFERATE SYSTEMS, INC.
FEE STRUCTURE
If a Transaction, other than a financing, is completed the following fee shall
be paid to MFGI.
5 percent (5%) of the first $2 million of Total Consideration.
4 percent (4%) of the second $2 million of Total Consideration.
3 percent (3%) of the third $2 million of Total Consideration.
2 percent (2%) of the fourth $2 million of Total Consideration.
1 percent (1%) of Total Consideration over $8 million.
In the event the Transaction is a sale to Medtronic, Inc. pursuant to the
existing contractual rights of first offer or first refusal, MFGI shall be paid
an Accomplishment Fee equal to three percent (3%) of the Total Consideration.
FINANCING ACCOMPLISHMENT FEE
If the Transaction involves debt or equity financing the following introduction
fee shall be paid to MFGI:
(i) Two percent (2%) of all senior debt.
(ii) Five percent (5%) of all junior debt.
(iii) Eight percent (8%) of all equity or equity equivalent capital.
EXHIBIT 10.42
MANCHESTER BUSINESS SERVICES, INC.
RETAINER AGREEMENT
THIS AGREEMENT is entered into as of August 22, 1998 between Manchester Business
Services, Inc. ("MBSI") and LifeRate Systems, Inc. ("Company").
1. Retention. Company hereby retains MBSI to provide the following advisory
services:
a) Act as interim CEO; and
b) Oversee wind-down of operations pending sale.
MBSI does not and will not provide legal counsel. You must rely upon advice from
your own legal counsel on all legal matters.
2. Term. MBSI is hereby retained by Company on a month to month basis for a
period Commencing August 22, 1998 and thereafter on a monthly basis unless
terminated in writing upon 30 days notice by either party. MBSI may
terminate this Agreement at any time for non-payment of fees or expenses.
3. Fees.
a) Company shall pay a monthly fee of $10,000 payable on the effective
date and on the 22nd day of each month thereafter until terminated
pursuant to paragraph 2 above.
b) Company will also reimburse MBSI for all reasonable out-of-pocket
expenses wihtin ten days of the billing.
4. Cooperation. Company agrees to provide MBSI with all information and
access to employees deemed reasonably necessary by MBSI to provide its
services hereunder.
5. Confidentiality.
e) MBSI agrees to treat as confidential all proprietary information
("Information") provided by Company during the period of this
Agreement and for one year thereafter and agrees that all such
Information does not include information which is available to the
public, already in possession of another party on a non-confidential
basis or which is available on a non-confidential basis from a third
party.
f) Company agrees to keep this Agreement and any work product and
advice rendered by MBSI confidential.
g) Notwithstanding the foregoing, any party may disclose such
Information if required by a court of law, or if in the opinion of
such party's counsel, the party is required under the law to
disclose Information.
6. Indemnification. If, in connection with any services or matters that are
the subject of this Agreement, MBSI becomes involved in any capacity in
any action or legal proceeding, pending
<PAGE>
or threatened, Company agrees (i) to reimburse MBSI for the reasonable
legal fees, disbursements of counsel and other expenses (including the
cost of investigation and preparation incurred by MBSI as such fees,
disbursements and other expenses are incurred; and (ii) to indemnify,
defend, and hold MBSI harmless against any losses, claims, damages, or
liabilities, joint or several, to which MBSI may become subject arising
out of such action or legal proceeding unless such claims arise from
MBSI's gross negligence or willful misconduct as determined in a judicial
proceeding.
7. Survival. The provisions of this Agreement shall, where applicable,
survive the expiration of the period of this Agreement, including any
extensions thereof.
8. Entire Agreement. This Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof and
supersedes and cancels as of the date hereof all prior understandings,
written or oral, with respect to the subject matter hereof.
9. Governing Law. This Agreement and the agreements contained herein shall be
governed by, and construed in accordance with, the laws of the State of
Minnesota, without giving effect to the principles of conflicts of laws
thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
MANCHESTER BUSINESS SERVICES, INC.
By: /s/ Donald C. Swenson
-------------------------------
Its: President
-------------------------------
LIFERATE SYSTEMS, INC.
By: /s/ Daniel A. Pelak
-------------------------------
Its: Board of Directors
-------------------------------
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated February 27, 1998, except
as to Note 4 as to which the date is November 2, 1998 in the Registration
Statement (Form SB-2) and related Prospectus of LifeRate Systems, Inc. for the
registration of 17,113,000 shares of its Common Stock.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
November 9, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE STATEMENT OF OPERATIONS AND THE BALANCE SHEET IS QUALIFIED IN ITS ENTIRETY
BY REFERENCES TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,251
<SECURITIES> 0
<RECEIVABLES> 226
<ALLOWANCES> (63)
<INVENTORY> 0
<CURRENT-ASSETS> 58
<PP&E> 1,039
<DEPRECIATION> 744
<TOTAL-ASSETS> 1,866
<CURRENT-LIABILITIES> 408
<BONDS> 3,120
0
0
<COMMON> 21,972
<OTHER-SE> (23,765)
<TOTAL-LIABILITY-AND-EQUITY> 1,866
<SALES> 396
<TOTAL-REVENUES> 396
<CGS> 445
<TOTAL-COSTS> 1,672
<OTHER-EXPENSES> (46)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> (1,694)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,694)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,694)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF EARNINGS AND THE BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<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> 3,107
0
0
<COMMON> 20,016
<OTHER-SE> (22,070)
<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> 299
<INCOME-PRETAX> (5,162)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,162)
<DISCONTINUED> 0
<EXTRAORDINARY> 200
<CHANGES> 0
<NET-INCOME> (4,962)
<EPS-PRIMARY> (1.13)
<EPS-DILUTED> (1.13)
</TABLE>
