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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
( ) Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
(Exact name of small business issuer as specified in its charter)
COMMISSION FILE NO. 0-25530
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LIFERATE SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
MINNESOTA 41-1682994
(State of Incorporation) (I.R.S Employer Identification No.)
P.O. BOX 390353
MINNEAPOLIS, MINNESOTA 55439-0353
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 837-2975
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO __
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. (X)
The Registrant's revenues for the nine months ended September 30, 1998
were $384,300. The Company has adopted the liquidation basis of accounting as of
October 1, 1998.
As of March 1, 1999, 13,272,000 shares of Common Stock of the Registrant
were outstanding, and the aggregate market value of the Common Stock of the
Registrant as of that date (based upon the average between the closing bid and
asked prices for the Common Stock on that date), excluding shares owned
beneficially by executive officers, directors and greater-than-5% shareholders,
was approximately $96,438.
Transitional Small Business Disclosure Format (check one): YES ____ NO __X___
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THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. FOR THIS
PURPOSE, ANY STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING
THE FOREGOING, WORDS SUCH AS "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR
COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES,
AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF FACTORS. SEE
ITEM 6. "MANAGEMENT'S DISCUSSION AND ANALYSIS - CERTAIN FACTORS."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
LifeRate Systems, Inc. (the "Company or "LifeRate") was 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. As of
March 1, 1999 the Company had one full-time employee and one part-time employee.
Although the Company is continuing to service two 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's principal executive offices are located at 7400 Metro
Boulevard, Minneapolis, Minnesota 55439, and its telephone number at that
location is (612) 837-2975.
PRODUCTS
Prior to deciding to cease 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.
RESEARCH AND DEVELOPMENT
The Company has in the past dedicated significant resources to research
and development activities. These research and development activities consisted
primarily of developing and releasing enhancements and new versions
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of its core software system. During 1996, LifeRate completed development of its
core system, including outpatient modules for cardiovascular and asthma and
allergy specialists. During 1997, research and development efforts were focused
on a new release of the outpatient modules for cardiovascular and asthma and
allergy, continued development of the cardiac catheterization laboratory product
and development work under the agreement with National Jewish Medical and
Research Center. Research and development expenses in 1998 were focused on three
projects: completion of the Company's entry-level cardiac catheterization
software product called CLE, completion of a new release of its asthma and
allergy software and development of a new version of its core Cardiovascular
Outpatient software product. The first two projects were completed and the last
project was canceled when the Company ceased its business operations in August
1998. The core software has been released in three phases: Version 1.1 in
February, 1996; Version 1.2 in October, 1996 and Version 1.3 in September, 1997.
In addition, in January 1998, the Company released an entry-level product for
use in the cardiac catheterization laboratory. The Company spent $530,300 for
the nine months ended September 30, 1998, and, $1,052,400 and $4,994,700,
respectively, on research and development in the years ended December 31, 1997,
and 1996.
PROPRIETARY PROTECTION
The Company relies solely on common law copyrights and trade secrets
for proprietary protection of its system. LifeRate does not currently have
patent protection with respect to any aspect of its system. There can be no
assurance that the Company's measures to protect its proprietary information
will be successful. In the absence of meaningful intellectual property
protection, the Company may be vulnerable to competitors who could lawfully
attempt to copy the Company's products. Moreover, there can be no assurance that
other competitors may not independently develop the same or similar technology.
Similarly, while LifeRate believes that it has all rights necessary to market
and sell its system without infringement of intellectual property rights held by
others, the Company has not conducted a formal infringement search, and there
can be no assurance that such conflicting rights do not exist.
Trademarks of the Company include LifeRate Systems(TM), Cardiovascular
Outpatient System(TM) and Asthma and Allergy Outpatient System(TM).
EMPLOYEES
As of March 1, 1999, the Company had one full-time employee and one
part-time employee. 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 Manchester Business Services, Inc.
ITEM 2. DESCRIPTION OF PROPERTY.
In December, 1998 the Company vacated its facilities at 7210 Metro
Boulevard, Minneapolis, Minnesota 55439 and subsequently negotiated the
termination of this lease. The company currently occupies a limited amount of
office space at 7400 Metro Boulevard, Minneapolis, Minnesota, which is leased on
a month-to-month basis at $1,100 per month.
ITEM 3. 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Report.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company as of March 1, 1999 are as
follows:
NAME AGE POSITION
---- --- --------
F.G. Hamilton 62 Acting Chief Executive Officer
Kenneth G. Tarr 42 Acting Chief Financial Officer
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, became its Chief Financial Officer in April 1998 and has served as Acting
Chief Financial Officer since August 1998. Mr. Tarr is also the Controller of
Telident, Inc. 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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCK HOLDER
MATTERS.
From January 1, 1996 to July 3, 1997, the Common Stock was traded on
the Nasdaq Small Cap Market. Effective July 3, 1997, the Company's Common Stock
was no longer quoted on the Nasdaq Stock Market because the Company no longer
met, and currently does not meet, the minimum net tangible assets and capital
and surplus requirements for continued quotation. The Common Stock currently
trades in the over-the-counter market on the NASD "Electronic Bulletin Board"
under the symbol "LRSI". The following table shows the high and low bid and
asked prices of the Common Stock for the periods indicated as reported by Nasdaq
from January 1, 1997 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.
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COMMON STOCK
HIGH: LOW:
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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 .12 .01
As of March 15, 1999, there were approximately 134 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
The Company ceased its ongoing business operations in the third quarter
of 1998 due to continuing losses from operations. The Company's Chief Executive
Officer resigned and staff was reduced to three full-time and one part-time
employee. The Company is servicing existing customers but is not marketing or
selling its products and does not expect to generate any revenue from new
customers. The Company's activities during the fourth quarter were focused on
reducing expenses, collecting receivables, and negotiating the termination or
satisfaction of all its remaining obligations.
The Company has adopted the liquidation basis of accounting as of
October 1, 1998. This basis of accounting is considered appropriate when the
liquidation of a company appears imminent and the net realizable value of its
assets are reasonably determinable. Under this basis of accounting, assets and
liabilities are stated at their net realizable value and estimated costs through
the liquidation date are provided to the extent reasonably determinable.
Revenues for the nine months ended September 30, 1998 were $384,300
compared to revenues of $620,300 for the twelve months ended December 31,1997.
The decline in revenue was due to the Company's discontinuing its sales and
marketing efforts in August 1998. Revenues of $126,400, or 32.9% of total
revenue, were generated from Carilion Medical Center. Revenues of $79,600, or
20.7% of total revenue, were generated from Washington Heart, a cardiovascular
medical center. Revenues of $72,100, or 18.8% of total revenue, were generated
from Cardiovascular Provider Resources. The remaining $106,200 of 1998 revenues
are related to the installation and monthly license fees generated from the
Company's Cardiovascular Outpatient product.
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.
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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 and 1998 to more effectively match expenses with revenues.
Cost of revenues for the nine months ended September 30, 1998 was
$457,000, compared to cost of revenues for the full year of 1997 of $782,500 The
1998 expense consists of $32,900 in amortization of software development costs,
$0 of royalty expense and $424,100 of customer support expenses. Customer
support expenses declined in 1998 due to reductions in employee head count which
resulted in decreased payroll expenses and travel expenses.
Cost of revenues in 1997 was $782,500, a $383,900 decrease from 1996.
The 1997 expense consists of $50,500 in amortization of software development
costs, $36,500 of royalty expense and $695,500 of customer support expenses.
Customer support expenses declined in 1997 due to reductions in employee head
count which resulted in decreased payroll expenses.
The Company is obligated to pay royalties on future sales of its
products. As described in Note 10 to the financial statements, in March 1997 the
Company completed a modified agreement with Dr. Furnary. Beginning in 1999 (or
sooner if the Company reaches $20,000,000 of cumulative revenues) the Company is
obligated to pay royalties in the amount of 3.0% on all gross revenues (as
defined in the agreement) up to $100,000,000 and, thereafter, 3.6% on all gross
revenues. 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. In March,
1999, ACG converted its subordinated note into 677,710 shares of Common Stock at
a conversion price of $3.32 per share. The Company incurred royalty expenses of
$0, $36,500 and $46,100 in 1998, 1997 and 1996, respectively, under these
agreements.
Sales and marketing expense for the nine months ended September 30,
1998 was $422,200, compared to 1997 expense of $1,279,700. Sales and marketing
expense declined from 1997 due to reductions in employee headcount which
resulted in reduced payroll expenses and reduced travel expense.
Sales and marketing expense in 1997 was $1,279,700, a $458,300, or
26.4% decrease from 1996 expense of $1,738,000. 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.
Research and development expenses in 1998 were focused on three
projects: completion of the Company's entry-level cardiac catheterization
software product called CLE, completion of a new release of its asthma and
allergy software and development of a new version of its core Cardiovascular
Outpatient software product. The first two projects were completed and the last
project was canceled when the Company ceased its business operations in August
1998. Expenses for the nine months ended September 30, 1998 totaled $530,300
compared to 1997 expenses of $1,052,400. Expenses decreased during 1998 due to
reductions in employee head count which resulted in lower payroll expense. This
was partially offset by increased consulting expenses related to the development
of the new version of the Cardiovascular Outpatient product. The Company does
not have any research and development employees at December 31, 1998 and does
not plan to commit any further resources to future development of its products.
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 $1,052,400, a decrease of
$3,942,300 or 78.9% from 1996. The reduction in expenses was due to the cost
reduction program
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described above and one-time expenses incurred in 1996 of $3,174,000. The
one-time expenses in 1996 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 ("FASB") Statement No.
86. 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. During the first
six months of 1998 the Company capitalized $84,600 of development costs for the
completion of the CLE product and the new release of the allergy and asthma
outpatient product. In the fourth quarter of 1998, the Company wrote off the
unamortized balance of development costs of $82,800. The Company is currently
seeking a buyer for its software technology.
General and administrative expenses for the nine months ended September
30, 1998 were $1,348,100 in 1998, compared to 1997 expenses of $2,402,500. The
decrease was due to reductions in employee head count which resulted in lower
payroll expense and travel expenses; lower professional services fees, lower
recruiting expenses and lower depreciation expense. These decreases were
partially offset by increased bad debt expense.
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. 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, $50,000 to settle a lawsuit brought by a former employee
and increased legal fees of $133,100 related to the former items and the
management change completed in the second quarter of 1996.
Interest income for the nine months ended September 30, 1998 and the
twelve months ended December 31, 1997 and 1996 was $52,600, $34,000 and
$261,900, 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 December 1995/January
1996, November 1997 and January 1998.
Interest expense for the nine months ended September 30, 1998 and the
twelve months ended December 31, 1997 and 1996 was $31,200, $299,300 and $6,300,
respectively. The increase in 1997 was due to interest expense accrued on the
convertible notes issued in 1997. These notes were renegotiated in November 1997
and became non-interest bearing notes.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily
through private and public placement of Common Stock, and, secondarily from
revenues. During 1997 and 1998, the Company needed additional financing to fund
operations.
In May 1997, the Company issued a convertible promissory note in the
principal amount of $1,000,000 to Medtronic, Inc., a shareholder of the Company
with a representative that serves on the Company's Board of Directors. Under the
original terms of the note, interest was at the prime rate, principal was due
upon the earlier of completion of an equity financing raising at least
$5,000,000 or November 30,1997, and was convertible, at the option of the
holder, into Common Stock at a conversion price equal to the lower of $2.00 or
the average per share
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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 described below, the Medtronic note was amended to provide that no
interest will accrue thereunder and accrued interest will be forgiven, principal
will not become due until May 2002 and the conversion price of the note is $1.50
per share. The warrant was also amended to change the conversion price to $.50
per share. In March 1999, the Company paid $62,000 of principal under the
Medtronic note and Medtronic converted the remaining principal balance of
$938,000 into 625,333 shares of Common Stock at a conversion price of $1.50 per
share.
In July 1997, the Company issued additional convertible promissory
notes in the amount of $500,000 and warrants in a private placement. The notes
accrued interest at the prime rate, were due at the earlier of November 30, 1997
or completion of the next equity financing and were convertible at the lesser of
$2.00 per share or the average per share price paid in the next equity
financing. In addition, 50,000 warrants were issued to purchasers of the notes
at an exercise price of the lesser of $2.00 per share or the average purchase
price paid in the next equity financing. In connection with the November 1997
equity financing, the notes were converted to Common Stock at a price of $2.00
per share, accrued interest was forgiven and the warrant conversion price was
fixed at $2.00 per share.
In September, October and November 1997, the Company obtained bridge
loans of $258,000 from Miller, Johnson and Kuehn, Inc. while the Company
attempted to complete the November 1997 equity financing. After completing the
November 1997 equity financing, $206,000 of the notes were repaid in cash and
$52,000 of the notes were converted into 104,000 shares of Common Stock at a
conversion price of $.50 per share and warrants to purchase 104,000 shares of
Common Stock at an exercise price of $1.50 per share.
In October and November 1997, the Company obtained bridge loans of
$46,200 from the Company's Board of Directors. After completion of the November
1997 equity financing, $40,425 of the notes were repaid in cash and $5,775 of
the notes were converted into 11,550 shares of Common Stock at a conversion
price of $.50 per share.
In November 1997, the Company entered into a securities purchase
agreement whereby the Company agreed to sell up to 9,000,000 shares of Common
Stock at prices ranging from $.50 to $.56 per share and warrants to purchase up
to 9,000,000 shares of Common Stock at an exercise price of $1.50 per share. In
November 1997, 4,290,000 shares of Common Stock were sold under the agreement
resulting in net proceeds to the Company of $1,964,400. The agreement provided
that if the Company fulfilled certain conditions by January 15, 1998, the
Company would issue up to an additional 4,500,000 shares of Common Stock and
warrants. The Company satisfied the conditions and in January 1998 sold an
additional 4,000,000 shares of Common Stock and warrants under the agreement
resulting in additional net proceeds to the Company of $1,955,300.
At December 31, 1998, the Company had $704,900 in cash and cash
equivalents, a $59,300 decrease from December 31, 1997. For the nine months
ended September 30, 1998, the Company used $1,939,200 to fund operations,
$23,800 to purchase furniture and equipment and $84,600 to fund capitalized
software development costs.
The Company does not have any commitments to purchase additional
equipment.
The Company estimates that its current cash balances will not be
sufficient to fund the limited operations of the Company through the end of
1999. The Company is presently seeking a buyer for the Company and/or its
software technology. There can be no assurance that the Company will be able to
find a buyer for the Company or its technology on satisfactory terms.
YEAR 2000 ISSUES
Computer programs have historically been written to abbreviate dates by
using two digits instead of four digits to identify a particular year. The so
called "Year 2000" problem or "millennium bug" is the inability of
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computer software or hardware to recognize or properly process dates ending in
"00." As the year 2000 approaches, significant attention is being focused on
updating or replacing such software and hardware in order to avoid system
failures, miscalculations or business interruptions that might otherwise result.
The Company has ceased its business operations and does not believe the
Year 2000 problem will materially impact its business, financial condition or
results of operations.
ITEM 7. FINANCIAL STATEMENTS.
The following Financial Statements and Independent Auditors' Report
thereon are included herein on the pages indicated:
<TABLE>
<CAPTION>
Financial Statements: Page
- --------------------- ----
<S> <C>
Report of Independent Auditors................................................................... 20
Statement of Net Liabilities in Liquidation as of December 31, 1998.............................. 21
Balance Sheet as of December 31, 1997 (Going Concern Basis)...................................... 22
Statement of Changes in Net Liabilities in Liquidation for the period October 1, 1998 through
December 31, 1998................................................................................ 23
Statements of Operations for the nine months ended September 30, 1998 and the years ended
December 31, 1997 and 1996 (Going Concern Basis)................................................. 24
Statements of Shareholders' Equity (deficit) for the nine months ended September 30, 1998
and the years ended December 31, 1997 and 1996 (Going Concern Basis).............................. 25
Statements of Cash Flow for the three months ended December 31, 1998 (liquidation basis) and
for the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996
(Going Concern Basis)............................................................................ 26
Notes to Financial Statements.................................................................... 27
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
(a) DIRECTORS OF THE REGISTRANT
The directors of the Company as of March 15, 1999 are as follows:
NAME AGE POSITION
---- --- --------
Mark W. Sheffert 51 Director and Chairman of the Board
Daniel A. Pelak 47 Director
Mark D. Dixon 33 Director
Robert N. Riner, M.D. 50 Director
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 Special Situations Fund elected
to the Board, as required by the November 14, 1997 Purchase Agreement. See
"Certain Transactions -- November 1997 Equity Financing."
DANIEL A. PELAK. Mr. Pelak has been a director of the Company since
January 1996. Mr. Pelak is currently a Vice President of Medtronic, Inc., a
multi-national medical device manufacturer. He has been with Medtronic, Inc.
since 1976 and has held several key managerial positions. Mr. Pelak served as
the Vice President and General Manager of the Nortech Division of Medtronic from
1988 to 1992, and he is currently Vice President of Cardiovascular Marketing at
Medtronic. Mr. Pelak was elected to the Board as the designee of Medtronic. See
"Certain Transactions."
MARK D. DIXON. Mr. Dixon became a director of the Company in April
1998. He is the Administrator of Abbott Northwestern Hospital. Mr. Dixon began
his career with Abbott Northwestern Hospital in 1984 serving as Operations Vice
President and as Executive Director of the Sister Kenny Institute. His
responsibilities have included planning, marketing, operations and overall
direction for the Cardiovascular, Rehabilitation, Neuroscience and Dialysis
programs, as well as numerous other ancillary departments and services. Mr.
Dixon received a Bachelor of Science Degree from the University of Minnesota in
1978 and a Master's Degree in Hospital and Health Care Administration in 1984
from the University of Minnesota.
RONALD N. RINER, M.D. Dr. Riner became a director of the Company in
April 1998. Dr. Riner is president of the Riner Group, Inc., an advisory and
consulting firm he founded in 1980. Dr. Riner currently serves as a member of
the Executive Management Team of the American College of Cardiology and is
responsible for business development and vendor relations in the College's
efforts at instituting a national data repository for clinical outcomes. A
graduate of Princeton University, Dr. Riner attended Cornell University Medical
College and received his internship and residency training at The New York
Hospital/Memorial Sloan Kettering Cancer Center.
During 1998, the Board of Directors met seven times and took action by
written consent three times. All of the nominees attended more than 75% of the
meetings of the Board that occurred while they were members of the Board.
9
<PAGE>
During 1998, the committees of the Board consisted of the Audit
Committee and the Compensation Committee. During 1998, neither Committee met or
took action by written consent.
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.
Prior to 1998, the Company did not pay fees to directors of the
Company. Beginning in 1998, the Company paid Mr. Dixon and Dr. Riner $500 for
each Board meeting attended. The Company generally reimburses directors of the
Company for out-of-pocket expenses incurred while attending Board or committee
meetings.
(b) EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning Executive Officers of the Company is
included in this Report under Item 4A, "Executive Officers of the Registrant".
(c) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who beneficially own more than 10% of the
Company's Common Stock, to file with the Securities and Exchange Commission (the
"SEC") initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Directors, executive
officers and greater than 10% shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) reports they file. To the
Company's knowledge, based solely on review of the copies of such reports
furnished to the Company during the year ended December 31, 1998, the Company's
directors, executive officers and greater than 10% shareholders complied with
all applicable Section 16(a) filing requirements.
ITEM 10. EXECUTIVE COMPENSATION.
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 1998 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------------- -------------
OTHER ANNUAL ALL OTHER
COMPENSATION SECURITIES COMPENSATION
------------- UNDERLYING ------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (4) OPTIONS (5)
- --------------------------- ---- ------ ----- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
F.G. Hamilton (1) 1998 $40,000 -- -- -- --
ACTING CHIEF EXECUTIVE OFFICER
David J. Chinsky (2) 1998 $180,000 $100,000 (3) $25,433 -- 3,431
FORMER PRESIDENT AND CHIEF 1997 $78,750 $108,000 $11,258 650,000 --
EXECUTIVE OFFICER
</TABLE>
- ------------------------
10
<PAGE>
(1) The services of Mr. Hamilton as Acting Chief executive Officer are
provided through a Retainer Agreement between the Company and
Manchester Business Services, Inc. ("MBSI"), pursuant to which the
Company pays MBSI a monthly fee of $10,000. see "Certain Transactions -
Manchester Companies."
(2) David J. Chinsky served as President and Chief Executive Officer from
August 1997 through August 1998.
(3) Such bonus was paid as follows: $35,000 in cash and 260,000 shares of
Common Stock (which had a fair market value at the time of issuance
equal to $65,000).
(4) "Other Annual Compensation" paid to Mr. Chinsky is comprised of an
apartment, car and travel allowance.
(5) "All Other Compensation" paid to Mr. Chinsky is comprised entirely of
matching contributions to the Company's 401(k) plan.
OPTION GRANTS AND EXERCISES IN 1997
No options were granted to or exercised by the Named Executive Officers
in 1998. The following table provides information as of December 31, 1998 as to
the value of options held by each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END (#) (1) OPTIONS AT FY-END ($)(2)
------------------------- ------------------------
NAME (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
- ---- ------------------------------------- -------------------------------------
<S> <C> <C>
F.G. Hamilton 0/0 $0/0
David J. Chinsky 216,666/0 $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, 1998 of $0.011, as
reported by the OTC Bulletin Board.
EMPLOYMENT AND SEPARATION 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
11
<PAGE>
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. 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.
12
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial
ownership of the Common Stock of the Company as of March 31, 1999, 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>
Miller, Johnson & Kuehn............................................ 5,512,805 (3) 37.8%
Special Situations Funds........................................... 5,000,000 (4) 25.5%
John R. Albers..................................................... 1,288,333 (5) 8.5%
Aaron Boxer Rev. Trust............................................. 885,000 (6) 5.9%
Medtronic Inc...................................................... 1,325,333 (7) 9.0%
F.G. Hamilton...................................................... 0 *
Daniel A. Pelak.................................................... 0 (8) 0
Mark W. Sheffert................................................... 0 0
Mark D. Dixon...................................................... 0 0
Robert N. Riner.................................................... 0 0
David J. Chinsky................................................... 476,666 (9) 3.2%
All directors and executive
officers as a group (5 persons) 0 (8) 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 14,575,043 outstanding shares of Common Stock as of March
31, 1999.
(3) As set forth in a Schedule 13D filed with the Securities and Exchange
Commission on December 28, 1998, this amount consists of: (i) 462,200
shares of Common Stock held by David B. Johnson; (ii) 1,880,000 shares
of Common Stock held by Betty Johnson; (iii) 400,000 shares of Common
Stock held by the Johnson Family Foundation; (iv) 28,355 shares of
Common Stock held by Eldon C. Miller; (v) 1,321,400 shares of Common
Stock held by Anne W. Miller; (vi) 1,388,715 shares of Common Stock
held by Paul R. Kuehn; (vii) 1,040,300 shares of Common Stock held by
Stanley D. Rahm; (viii) 304,305 shares of Common Stock held by Jeffrey
D. Rahm; (ix) 304,305 shares of Common Stock held by Susan Rahm; and
(i) 35,800 shares of Common Stock held by the Mary Ann Rahm Trust.
13
<PAGE>
(4) As set forth in a Schedule 13D/A filed with the Securities and Exchange
Commission on January 8, 1999, this amount consists of: (i) 2,000,000
shares of Common Stock issuable to Special Situations Private Equity
Fund, L.P. pursuant to outstanding warrants; (ii) 2,200,000 shares of
Common Stock issuable to Special Situations Fund III, L.P. pursuant to
outstanding warrants; and (iii) 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) Includes 216,666 shares that Mr. Chinsky has the right to acquire
within 60 days pursuant to the exercise of stock options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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
14
<PAGE>
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.
NOVEMBER 1997 EQUITY FINANCING
On November 14, 1997, the Company entered into the Purchase Agreement
with Special Situations Private Equity Fund, L.P., Special Situations Cayman
Fund, L.P., Special Situations Fund III, L.P. (collectively, the "Funds") and
the other purchasers named in the Purchase Agreement (the Funds and such other
purchasers are collectively referred to herein as the "Purchasers"), pursuant to
which the Company agreed to sell up to 9,000,000 shares of Common Stock of the
Company at prices ranging from $.50 to $.56 per share and warrants to purchase
up to 9,000,000 shares of Common Stock, as well as an additional 104,000 shares
of Common Stock and warrants to purchase 104,000 shares of Common Stock for
cancellation of certain indebtedness. The warrants are exercisable for a period
of ten years at a price of $1.50 per share, subject to adjustment as provided in
the warrants. The first closing under the Purchase Agreement was held on
November 14, 1997, at which the Company sold an aggregate of 2,500,000 shares of
Common Stock at a price of $.50 per share and issued warrants to purchase an
aggregate of 2,500,000 shares of Common Stock to the Funds for an aggregate
purchase price of $1,250,000 and an aggregate of 104,000 shares of Common Stock
and warrants to purchase an aggregate of 104,000 shares of Common Stock for the
cancellation of $52,000 of indebtedness (the "First Closing"). 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,
15
<PAGE>
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 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 from 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 "Executive
Compensation -- Employment and Separation Agreements."
In December 1998, the Funds sold all of their shares to certain
principals of and other persons affiliated with MJK.
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 connection with the November 1997 equity financing, the Medtronic Note
was amended to provide that: (a) no interest will accrue thereunder and accrued
16
<PAGE>
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. In March 1999, the Company paid
$62,000 of principal under the Medtronic Note, and Medtronic converted the
remaining principal balance under the Medtronic Note into 625,333 shares Common
Stock of the Company at a conversion price of $1.50 per share.
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 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.
17
<PAGE>
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. In March 1999, ACG converted the ACG
Note into 677,710 shares of Common Stock of the Company at a conversion price of
$3.32 per share.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Reference is made to the Exhibit Index hereinafter contained on pages
38 to 43 of this Report.
A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a shareholder of the
Company as of March 31, 1999, upon receipt from any such person of a written
request for any such exhibit. Such request should be sent to LifeRate Systems,
Inc., P. O. Box 390353, Minneapolis, MN 55439. Attention: Investor Relations.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an Exhibit to this Report, the
location of which is indicated in the Exhibit Index of this Report.
(1) Employee Stock Purchase Plan, as amended.
18
<PAGE>
(2) LifeRate Systems, Inc. 1993 Stock Option Plan, as amended.
(3) Form of Incentive Stock Option Agreement for Employees.
(4) Form of Non-Statutory Stock Option Agreement for
Non-Employees.
(5) Employment Agreement and Amendment, dated August 18, 1997 and
November 13, 1997, respectively, between the Company and David
J. Chinsky.
(6) Non-Statutory Stock Option Agreement, dated November 13, 1997,
between the Company and David J. Chinsky.
(7) Employment Agreement, dated April 29, 1996, between the
Company and William W. Chorske.
(8) Stock Option Agreement, dated April 29, 1996, between the
Company and William W. Chorske.
(b) REPORTS ON FORM 8-K
The Company did not file any Current Report on Form 8-K in the quarter
ended December 31, 1998.
19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
LifeRate Systems, Inc.
We have audited the balance sheets of LifeRate Systems, Inc. as of December 31,
1997 and the related statements of operations and cash flows for the nine months
ended September 30, 1998 and for each of the two years in the period ended
December 31, 1997. In addition, we have audited the statement of net liabilities
in liquidation as of December 31, 1998, and the related statements of changes in
net liabilities in liquidation and cash flows in liquidation for the period from
October 1, 1998 to December 31, 1998. 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 including 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 provided a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company decided to
liquidate in the third quarter of 1998, and commenced liquidation shortly
thereafter. As a result, the Company has changed its basis of accounting for
periods subsequent to September 30, 1998 from the going-concern basis to a
liquidation basis.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LifeRate Systems, Inc. as of
December 31, 1997, the results of operations and cash flows for the nine months
ended September 30, 1998 and for each of the two years in the period ended
December 31, 1997, the net liabilities in liquidation as of December 31, 1998
and the changes in net liabilities in liquidation and cash flows in liquidation
for the period from October 1, 1998 to December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 2, 1999
20
<PAGE>
LifeRate Systems, Inc.
Statement of Net Liabilities in Liquidation
December 31, 1998
ASSETS
Cash and cash equivalents $ 704,900
Accounts receivable 40,600
Prepaid expenses and other current assets 49,000
Computer equipment, net 11,900
-----------
Total assets 806,400
-----------
LIABILITIES
Accounts payable and other accrued liabilities 81,400
Other current liabilities 367,900
Reserve for estimated costs during period of liquidation 209,000
Long term debt and capital lease obligations 3,137,000
-----------
Total liabilities 3,795,300
-----------
Net liabilities $(2,988,900)
===========
SEE ACCOMPANYING NOTES.
21
<PAGE>
LifeRate Systems, Inc.
Balance Sheets
(Going-Concern Basis)
December 31, 1997
<TABLE>
<CAPTION>
1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 764,200
Accounts receivable, less allowance of $62,850 278,200
Prepaid expenses and other current assets 59,800
------------
Total current assets 1,102,200
Furniture and fixtures 177,600
Computer equipment 872,000
------------
1,049,600
Less accumulated depreciation 635,600
------------
414,000
Software development costs 28,600
------------
Total assets 1,544,800
============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 71,600
Accrued compensation 203,300
Accrued consulting fees 5,000
Accrued royalties 19,700
Other current liabilities 3,200
Current portion of long-term debt and capital lease obligations 12,300
------------
Total current liabilities 315,100
Long-term debt and capital lease obligations 3,106,500
Deferred rent 4,900
Deferred revenue 172,300
Shareholders' deficit:
Preferred stock, no par value:
Authorized shares - 1,000,000
Issued and outstanding shares - none
Common stock, no par value:
Authorized shares - 75,000,000
Issued and outstanding shares - 8,485,000 20,016,400
Accumulated deficit (22,070,400)
------------
Total shareholders' deficit (2,054,000)
------------
Total liabilities and shareholders' deficit $ 1,544,800
============
</TABLE>
SEE ACCOMPANYING NOTES.
22
<PAGE>
LifeRate Systems, Inc.
Statement of Changes in Net Liabilities in Liquidation
October 1, 1998 through December 31, 1998
Net liabilities in liquidation as of October 1, 1998 $(3,128,900)
Changes in net liabilities 140,000
-----------
Net liabilities in liquidation as of December 31, 1998 $(2,988,900)
===========
SEE ACCOMPANYING NOTES.
23
<PAGE>
LifeRate Systems, Inc.
Statements of Operations
(Going Concern Basis)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, Year ended December 31,
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Net revenues $ 384,300 $ 620,300 $ 615,700
Cost of revenues 457,000 782,500 1,166,400
------------------------------------------------------
Gross profit (72,700) (162,200) (550,700)
Operating expenses:
Sales and marketing 422,200 1,279,700 1,738,000
Research and development 530,300 1,052,400 4,994,700
General and administrative 1,348,100 2,402,500 2,845,700
------------------------------------------------------
Loss from operations (2,373,300) (4,896,800) (10,129,100)
Interest income 52,600 34,000 261,900
Interest expense (31,2000) (299,300) (6,300)
------------------------------------------------------
Net loss before extraordinary item (2,351,900) (5,162,100) (9,873,500)
Extraordinary item - debt restructuring -- 200,000 --
------------------------------------------------------
Net loss $(2,351,900) $(4,962,100) $(9,873,500)
======================================================
Net loss per share before
Extraordinary item $ (0.19) $ (1.18) $ (2.61)
Extraordinary item per share -- 0.05 --
------------------------------------------------------
Net loss per share - basic and diluted $ (0.19) $ (1.13) $ (2.61)
======================================================
Weighted average number of common shares
outstanding 12,065,296 4,387,405 3,783,931
======================================================
</TABLE>
24
<PAGE>
LifeRate Systems, Inc.
Statements of Shareholders' Equity (Deficit)
(Going Concern Basis)
<TABLE>
<CAPTION>
COMMON STOCK ISSUED
--------------------------- ACCUMULATED
SHARES AMOUNTS DEFICIT
------------------------------------------------
<S> <C> <C> <C>
Balance December 31, 1995 3,474,428 $14,384,100 $ (7,234,800)
Private placement of common stock, net of offering costs of $253,846 295,546 1,667,200 -
Payments on stock subscriptions - - -
Stock options exercised 41,665 235,400 -
Value of stock options granted for services rendered - 974,000 -
Net loss - - (9,873,500)
---------- ----------- ------------
Balance December 31, 1996 3,811,639 17,260,700 (17,108,300)
Private placement of common stock, net of offering costs of $177,700 4,290,000 1,964,400 -
Conversion of notes payable to common stock, net of
unamortized discount of $31,800 365,550 525,900 -
Value of warrants issued to holders of notes - 204,500 -
Stock options exercised 17,811 33,400 -
Value of stock options granted for services rendered - 27,500 -
Net loss - - (4,962,100)
---------- ----------- ------------
Balance December 31, 1997 8,485,000 20,016,400 (22,070,400)
Private placement of common stock, net of offering costs of $134,700 4,000,000 1,955,300 -
Common stock issued as part of lawsuit settlement 325,000 21,100 -
Employee stock sales 2,000 600 -
Net loss - - (2,351,900)
---------- ----------- ------------
Balance September 30, 1998 12,812,000 $21,993,400 $(24,422,300)
========== =========== ============
</TABLE>
[WIDE TABLE CONTINUED]
<TABLE>
<CAPTION>
STOCK
SUBSCRIPTIONS
RECEIVABLE TOTAL
-----------------------------
<S> <C> <C>
Balance December 31, 1995 $(5,000) $ 7,144,300
Private placement of common stock, net of offering costs of $253,846 - 1,667,200
Payments on stock subscriptions 5,000 5,000
Stock options exercised - 235,400
Value of stock options granted for services rendered - 974,000
Net loss - (9,873,500)
------- -----------
Balance December 31, 1996 - 152,400
Private placement of common stock, net of offering costs of $177,700 - 1,964,400
Conversion of notes payable to common stock, net of
unamortized discount of $31,800 - 525,900
Value of warrants issued to holders of notes - 204,500
Stock options exercised - 33,400
Value of stock options granted for services rendered - 27,500
Net loss - (4,962,100)
------- -----------
Balance December 31, 1997 - (2,054,000)
Private placement of common stock, net of offering costs of $134,700 - 1,955,300
Common stock issued as part of lawsuit settlement - 21,100
Employee stock sales - 600
Net loss - (2,351,900)
------- -----------
Balance Septemer 30, 1998 $ - $(2,428,900)
======= ===========
</TABLE>
SEE ACCOMPANYING NOTES.
25
<PAGE>
LifeRate Systems, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ending
December 31, September 30, Year Ended December 31,
1998 1998 1997 1996
(Liquidation (Going Concern (Going Concern (Going Concern
Basis) Basis) Basis) Basis)
---------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Decrease in net liabilities in liquidation $ 140,000
Net loss -- $(2,351,900) $(4,962,100) $(9,873,500)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation 24,900 202,600 309,700 238,600
Amortization of software development costs -- 30,400 50,500 100,800
Amortization of discounts on long-term debt 8,300 25,100 49,400 --
Value of stock options granted for services rendered -- -- 27,500 974,000
Value of warrants issued to note holders -- -- 43,500 --
Convertible subordinated note issued for services -- -- 2,250,000
rendered
Writedown of software development costs to net
realizable value 82,800 -- -- --
Stock issued for lawsuit settlement -- 21,100 -- --
Loss on sale of furniture and equipment 148,400 -- -- --
Changes in operating assets and liabilities:
Accounts receivable 64,200 173,400 (135,800) (38,000)
Advances to agent -- -- -- --
Prepaid and other current assets 32,800 (22,000) 68,200 (61,700)
Other assets -- -- -- 11,800
Accounts payable (49,400) 27,100 (180,100) (247,700)
Accrued compensation (145,400) (25,800) 159,400 (200,900)
Accrued consulting fees -- (5,000) (81,100) (296,500)
Accrued royalties -- (19,700) (16,400) 36,100
Decrease in estimated liquidation expenses (491,000) -- -- --
Other current liabilities 339,100 25,600 (70,700) 72,400
Deferred revenue (157,100) (15,200) 20,500 90,900
Deferred rent -- (4,900) (11,900) (11,900)
---------------------------------------------------------------
Net cash used in operating activities (2,400) (1,939,200) (4,729,400) (6,955,600)
INVESTING ACTIVITIES
Software development costs -- (84,600) (28,600) --
Purchase of furniture and equipment -- (23,800) (20,100) (602,600)
Proceeds from sales of furniture and equipment 49,000 900 -- --
---------------------------------------------------------------
Net cash provided by (used in) investing activities 49,000 (107,500) (48,700) (602,600)
FINANCING ACTIVITIES
Payments on notes payable and capital leases (4,800) (10,300) (265,000) (27,900)
Stock subscription received -- -- -- 5,000
Proceeds from issuance of notes payable -- -- 1,737,500 --
Proceeds from issuance of common stock -- 1,955,900 1,997,800 1,902,600
---------------------------------------------------------------
Net cash provided by (used in) financing activities (4,800) 1,945,600 3,470,300 1,879,700
---------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 41,800 (101,100) (1,307,800) (5,678,500)
Cash and cash equivalents at beginning of period 663,100 764,200 2,072,000 7,750,500
---------------------------------------------------------------
Cash and cash equivalents at end of period $ 704,900 $ 663,100 $ 764,200 $ 2,072,000
===============================================================
</TABLE>
SEE ACCOMPANYING NOTES
26
<PAGE>
LifeRate Systems, Inc.
Notes to Financial Statements
December 31, 1998
1. DESCRIPTION OF BUSINESS
LifeRate Systems, Inc. (the Company) was 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. In August 1998, the Company closed its business operations
due to continuing losses from operations. The Company is continuing to service
its existing customers. It is not marketing or selling its products and does not
expect to generate any meaningful revenue. The Company is currently winding down
its business, reducing expenses, collecting receivables and negotiating the
termination or satisfaction of all its remaining obligations. The Company has
retained an investment banker to seek a buyer for its technology and possible
merger candidates.
2. LIQUIDATION BASIS OF ACCOUNTING
The Company has adopted the liquidation basis of accounting as of October 1,
1998. This basis of accounting is considered appropriate when the liquidation of
a company appears imminent and the net realizable value of its assets are
reasonably determinable. Under this basis of accounting, assets and liabilities
are stated at their net realizable value and estimated costs through the
liquidation date are provided to the extent reasonably determinable.
3. 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
At December 31, 1997, 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
Basic loss per share is computed using the weighted average number of common
shares outstanding. Diluted loss per share is computed using the combination of
dilutive common share equivalents and the weighted average number of common
shares outstanding. Diluted loss per share is not presented as the effect of
outstanding options is antidilutive.
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
27
<PAGE>
LifeRate Systems, Inc.
Notes to Financial Statements
December 31, 1998
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 the fourth quarter of
1998 the Company wrote off $82,800 of capitalized software development costs due
to the planned liquidation of the Company.
REVENUE RECOGNITION
Revenues derived from software licenses are recognized upon execution of a
license agreement, delivery of the software product, reasonable assurance of
customer acceptance of the software and fulfillment of any other significant
contract obligations. Revenues derived from customer service and support
activities are deferred and recognized ratably over the term of the contract.
Revenues derived from software development contracts will be recognized using a
percentage of completion method based on meeting key milestones over the term of
the contract. Cash received as deposits on software license contracts is
recorded as deferred revenue in the accompanying balance sheet.
COST OF REVENUES
Cost of revenues includes royalty expense, amortization of capitalized software
expense and costs of customer support activities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from the estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure only provisions of FASB Statement No.
123, "Accounting for Stock-Based Compensation," but applies Accounting
Principles Board Opinion No. 25 (APB 25), and related interpretations in
accounting for its stock option plans. Under APB 25, when the exercise price of
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
28
<PAGE>
LifeRate Systems, Inc.
Notes to Financial Statements
December 31, 1998
4. LONG-TERM DEBT AND EXTRAORDINARY ITEM
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-----------------------------
<S> <C> <C>
Convertible subordinated note payable, non-interest
bearing, due April 2002 $ 2,250,000 $ 2,250,000
Convertible promissory note payable, non-interest 1,000,000 1,000,000
bearing, due May 2002
Note payable, bears interest at 1.0% above prime
(9.5% at December 31, 1997) - 1,700
Capital lease obligation, bears interest at 19.1% - 13,500
----------- -----------
3,250,000 3,265,200
Less discount on Medtronic, Inc. note (113,000) (146,400)
Current portion - long-term debt - (12,300)
----------- -----------
$ 3,137,000 $ 3,106,500
=========== ===========
</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.
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
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.
29
<PAGE>
LifeRate Systems, Inc.
Notes to Financial Statements
December 31, 1998
In March 1999, the Company paid $62,000 to Medtronic, Inc. against their
$1,000,000 convertible promissory note and the balance of $938,000 was converted
into 625,333 shares of common stock at $1.50 per share. In March 1999, the
$2,250,000 convertible subordinated note held by a physician group was converted
into 677,710 shares of common stock at $3.32 per share.
5. COMMON STOCK AND WARRANTS
In January 1996, the Company sold 295,546 shares of common stock resulting in
net proceeds to the Company of $1,667,200. In connection with the December 1995
and January 1996 private placements of stock, the Company agreed to grant the
underwriter 85,540 warrants to purchase shares of common stock. The warrants are
exercisable at a price of $6.50 and remain outstanding for a period of ten
years.
In July 1997, the Company issued convertible promissory notes totaling $500,000.
Purchasers of the notes also received 50,000 warrants at an exercise price of
$2.00 per share. The warrants remain outstanding for a period of five years. In
connection with the sale of the notes, the underwriter was granted a warrant to
purchase 25,000 shares of common stock. The warrant is exercisable at a price of
$2.00 per share and remains outstanding for a period of five years. In November
1997, the convertible promissory notes were converted into 250,000 shares of
common stock at a conversion price of $2.00 per share and $13,600 of accrued
interest was forgiven.
In November 1997, a director loan of $5,775 was converted into 11,550 shares of
stock at a price of $.50 per share. In November 1997, notes payable for an
aggregate of $52,000 were converted into 104,000 shares of common stock at a
price of $.50 per share and ten year warrants for 104,000 shares of common stock
at an exercise price of $1.50 per share.
In November 1997, the Company sold 4,290,000 shares of common stock and issued
warrants to purchase 4,290,000 shares of common stock at an exercise price of
$1.50. The warrants expire in November 2007. The sale resulted in net proceeds
to the Company of $1,964,400.
In January 1998, the Company sold 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 sales were $1,955,300.
As of December 31, 1998, the Company had 8,901,395 warrants outstanding with
exercise prices ranging from $ .50 to $6.50. The warrants expire at various
dates ranging from December 1999 to January 2008.
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 1998, 2,000 shares were sold at a price of $0.30 per share.
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
30
<PAGE>
LifeRate Systems, Inc.
Notes to Financial Statements
December 31, 1998
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>
1998 1997 1996
----------------------- ---------------------- -----------------------
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 172,347 $ 5.14 409,441 $ 7.68 250,106 $ 5.97
Granted 214,500 0.49 302,779 2.82 274,333 8.84
Exercised - - (41,665) 5.66
Canceled (138,025) 0.80 (539,873) 5.77 (73,333) 7.35
-------- --------- -------- -------- -------- --------
Outstanding at end of year 248,822 $ 3.54 172,347 $ 5.14 409,441 $ 7.68
======== ======== ======== ======== ======== ========
Options exercisable
at year-end 223,966 $ 3.79 147,789 $ 5.52 239,326 $ 7.03
======== ======== ======== ======== ======== ========
</TABLE>
At December 31, 1998, there were 501,178 shares available for grant under the
1993 Stock Option Plan.
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE AT REMAINING AVERAGE AT AVERAGE
OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE
--------------- ---- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$0.34 to $0.65 90,000 9.4 Years $0.39 72,500 $0.34
$1.00 to $1.938 30,707 3.7 Years 1.33 30,707 1.33
$2.625 to $3.00 31,449 5.0 Years 2.88 24,093 2.95
$5.875 to $6.33 45,666 6.2 Years 5.99 45,666 5.99
$8.625 51,000 7.4 Years 8.625 51,000 8.625
------- 7.2 Years $3.54 ------- $3.80
248,822 223,966
======= =======
</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
522,666 shares with prices ranging from $.50 to $5.19 per share. Expiration
dates of these options range from August 2003 to March 2007. At December 31,
1998, 522,666 options were exercisable at a weighted average exercise price of
$1.52 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
31
<PAGE>
LifeRate Systems, Inc.
Notes to Financial Statements
December 31, 1998
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>
Nine months
ended September 30, Year ended December 31,
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
Pro forma net loss $ (2,544,600) $ (5,332,400) $ (11,094,600)
Pro forma loss per share - basic and diluted $ (0.21) $ (1.22) $ (2.93)
</TABLE>
The pro forma effect on the net loss for 1998, 1997 and 1996 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 1998, 1997 and 1996 was estimated using
the Black-Scholes option pricing model with the following assumptions: no
dividend yield; a risk free interest rate of 5.0%, 5.5% and 6.0% during 1998,
1997 and 1996, respectively; expected volatility of the market price of the
Company's common stock of 122%, 71% and 64% during 1998, 1997 and 1996,
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, 1998, 1997 and 1996 was $0..31, $1.05 and $5.19 per
share, respectively. The weighted average fair value of non-plan options granted
at market prices during the years ended December 31, 1998, 1997 and 1996 was $0,
$0.90 and $3.09 per share, respectively.
The Black-Sholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
8. INCOME TAXES
The tax effects of significant components of the Company's deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $9,825,900 $8,688,800
Accounts receivable allowance - 25,100
Deferred rent - 2,000
Deferred revenue 61,400 68,900
Accrued salaries 12,800 81,300
Accrued consulting fees - 2,000
Accrued reserve for liquidation expenses 83,600
Deferred tax liabilities:
Depreciation - 49,500
---------- ----------
Net deferred tax assets 9,983,700 8,818,600
Valuation allowance 9,983,700 8,818,600
---------- ----------
$ - $ -
========== ==========
</TABLE>
A valuation allowance of 100% of tax benefits has been provided because of the
Company's history of operating losses.
32
<PAGE>
LifeRate Systems, Inc.
Notes to Financial Statements
December 31, 1998
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $24,525,000 that expire at various times through the year 2013.
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, 1997 and 1998.
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 a month to month operating lease.
During 1998 the Company paid $74,900 in office and equipment lease cancellation
charges. Rent expense for the years ended December 31, 1998, 1997, and 1996 was
$301,100, $255,700 and $182,600, respectively.
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, 1998 on the letter of credit was $30,000.
10. 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.
33
<PAGE>
LifeRate Systems, Inc.
Notes to Financial Statements
December 31, 1998
The Company incurred royalty expense for the years ended December 31, 1998, 1997
and 1996 of $0, $36,500 and $46,200, respectively.
11. 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.
12. SUPPLEMENTAL CASH FLOW INFORMATION
The Company entered into the following non-cash transactions:
DECEMBER 31
1998 1997 1996
-------- -------- --------
Conversion of notes payable
into common stock $ -- $557,800 $ --
Equipment and other assets
acquired under a capital lease -- 20,200 --
Stock issued for services 140,000 -- --
13. MAJOR CUSTOMERS
For the nine months ended September 30, 1998, the Company had three customers
that accounted for 32.9%, 20.7% and 18.8% of revenue, respectively. In 1997,
three customers accounted for 44.3%, 16.1% and 15.7% of revenue, respectively.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LIFERATE SYSTEMS, INC.
Dated: March 29, 1999 By: /s/ F.G. Hamilton
---------------------------------
F.G. Hamilton
Acting Chief Executive Officer
(Principal Executive Officer)
By:/s/Kenneth G. Tarr
---------------------------------
Kenneth G. Tarr
Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
By:/s/Daniel A. Pelak
---------------------------------
Daniel A. Pelak
Director
By:/s/Mark D. Dixon
---------------------------------
Mark D. Dixon
Director
By:/s/Ronald N. Riner, M.D.
---------------------------------
Ronald N. Riner, M.D.
Director
By:/s/Mark W. Sheffert
---------------------------------
Mark W. Sheffert
Chairman of the Board of Directors
and Director
35
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION (METHOD OF FILING)
- ------- ------------------------------
NO.
- ---
3.1 Amended and Restated Articles of Incorporation,
as amended. (Incorporated by reference to Exhibit 3.1 of the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997, File No. 0-25530).
3.2 Amended and Restated Bylaws, as amended. (Incorporated by
reference to Exhibit 3.2 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995, File No.
0-25530).
4.1 Form of the Company's Common Stock Certificate. (Incorporated
by reference to Exhibit 4.1 of the Company's Registration
Statement on Form SB-2, File No. 33-89016C).
4.2 Amended and Restated Articles of Incorporation, as amended.
(See Exhibit 3.1.)
4.3 Amended and Restated Bylaws, as amended. (See Exhibit 3.2.)
4.4 Form of Warrant dated December, 1994 to purchase shares of
Common Stock issued to investors in connection with the
Company's December, 1994 Private Placement. (Incorporated by
reference to Exhibit 10.17 of the Company's Registration
Statement on Form SB-2, File No. 33-89016C).
4.5 Form of Warrant dated March, 1995 to purchase 91,000 shares of
Common Stock issued to Principals of Miller Johnson & Kuehn,
Inc. in connection with the Company's Initial Public Offering.
(Incorporated by reference to Exhibit 4.5 of the Company's
Registration Statement on Form SB-2, File No. 333-42155).
4.6 Form of Warrant dated December, 1995 to purchase 56,286 shares
of Common Stock issued to Principals of Miller Johnson &
Kuehn, Inc. in connection with the Company's December, 1995
Private Placement. (Incorporated by reference to Exhibit 4.6
of the Company's Registration Statement on Form SB-2, File No.
333-42155).
4.7 Form of Warrant dated January, 1996 to purchase 29,555 shares
of Common Stock issued to Principals of Miller Johnson &
Kuehn, Inc. in connection with the Company's January, 1996
Private Placement. (Incorporated by reference to Exhibit 4.7
of the Company's Registration Statement on Form SB-2, File No.
333-42155).
4.8 Warrant dated May 12, 1997 to purchase 100,000 shares of
Common Stock issued to Medtronic, Inc. (Incorporated by
reference to Exhibit 10.2 of the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1997, File No.
0-25530).
4.9 Form of Warrant to purchase shares of Common Stock of the
Company issued to investors in connection with the July, 1997
Bridge Financing. (Incorporated by reference to Exhibit 4.9 of
the Company's Registration Statement on Form SB-2, File No.
333-42155).
36
<PAGE>
EXHIBIT DESCRIPTION (METHOD OF FILING)
- ------- ------------------------------
NO.
- ---
4.10 Form of Warrant dated July 21, 1997 to purchase 29,555 shares
of Common Stock to Principals of Miller Johnson & Kuehn, Inc.
in connection with the Company's July, 1997 Bridge Financing.
(Incorporated by reference to Exhibit 4.10 of the Company's
Registration Statement on Form SB-2, File No. 333-42155).
4.11 Form of Warrant to Purchase Common Stock of the Company issued
in connection with the November 1997 Equity Financing.
(Incorporated by reference to Exhibit 10.2 of the Company's
Current Report on Form 8-K dated November 26, 1997, File No.
0-25530).
10.1 1993 Stock Option Plan, as amended. (Incorporated by reference
to Exhibit 99.1 to the Company's Registration Statement on
Form S-8, File No. 333-02850).
10.2 Form of Incentive Stock Option Agreement for Employees.
(Incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form SB-2, File No. 33-89016C).
10.3 Form of Non-Statutory Stock Option Agreement for
Non-Employees. (Incorporated by reference to Exhibit 10.15 to
the Company's Registration Statement on Form SB-2, File No.
33-89016C).
10.4 Employee Stock Purchase Plan, as amended. (Incorporated by
reference to Exhibit 10.27 to the Company's Annual Report on
Form 10-KSB/A (Amendment No. 1), File No. 0-25530).
10.5 Form of Employment Agreement. (Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form
SB-2, File No. 33-89016C).
10.6 Lease Agreement with Alpha Associates, Inc. dated April 30,
1993. (Incorporated by reference to Exhibit 10.20 to the
Company's Registration Statement on Form SB-2, File No.
33-89016C).
10.7 Computer Software Purchase Agreement, dated July 2, 1995,
between the Company, Anthony Furnary, M.D. and APF, LLC.
(Incorporated by reference to Exhibit 10.28 of the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1995, File No. 0-25530).
10.8 Investment Agreement, dated as of December 26, 1995 between
the Company and Medtronic, Inc. (Incorporated by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-K dated
December 22, 1995, File No. 0-25530).
10.9 License and Development Agreement, dated as of December 26,
1995 between the Company and Medtronic, Inc. (Incorporated by
reference to Exhibit 10.3 of the Company's Current Report on
Form 8-K dated December 22, 1995, File No. 0-25530).
10.10 Shareholder Voting Agreement, dated as of December 26, 1995 by
and among the Company, Medtronic, Inc., Donna J. Edmonds,
Jeffrey B. Comer, David W. Haskin and Paul D. Benson.
(Incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K dated December 22, 1995, File No.
0-25530).
37
<PAGE>
EXHIBIT DESCRIPTION (METHOD OF FILING)
- ------- ------------------------------
NO.
- ---
10.11 Employment Agreement, dated April 29, 1996 between the Company
and William W. Chorske. (Incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1996, File No 0-25530).
10.12 Stock Option Agreement, dated April 29, 1996, between the
Company and William W. Chorske. (Incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1996, File No. 0-25530).
10.13 Agreement, dated June 4, 1996, between the Company and Jeffrey
B. Comer. (Incorporated by reference to Exhibit 10.21 of the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996, File No. 0-25530).
10.14 Non-Statutory Stock Option Agreement, dated June 6, 1995,
between the Company and Jeffrey B. Comer. (Incorporated by
reference to Exhibit 10.23 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996, File No.
0-25530).
10.15 Agreement, dated June 5, 1996, between the Company and David
W. Haskin. (Incorporated by reference to Exhibit 10.24 of the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996, File No. 0-25530).
10.16 Agreement, dated September 1, 1996, between the Company and
William Knopf, M.D. (Incorporated by reference to Exhibit 10.1
of the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1996, File No. 0-25530).
10.17 Non-Statutory Stock Option Agreement dated September 1, 1996,
between the Company and William Knopf, M.D. (Incorporated by
reference to Exhibit 10.3 of the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1996, File No.
0-25530).
10.18 Non-Statutory Stock Option Agreement, dated September 1, 1996,
between the Company and Donna J. Edmonds. (Incorporated by
reference to Exhibit 10.29 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996, File No.
0-25530).
10.19 Agreement, dated September 25, 1996, between the Company and
Donna J. Edmonds (Incorporated by reference to Exhibit 10.28
of the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996, File No. 0-25530).
10.20 Agreement, dated December 18, 1996, between the Company and
National Jewish Center (confidential portions have been
omitted and filed with the Secretary of the Commission).
(Incorporated by reference to Exhibit 10.30 of the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1996, File No. 0-25530).
10.21 Technical Support Agreement, dated as of December 18, 1996,
between the Company and National Jewish Center. (Incorporated
by reference to Exhibit 10.31 of the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996, File No.
0-25530).
38
<PAGE>
EXHIBIT DESCRIPTION (METHOD OF FILING)
- ------- ------------------------------
NO.
- ---
10.22 Non-Statutory Stock Option Agreement, dated March 4, 1997,
covering 26,000 shares between the Company and APF, LLC.
(Incorporated by reference to Exhibit 10.39 of the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1996, File No. 0-25530).
10.23 Non-Statutory Stock Option Agreement, dated March 4, 1997,
covering 10,333 shares between the Company and APF, LLC.
(Incorporated by reference to Exhibit 10.40 of the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1996, File No. 0-25530).
10.24 Non-Statutory Stock Option Agreement, dated March 24, 1997,
covering 550,000 shares between the Company and APF, LLC.
(Incorporated by reference to Exhibit 10.38 of the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1996, File No. 0-25530).
10.25 Master Agreement, dated March 25, 1997, among the Company,
Anthony Furnary, M.D. and APF, LLC. (Incorporated by reference
to Exhibit 10.35 of the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996, File No. 0-25530).
10.26 Modification Agreement, dated March 25, 1997, among the
Company, Anthony Furnary, M.D. and APF, LLC. (Incorporated by
reference to Exhibit 10.36 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996, File No.
0-25530).
10.27 Agreement, dated March 28, 1997 between The Company and
Atlanta Cardiology Group, P.C. (Incorporated by reference to
Exhibit 10.32 of the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996, File No. 0-25530).
10.28 Convertible Subordinated Promissory Note, dated March 28,
1997, issued by the Company to The Atlanta Cardiology Group,
PC. (Incorporated by reference to Exhibit 10.33 of the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996, File No. 0-25530).
10.29 Mutual Release, dated March 28, 1997, between the Company and
The Atlanta Cardiology Group, P.C. (Incorporated by reference
to Exhibit 10.34 of the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996, File No. 0-25530).
10.30 Note dated May 12, 1997 in the principal amount of $1,000,000
issued to Medtronic, Inc. (Incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1997, File No. 0-25530).
10.31 Employment Agreement, dated August 18, 1997, between the
Company and David J. Chinsky. (Incorporated by reference to
Exhibit 10.6 of the Company's Current Report on Form 8-K dated
November 26, 1997, File No. 0-25530).
10.32 Letter Agreement, dated November 10, 1997, among the Company,
APF, LLC and Anthony P. Furnary, M.D. (Incorporated by
reference to Exhibit 10.3 of the Company's Current Report on
Form 8-K dated November 26, 1997, File No. 0-25530).
39
<PAGE>
EXHIBIT DESCRIPTION (METHOD OF FILING)
- ------- ------------------------------
NO.
- ---
10.33 Letter Agreement, dated November 10, 1997, between the Company
and the Atlanta Cardiology Group, P.C. (Incorporated by
reference to Exhibit 10.4 of the Company's Current Report on
Form 8-K dated November 26, 1997, File No. 0-25530).
10.34 Letter Agreement, dated November 10, 1997, between the Company
and Medtronic, Inc. (Incorporated by reference to Exhibit 10.5
of the Company's Current Report on Form 8-K dated November 26,
1997, File No. 0-25530).
10.35 Amendment to Employment Agreement, dated November 13, 1997,
between the Company and David J. Chinsky. (Incorporated by
reference to Exhibit 10.7 of the Company's Current Report on
Form 8-K dated November 26, 1997, File No. 0-25530).
10.36 Non-Statutory Stock Option Agreement, dated November 13, 1997,
between the Company and David J. Chinsky. (Incorporated by
reference to Exhibit 10.8 of the Company's Current Report on
Form 8-K dated November 26, 1997, File No. 0-25530).
10.37 Securities Purchase Agreement, dated as of November 14, 1997,
among the Company and the Purchasers. Omitted from this
Exhibit, as filed, are the exhibits and schedules referenced
in such agreement. The Company will furnish supplementally a
copy of any such exhibits and schedules to the Commission upon
request. (Incorporated by reference to Exhibit 10.1 of the
Company's Current Report on Form 8-K dated November 26, 1997,
File No. 0-25530).
10.38 Agreement dated August 17, 1998, between the Company and
William W. Chorske. (Incorporated by reference to Exhibit
10.38 to the Company's Registration Statement on Form SB-2,
File No. 333-67061).
10.39 Restricted Stock Agreement, dated August 17, 1998, between the
Company and William W. Chorske. (Incorporated by reference to
Exhibit 10.39 to the Company's Registration Statement on Form
SB-2, File No. 333-67061).
10.40 Separation and Release Agreement, dated as of August 26, 1998,
between the Company and David J. Chinsky. (Incorporated by
reference to Exhibit 10.40 to the Company's Registration
Statement on Form SB-2, File No. 333-67061).
10.41 Engagement Agreement, dated as of August 20, 1998, between the
Company and Manchester Financial Group, Inc. (Incorporated by
reference to Exhibit 10.41 to the Company's Registration
Statement on Form SB-2, File No. 333-67061).
10.42 Retainer Agreement, dated as of August 22, 1998, between the
Company and Manchester Business Services, Inc. (Incorporated
by reference to Exhibit 10.42 to the Company's Registration
Statement on Form SB-2, File No. 333-67061).
10.43 Conversion Agreement dated February 17, 1999 by and between
the Company and The Atlanta Cardiology Group, P.C. (Filed
herewith).
10.44 Conversion Agreement dated February 23, 1999 by and between
the Company and Medtronic, Inc. (Filed herewith).
40
<PAGE>
EXHIBIT DESCRIPTION (METHOD OF FILING)
- ------- ------------------------------
NO.
- ---
23.1 Consent of Independent Auditors. (Filed herewith.)
27.1. Amended Financial Data Schedule. (Filed herewith.)
41
EXHIBIT 10.43
CONVERSION AGREEMENT
THIS CONVERSION AGREEMENT ("Agreement"), is made and entered effective
as of February 17, 1999, among LifeRate Systems, Inc., a Minnesota corporation
(the "Company"), and The Atlanta Cardiology Group, a professional corporation
organized under the laws of the State of Georgia ("ACG").
A. ACG holds a Convertible Subordinated Note, dated March 28, 1997,
payable by the Company in the principal amount of Two Million Two Hundred Fifty
Thousand Dollars ($2,250,000.00), as amended pursuant to a letter agreement,
dated November 10, 1997 (as amended, the "Note").
B. The Company has ceased operations and is winding down its business.
C. ACG is willing to enter into this Agreement in full satisfaction of
the Note so to facilitate the winding down of the Company's business.
Accordingly, in consideration of the foregoing, the mutual promises set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. CONVERSION OF NOTE. ACG hereby agrees to convert all outstanding
principal under the Note into 677,710 shares of Common Stock (the "Conversion
Securities") of the Company at a conversion price of $3.32 per share. ACG
acknowledges no interest is due under the Note. The issuance of the Conversion
Securities shall constitute full payment of all amounts due under the Note and
all obligations of the Company thereunder. Promptly after execution of this
Agreement, ACG shall surrender the original Note to the Company, and the Company
shall instruct its transfer agent and registrar to issue to ACG a stock
certificate representing 677,710 shares of Common Stock. The covenants contained
in Section 8 of the Note are hereby terminated.
2. REPRESENTATIONS AND WARRANTIES OF ACG. ACG represents and warrants
to the Company as follows:
(a) The Conversion Securities are being acquired for
investment for ACG's own account and not with the view to, or for
resale in connection with, any distribution or public offering thereof.
ACG understands that the Conversion Securities 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 and others upon these exemptions is predicated
in part upon this representation by ACG. ACG further understands that
the Conversion Securities 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.
(b) ACG's principal office is at 5665 Peachtree, Dunwoody
Road, N.E., Atlanta, Georgia 30342. ACG qualifies as an "accredited
investor," as defined in Rule 501 of Regulation D under the Securities
Act. ACG acknowledges that the Company has made available to ACG 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 the
terms and conditions of the issuance of securities contemplated by this
Agreement 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 ACG.
ACG is able to bear the loss of its entire investment in the Conversion
Securities without any material adverse affect on its business,
operations or prospects, and has such knowledge and experience of
financial and business matters that it is capable of evaluating the
merits and risks of the investment to be made by it pursuant to this
Agreement.
42
<PAGE>
(c) This Agreement has been duly authorized by all necessary
action on the part of ACG, has been duly executed and delivered by ACG
and is a valid and binding agreement of ACG.
3. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns, but neither this Agreement nor any of the rights and obligations of the
parties hereunder shall be assigned (whether voluntarily, involuntarily, by
operation of law or otherwise), in whole or in part, by any party without the
prior written consent of each other party, and neither this Agreement nor any
provision hereof may be amended, modified, waived or discharged without the
written consent of the party against whom enforcement of such amendment,
modification, waiver or discharge is sought.
4. MISCELLANEOUS.
(a) This Agreement embodies the entire agreement and
understanding of the parties relative to the subject matter hereof and
supersedes any and all other agreements and understanding, whether
written or oral, relative to the matters discussed herein.
(b) This Agreement shall be construed and enforced in
accordance with the laws of the State of Minnesota.
(c) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one in 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/ F.G. Hamilton
-------------------------------------
F.G. Hamilton
Its Acting CEO
THE ATLANTA CARDIOLOGY GROUP, P.C.
By /s/ Dr. William Knopf
-------------------------------------
Dr. William Knopf
Its President
43
EXHIBIT 10.44
CONVERSION AGREEMENT
THIS CONVERSION AGREEMENT ("Agreement"), is made and entered effective
as of February 23, 1999, among LifeRate Systems, Inc., a Minnesota corporation
(the "Company"), and Medtronic, Inc. a Minnesota corporation ("Medtronic").
A. Medtronic holds a Convertible Promissory Note, dated May 12, 1997,
of the Company in the principal amount of One Million Dollars ($1,000,000.00),
as amended pursuant to a letter agreement, dated November 10, 1997 (as amended,
the "Note").
B. The Company has ceased operations and is winding down its business.
C. Medtronic is willing to enter into this Agreement in full
satisfaction of the Note so to facilitate the winding down of the Company's
business.
Accordingly, in consideration of the foregoing, the mutual promises set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. PARTIAL PAYMENT ON THE NOTE. Promptly following execution of this
Agreement, the Company shall pay to Medtronic the amount of Sixty-Two Thousand
Dollars ($62,000) as a principal payment under the Note. After such payment the
principal amount due under the Note shall be Nine Hundred Thirty-Eight Thousand
Dollars ($938,000) (the "New Principal Amount").
2. CONVERSION OF NOTE. Medtronic hereby agrees that effective upon the
payment, of $62,000 pursuant to Section 1, the New Principal Amount will
automatically convert into 625,333 shares of Common Stock of the Company (the
"Conversion Securities") at a conversion price of $1.50 per share. Medtronic
acknowledges no interest is due under the Note. The cash payment of $62,000 and
the issuance of the Conversion Securities shall constitute full payment of all
amounts due under the Note and all obligations of the Company thereunder. Upon
the payment of $62,000 pursuant to Section 1, Medtronic shall surrender the
original Note to the Company, and the Company shall instruct its transfer agent
and registrar to issue to Medtronic a stock certificate representing 625,333
shares of Common Stock.
3. REPRESENTATIONS AND WARRANTIES OF MEDTRONIC. Medtronic represents
and warrants to the Company as follows:
(a) The Conversion Securities are being acquired for
investment for Medtronic's own account and not with the view to, or for
resale in connection with, any distribution or public offering thereof.
Medtronic understands that the Conversion Securities 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 and others upon these exemptions
is predicated in part upon this representation by Medtronic. Medtronic
further understands that the Conversion Securities 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.
(b) Medtronic's principal office is at 7000 Central Avenue
N.E., Minneapolis, Minnesota 55432-3576. Medtronic qualifies as an
"accredited investor," as defined in Rule 501 of Regulation D under the
Securities Act. Medtronic acknowledges that the Company has made
available to Medtronic 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 the terms and conditions of the issuance of securities
contemplated by this Agreement and to obtain any additional information
(which the Company
44
<PAGE>
possesses or can acquire without unreasonable effort or expense) as may
be necessary to verify the accuracy of information furnished to
Medtronic. Medtronic is able to bear the loss of its entire investment
in the Conversion Securities without any material adverse affect on its
business, operations or prospects, and has such knowledge and
experience of financial and business matters that it is capable of
evaluating the merits and risks of the investment to be made by it
pursuant to this Agreement.
(c) This Agreement has been duly authorized by all necessary
action on the part of Medtronic, has been duly executed and delivered
by Medtronic and is a valid and binding agreement of Medtronic.
4. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns, but neither this Agreement nor any of the rights and obligations of the
parties hereunder shall be assigned (whether voluntarily, involuntarily, by
operation of law or otherwise), in whole or in part, by any party without the
prior written consent of each other party, and neither this Agreement nor any
provision hereof may be amended, modified, waived or discharged without the
written consent of the party against whom enforcement of such amendment,
modification, waiver or discharge is sought..
5. MISCELLANEOUS.
(a) This Agreement embodies the entire agreement and
understanding of the parties relative to the subject matter hereof and
supersedes any and all other agreements and understanding, whether
written or oral, relative to the matters discussed herein.
(b) This Agreement shall be construed and enforced in
accordance with the laws of the State of Minnesota.
(c) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one in 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/ F.G. Hamilton
---------------------------------------
F.G. Hamilton
Its Acting CEO
MEDTRONIC, INC.
By /s/ Michael Ellwein
---------------------------------------
Michael Ellwein
Its Vice President, Chief Development Officer
45
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-02856) pertaining to the LifeRate
Systems, Inc. 1993 Stock Option Plan, as amended, in the Registration
Statement on Form S-8 (No. 333-06783) pertaining to the LifeRate
Systems, Inc. Employee Stock Option Plan and in the Registration
Statement on Form S-3 (No. 333-04939) dated June 21, 1996, of our
report dated March 2, 1999, with respect to the financial statements
of LifeRate Systems, Inc. included in the Annual Report on Form 10-KSB
for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 29, 1999
46
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