SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
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, 1999
or
( ) Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
(Exact name of small business issuer as specified in its charter)
COMMISSION FILE NO. 0-25530
--------------------------
LIFERATE SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
MINNESOTA 41-1682994
(State of Incorporation) (I.R.S Employer Identification No.)
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 Company has adopted the liquidation basis of accounting as of October
1, 1998.
As of March 10, 2000, 14,575,043 shares of Common Stock of the Registrant
were outstanding, and the aggregate market value of the Common Stock of the
Registrant as of that date (based upon the average between the closing bid and
asked prices for the Common Stock on that date), excluding shares owned
beneficially by executive officers, directors and greater-than-5% shareholders,
was approximately $3,998,829.
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, 2000 the Company does not have any employees. Although the Company is
continuing to service one customer, it is not marketing or selling its products.
Accordingly, the Company does not expect to generate any meaningful amount of
revenue. During 1999, the Company completed the process of eliminating expenses,
collecting receivables, and negotiating the termination of satisfaction of all
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. In August 1999, this agreement was canceled. 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 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
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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 on research and
development in the year ended December 31, 1997.
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, 2000, the Company does not have any employees. Bruce H.
Senske, 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.
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.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company as of March 1, 2000 are as
follows:
NAME AGE POSITION
---- --- --------
Bruce H. Senske 45 Acting Chief Executive Officer
BRUCE H. SENSKE. Mr. Senske has been a Vice President at Manchester
Companies since June 1998. Mr. Senske served as the President, Chief Executive
Officer, Chief Financial Officer and Treasurer of U-Ship, Inc. from January 1993
to June 1998, with the exception of June and July 1997. From 1988 to 1992, Mr.
Senske was Vice President of Strategic Marketing and Product Planning at Vocam
Systems, Inc., which became a division of the Pitney Bowes Company, a
manufacturer of transportation management software systems, in 1990.
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 the
OTC Bulletin Board. These quotations reflect inter-dealer prices without retail
markup, markdown or commission and may not necessarily represent actual
transactions.
COMMON STOCK
HIGH: LOW:
----- ----
1998:
First Quarter 3/4 25/64
Second Quarter 43/64 15/64
Third Quarter 27/64 1/16
Fourth Quarter .12 .01
1999:
First Quarter .04 .011
Second Quarter .20 .012
Third Quarter .45 .05
Fourth Quarter .55 .12
As of March 10, 2000, there were approximately 114 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
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part-time employee. The Company is servicing one customer 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 1999 were focused on reducing
expenses, collecting receivables, and negotiating the termination or
satisfaction of all its remaining obligations. The Company presently does not
have any employees. Management, customer support and accounting functions are
performed by outside contractors. 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.
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.
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, and $36,500 in 1998 and 1997, 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.
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.
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
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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.
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 was $31,200 and $299,300, respectively.
The decrease in 1998 was due to renegotiating the convertible notes in November
1997 to become 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 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.
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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, 1999, the Company had $100,800 in cash and cash
equivalents, a $604,100 decrease from December 31, 1998. For the year ended
December 31, 1999, the Company used $546,000 to fund operations and settle the
Company's obligations, $62,000 for payments on notes payable and received $3,900
from sales of fixed assets. 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
2000. 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 computer
software or hardware to recognize or properly process dates ending in "00."
During 1999, most companies focused significant attention 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 the Year 2000
problem has not materially impacted 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:
Financial Statements: Page
- --------------------- ----
Report of Independent Auditors...............................................17
Statement of Net Assets (Liabilities) in Liquidation as of
December 31, 1999 and 1998.................................................18
Statement of Changes in Net Assets (Liabilities) in Liquidation
for the period from October 1, 1998 through December 31, 1998
and the year ended December 31, 1999........................................19
Statements of Operations for the nine months ended September 30, 1998
and the year ended December 31, 1997 (Going Concern Basis)..................20
Statements of Shareholders' Equity (deficit) for the nine months ended
September 30, 1998 and the year ended December 31, 1997
(Going Concern Basis).......................................................21
Statements of Cash Flow for the year ended December 31, 1999 and
three months ended December 31, 1998 (Liquidation Basis) and for
the nine months ended September 30, 1998
and the year ended December 31, 1997 (Going Concern Basis)..................22
Notes to Financial Statements................................................23
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
(a) DIRECTORS OF THE REGISTRANT
The directors of the Company as of March 10, 2000 are as follows:
NAME AGE POSITION
---- --- --------
Mark W. Sheffert 52 Director and Chairman of the Board
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."
In August, 1999 all directors resigned except for the Chairman of the
Board. During 1999, the Board of Directors met two times. All of the directors
attended more than 75% of the meetings of the Board that occurred while they
were members of the Board.
During 1999, the committees of the Board consisted of the Audit
Committee and the Compensation Committee. During 1999, neither Committee met or
took action by written consent.
Prior to 1998, the Company did not pay fees to directors of the
Company. Beginning in 1998, the Company paid two outside directors $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
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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, 1999, 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 1999 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------ ------------
OTHER ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (4) OPTIONS (5)
- --------------------------- ---- ------ ----- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bruce H. Senske (1) 1999 $ 55,000 -- -- -- --
ACTING CHIEF EXECUTIVE OFFICER
F.G. Hamilton (1) 1999 $ 40,000 -- -- -- --
FORMER ACTING CHIEF EXECUTIVE 1998 $ 40,000 -- -- -- --
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>
- ------------------------
(1) The services of Mr. Senske and 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 $5,000. see "Certain Transactions -
Manchester Companies." This fee was reduced from $10,000 in August
1999. Mr. Hamilton resigned in May 1999 and was replaced by Mr. Senske.
(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 $65,000).
(4) "Other Annual Compensation" paid to Mr. Chinsky is comprised of an
apartment, car and travel allowance.
(5) "All Other Compensation" paid to Mr. Chinsky is comprised entirely of
matching contributions to the Company's 401(k) plan.
OPTION GRANTS AND EXERCISES IN 1999
No options were granted to or exercised by the Named Executive Officers
in 1999. The following table provides information as of December 31, 1999 as to
the value of options held by each of the Named Executive Officers.
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AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FY-END(#)(1) MONEY OPTIONS AT FY-END($)(2)
----------------------- -----------------------------
NAME (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
- ---- --------------------------- -----------------------------
Bruce H. Senske 0/0 $0/0
F.G. Hamilton 0/0 $0/0
David J. Chinsky 216,666/0 $0/0
- ------------------------
(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, 1999 of $0.37, 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 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.
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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 10, 2000, unless
otherwise indicated, by (a) each shareholder who is known by the Company to own
beneficially more than 5% of the outstanding Common Stock, (b) each director,
(c) each of the Named Executive Officers and (d) all directors and executive
officers of the Company as a group.
SHARES OF COMMON STOCK
NAME BENEFICIALLY OWNED(1)
- ---- ------------------------------------
AMOUNT PERCENT OF CLASS(2)
------ -------------------
Miller, Johnson & Kuehn Inc............. 6,907,630(3) 46.4%
Special Situations Funds................ 5,000,000(4) 25.5%
John R. Albers.......................... 1,288,333(5) 8.5%
Aaron Boxer Rev. Trust.................. 1,696,500(6) 11.3%
Medtronic Inc........................... 1,325,333(7) 9.0%
F.G. Hamilton........................... 0 0
Bruce H. Senske......................... 0 0
Mark W. Sheffert........................ 0 0
David J. Chinsky........................ 476,666(8) 3.2%
All directors and executive
officers as a group (2 persons)......... 0 0
- ------------------------
(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
10, 2000.
(3) As set forth in a Schedule 13G/A filed with the Securities and Exchange
Commission on February 22, 2000 and in a Schedule 13D filed with the
Securities and Exchange Commission on December 28, 1998, this amount
consists of shares held by the principals and related parties of Miller
Johnson Kuehn Inc.: (i) 128,715 shares of Common Stock held by David B.
Johnson; (ii) 1,990,000 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) 1,004,500
shares of Common Stock held by Stanley D. Rahm; (viii) 304,305 shares
of Common Stock held by Jeffrey D. Rahm; and (ix) 35,800 shares of
Common Stock held by the Mary Ann Rahm Trust. The above amount also
includes 305,840 shares that Miller Johnson and Kuehn Inc. has the
right to acquire within 60 days pursuant to the exercise of warrants.
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(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) As set forth in a Schedule 13G/A filed with the Securities and Exchange
Commission on February 22, 2000, this amount consists of 1,269,000
shares of Common Stock held by the Aaron Boxer Revocable Trust and
includes 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 c/o Miller Johnson & Kuehn
Inc., 5500 Wayzata Blvd., Suite 800, Minneapolis, MN 55416.
(7) As set forth in a Schedule 13G/A filed with the Securities and Exchange
Commission on February 11, 2000, this amount consists of 1,225,333
shares of Common Stock held by Medtronic, Inc. and 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) 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. In August
1999, this agreement was canceled.
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. Bruce Senske, the Company's Acting Chief
Executive Officer, is an associate of MBSI and is serving as the Company's
Acting Chief Executive Officer under the Retainer Agreement. The term of the
Retainer Agreement is month-to-month unless terminated in writing upon 30 days
notice by either party. In exchange for such services, the Company has agreed to
pay MBSI a monthly fee in the amount of $10,000 and reimburse MBSI for all
reasonable out-of-pocket expenses. In August 1999, the monthly fee was reduced
to $5,000.
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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, 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
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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
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.
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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.
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
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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
31 to 36 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 30, 2000, 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.
(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.
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(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, 1999.
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REPORT OF INDEPENDENT AUDITORS
Board of Directors Life
Rate Systems, Inc.
We have audited the accompanying statements of operations, shareholders
equity (deficit) and cash flows of LifeRate Systems, Inc. for the nine months
ended September 30, 1998 and the year ended December 31, 1997. In addition, we
have audited the statement of net assets (liabilities) in liquidation as of
December 31, 1999 and 1998, and the related statements of changes in net assets
(liabilities) in liquidation and cash flows in liquidation for the period from
October 1, 1998 to December 31, 1998 and the year ended December 31, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
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, 1999 and 1998, the results of operations and cash flows
for the nine months ended September 30, 1998 and the year ended December 31,
1997, and the changes in net assets (liabilities) in liquidation and cash flows
in liquidation for the period from October 1, 1998 to December 31, 1998, and the
year ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 15, 2000
17
<PAGE>
LifeRate Systems, Inc.
Statement of Net Assets (Liabilities) in Liquidation
(Liquidation Basis)
DECEMBER 31,
1999 1998
---- ----
ASSETS
Cash and cash equivalents $100,800 $ 704,900
Accounts receivable 5,800 40,600
Prepaid expenses and other current assets 2,300 49,000
Computer equipment, net 4,300 11,900
-------- -----------
Total assets $113,200 $ 806,400
======== ===========
LIABILITIES
Accounts Payable and other accrued liabilities 1,300 81,400
Other current liabilities 4,600 367,900
Reserve for estimated costs during period
of liquidation 72,000 209,000
Long term debt and capital lease obligations -- 3,137,000
-------- -----------
Total Liabilities 77,900 3,795,300
-------- -----------
Net assets (liabilities) $ 35,300 $(2,988,900)
======== ===========
SEE ACCOMPANYING NOTES.
18
<PAGE>
LifeRate Systems, Inc.
Statement of Changes in Net Assets (Liabilities)
in Liquidation for the period from
October 1, 1998 through December 31, 1998
and the year ended December 31, 1999
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)
Changes in net liabilities 3,024,200
-----------
Net assets in liquidation as of December 31, 1999 $ 35,300
===========
SEE ACCOMPANYING NOTES.
19
<PAGE>
LifeRate Systems, Inc.
Statements of Operations
(Going Concern Basis)
NINE MONTHS ENDED Year ended
SEPTEMBER 30, December 31,
1998 1997
---------------- ------------
Net revenues $ 384,300 $ 620,300
Cost of revenues 457,000 782,500
------------ ------------
Gross profit (72,700) (162,200)
Operating expenses:
Sales and marketing 422,200 1,279,700
Research and development 530,300 1,052,400
General and administrative 1,348,100 2,402,500
------------ ------------
Loss from operations (2,373,300) (4,896,800)
Interest income 52,600 34,000
Interest expense (31,200) (299,300)
------------ ------------
Net loss before extraordinary item (2,351,900) (5,162,100)
Extraordinary item - debt restructuring -- 200,000
------------ ------------
Net loss $ (2,351,900) $ (4,962,100)
============ ============
Net loss per share before
extraordinary item $ (0.19) $ (1.18)
Extraordinary item per share -- 0.05
------------ ------------
Net loss per share - basic and diluted $ (0.19) $ (1.13)
============ ============
Weighted average number of
common shares outstanding 12,065,296 4,387,405
============ ============
SEE ACCOMPANYING NOTES.
20
<PAGE>
LifeRate Systems, Inc.
Statements of Shareholders' Equity (Deficit)
(Going Concern Basis)
<TABLE>
<CAPTION>
Common Stock Issued Stock
------------ ------ Accumulated Subscriptions
Shares Amounts Deficit Receivable Total
------ ------- ------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance December 31, 1996 3,811,639 $ 17,260,700 $(17,108,300) -- $ 152,400
Private placement of common stock, net of
offering costs of $177,700 4,290,000 1,964,400 -- -- 1,964,400
Conversion of notes payable to common stock, net of
unamortized discount of $31,800 365,550 525,900 -- -- 525,900
Value of warrants issued to holders of notes -- 204,500 -- -- 204,500
Stock options exercised 17,811 33,400 -- -- 33,400
Value of stock options granted for services rendered -- 27,500 -- -- 27,500
Net loss -- -- (4,962,100) -- (4,962,100)
---------- ------------ ------------ ------- ------------
Balance December 31, 1997 8,485,000 20,016,400 (22,070,400) -- (2,054,000)
Private placement of common stock, net of
offering costs of $134,700 4,000,000 1,955,300 -- -- 1,955,300
Common stock issued as part of lawsuit settlement 325,000 21,100 -- -- 21,100
Employee stock sales 2,000 600 -- -- 600
Net loss -- -- (2,351,900) -- (2,351,900)
---------- ------------ ------------ ------- ------------
Balance September 30, 1998 12,812,000 $ 21,993,400 $(24,422,300) $ -- $ (2,428,900)
========== ============ ============ ======= ============
</TABLE>
SEE ACCOMPANYING NOTES
21
<PAGE>
LifeRate Systems, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
THREE NINE
MONTHS MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER SEPTEMBER DECEMBER
1999 31, 1998 30, 1998 31, 1997
(LIQUIDATION (LIQUIDATION (GOING CONCERN (GOING CONCERN
BASIS) BASIS) BASIS) BASIS)
------ ------ ------ ------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Decrease in net liabilities in liquidation $ 3,024,300 $ 140,000 -- --
Net loss -- -- $(2,351,900) $(4,962,100)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation 6,500 24,900 202,600 309,700
Amortization of software development costs -- -- 30,400 50,500
Amortization of discounts on long-term debt 5,600 8,300 25,100 49,400
Value of stock options granted for services rendered -- -- -- 27,500
Value of warrants issued to note holders -- -- -- 43,500
Writedown of software development costs to net
Realizable value -- 82,800 -- --
Stock issued for lawsuit settlement -- -- 21,100 --
Long term debt converted to common stock (3,080,600) -- -- --
(Gain) loss on sale of furniture and equipment (2,900) 148,400 -- --
Changes in operating assets and liabilities:
Accounts receivable 34,800 64,200 173,400 (135,800)
Prepaid and other current assets 46,700 32,800 (22,000) 68,200
Accounts payable (48,000) (49,400) 27,100 (180,100)
Accrued compensation (32,100) (145,400) (25,800) 159,400
Accrued consulting fees -- -- (5,000) (81,100)
Accrued royalties -- -- (19,700) (16,400)
Decrease in estimated liquidation expenses (137,000) (491,000) -- --
Other current liabilities (214,400) 339,100 25,600 (70,700)
Deferred revenue (148,900) (157,100) (15,200) 20,500
Deferred rent -- -- (4,900) (11,900)
----------- ----------- ----------- -----------
Net cash used in operating activities (546,000) (2,400) (1,939,200) (4,729,400)
INVESTING ACTIVITIES
Software development costs -- -- (84,600) (28,600)
Purchase of furniture and equipment -- -- (23,800) (20,100)
Proceeds from sales of furniture and equipment 3,900 49,000 900 --
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities 3,900 49,000 (107,500) (48,700)
FINANCING ACTIVITIES
Payments on notes payable and capital leases (62,000) (4,800) (10,300) (265,000)
Proceeds from issuance of notes payable -- -- -- 1,737,500
Proceeds from issuance of common stock -- -- 1,955,900 1,997,800
----------- ----------- ----------- -----------
Net cash provided by (used by) financing activities (62,000) (4,800) 1,945,600 3,470,300
----------- ----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (604,100) 41,800 (101,100) (1,307,800)
Cash and cash equivalents at beginning of period 704,900 663,100 764,200 2,072,000
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 100,800 $ 704,900 $ 663,100 $ 764,200
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES
22
<PAGE>
LifeRate Systems, Inc.
Notes to Financial Statements
December 31, 1999
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. During 1999 the Company completed the
process of eliminating expenses, collecting receivables and negotiating the
termination or satisfaction of all its remaining obligations.
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.
COMPUTER EQUIPMENT
Computer equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets of three
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 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.
23
<PAGE>
LifeRate Systems, Inc.
Notes to Financial Statements
December 31, 1999
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues derived from software licenses are recognized upon execution of a
license agreement, delivery of the software product, reasonable assurance of
customer acceptance of the software and fulfillment of any other significant
contract obligations. Revenues derived from customer service and support
activities are deferred and recognized ratably over the term of the contract.
Revenues derived from software development contracts will be recognized using a
percentage of completion method based on meeting key milestones over the term of
the contract. Cash received as deposits on software license contracts is
recorded as deferred revenue in the accompanying balance sheet.
COST OF REVENUES
Cost of revenues includes royalty expense, amortization of capitalized software
expense and costs of customer support activities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from the estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure only provisions of FASB Statement No.
123, "Accounting for Stock-Based Compensation," but applies Accounting
Principles Board Opinion No. 25 (APB 25), and related interpretations in
accounting for its stock option plans. Under APB 25, when the exercise price of
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
4. LONG-TERM DEBT AND EXTRAORDINARY ITEM
Long-term debt consists of the following:
DECEMBER 31
1999 1998
-------------------------
Convertible subordinated note payable,
non-interest bearing , due April 2002 $ -- $2,250,000
Convertible promissory note payable,
non-interest bearing, due May 2002 -- 1,000,000
----------- ----------
-- 3,265,200
Less discount on Medtronic, Inc. note -- (113,000)
----------- ----------
$ -- $3,137,000
=========== ==========
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
24
<PAGE>
LifeRate Systems, Inc.
Notes to Financial Statements
December 31, 1999
4. LONG TERM DEBT AND EXTRAORDINARY ITEM (CONTINUED)
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 March 1999 the Company converted
the note into 677,710 shares of common stock at $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. In March 1999 the Company paid $62,000 against
the note and converted the remainder into 625,333 shares of common stock at
$1.50 per share.
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.
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, 1999, the Company had 8,745,840 warrants outstanding with
exercise prices ranging from $ .50 to $6.50. The warrants expire at various
dates ranging from March 2000 to January 2008.
25
<PAGE>
LifeRate Systems, Inc.
Notes to Financial Statements
December 31, 1999
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 issued 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 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>
1999 1998 1997
---------------------- ---------------------- ----------------------
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 248,822 $ 3.54 172,347 $ 5.14 409,441 $ 7.68
Granted -- -- 214,500 0.49 302,779 2.82
Exercised -- -- --
Canceled (18,200) 0.71 (138,025) 0.80 (539,873) 5.77
-------- -------- -------- -------- -------- --------
Outstanding at end of year 230,622 $ 3.76 248,822 $ 3.54 172,347 $ 5.14
======== ======== ======== ======== ======== ========
Options exercisable
at year-end 227,177 $ 3.78 223,966 $ 3.79 239,326 $ 7.03
======== ======== ======== ======== ======== ========
</TABLE>
At December 31, 1999, there were 519,378 shares available for grant under the
1993 Stock Option Plan.
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ --------------------------
WEIGHTED NUMBER
NUMBER AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OUTSTANDING AT REMAINING AVERAGE AT AVERAGE
OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1999 LIFE PRICE 1999 PRICE
--------------- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$0.34 to $0.65 72,500 8.5 Years $0.34 72,500 $0.34
$1.00 to $1.938 30,707 2.7 Years 1.33 30,707 1.33
$2.625 to $3.00 30,749 4.1 Years 2.87 27,304 2.90
$5.875 to $6.33 45,666 5.2 Years 5.99 45,666 5.99
$8.625 51,000 6.4 Years 8.625 51,000 8.625
------- -------
230,622 6.0 Years $3.76 227,177 $3.78
======= =======
</TABLE>
26
<PAGE>
LifeRate Systems, Inc.
Notes to Financial Statements
December 31, 1999
7. STOCK OPTIONS (CONTINUED)
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,
1999, 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 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, 1998 1997
------------------ ----
<S> <C> <C> <C>
Pro forma net loss $(2,544,600) $(5,332,400)
Pro forma loss per share -
basic and diluted $ (0.21) $ (1.22)
</TABLE>
The pro forma effect on the net loss for 1999, 1998 and 1997 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 and 1997 was estimated using the
Black-Scholes option pricing model with the following assumptions: no dividend
yield; a risk free interest rate of 5.0% and 5.5% during 1998 and 1997,
respectively; expected volatility of the market price of the Company's common
stock of 122% and 71% during 1998 and 1997, 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 and
1997 was $0.31 and $1.05 per share, respectively. The weighted average fair
value of non-plan options granted at market prices during the years ended
December 31, 1998 and 1997 was $0 and $0.90, 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.
27
<PAGE>
LifeRate Systems, Inc.
Notes to Financial Statements
December 31, 1999
8. INCOME TAXES
The tax effects of significant components of the Company's deferred tax assets
and liabilities are as follows:
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards $9,903,300 $9,825,900
Deferred revenue 1,800 61,400
Accrued salaries -- 12,800
Accrued reserve for liquidation expenses 28,800 83,600
---------- ----------
Valuation allowance 9,933,900 9,983,700
---------- ----------
(9,933,900) (9,983,700)
---------- ----------
$ -- $ --
========== ==========
A valuation allowance of 100% of tax benefits has been provided because of the
Company's history of operating losses. At December 31, 1999, the Company had net
operating loss carryforwards of approximately $24,718,000 that expire at various
times through the year 2014. 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 cancelation
charges. Rent expense for the years ended December 31, 1999, 1998, and 1997 was
$13,200, $301,100 and $255,700, 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. During 1999 the Company
negotiated a cancellation of the agreement requiring the letter of credit. The
balance at December 31, 1999 on the letter of credit was zero.
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
28
<PAGE>
LifeRate Systems, Inc.
Notes to Financial Statements
December 31, 1999
10. LICENSE, ROYALTY AND DEVELOPMENT AGREEMENTS (CONTINUED)
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 converted all
of the convertible subordinated note into common stock at a conversion rate of
$3.32 per share during 1999.
In July 1995, the Company entered into a license agreement with an advisor to
the Company. The agreement called for the Company to grant to the advisor a
license to utilize software developed by the advisor at one healthcare facility.
In addition, the Company agreed to pay to the advisor a royalty of 7.5% through
December 31, 1998, and 5% thereafter, on certain product sales. In connection
with the agreement, the Company granted the advisor options to purchase 26,000
shares of the Company's common stock at an exercise price of $4.50 per share. In
March 1997, this agreement was modified. Under the terms of the modified
agreement, after March 31, 1997, no royalties will be due until the sooner of
the Company reaching $20,000,000 of cumulative revenues or January 1, 1999, at
which time the Company will pay royalties of 3% of gross sales to the physician.
The Company will pay the physician royalties of 3.6% on all gross revenues once
the Company has reached $100,000,000 of gross revenues. In addition, the Company
agreed to make certain milestone payments aggregating $450,000 based upon the
Company reaching certain revenue goals and had agreed to pay the physician
$100,000 per year for the next five years under a consulting agreement. Also,
the Company granted the physician an option to purchase 550,000 shares of common
stock at $2.625 per share for assistance with the development of the Company's
system. The fair value of these options at the date of grant was $924,000. In
November 1997, the consulting agreement and the Company's obligation to make
certain milestone payments were canceled. Also, the option to purchase 550,000
shares of common stock was changed to 200,000 shares of common stock with an
exercise price of $1.00 per share.
The Company incurred royalty expense of $0, $0 and $36,500 in 1999, 1998 and
1997, 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
1999 1998 1997
---- ---- ----
Conversion of notes payable into
common stock $3,080,600 $ -- $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 of 44.3%, 16.1% and 15.7% of revenue.
29
<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 27, 2000 By: /s/ Bruce H. Senske
---------------------------------
Bruce H. Senske
Acting Chief Executive Officer
(Principal Executive and Accounting Officer)
By: /s/ Mark W. Sheffert
---------------------------------
Mark W. Sheffert
Chairman of the Board of Directors
and Director
30
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION (METHOD OF FILING)
- --- ------------------------------
3.1 Amended and Restated Articles of Incorporation, as amended.
(Incorporated by reference to Exhibit 3.1 of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997, File No.
0-25530).
3.2 Amended and Restated Bylaws, as amended. (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).
31
<PAGE>
EXHIBIT
NO. DESCRIPTION (METHOD OF FILING)
- --- ------------------------------
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. r (Incorporated by reference to Exhibit 10.2 of the
Company's Current Report on Form 8-K dated Decembe 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).
32
<PAGE>
EXHIBIT
NO. DESCRIPTION (METHOD OF FILING)
- --- ------------------------------
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 r Center. (Incorporated by reference to
Exhibit 10.31 of the Company's Annual Report on Form 10-KSB fo the year
ended December 31, 1996, File No. 0-25530).
10.22 Non-Statutory Stock Option Agreement, dated March 4, 1997, covering
26,000 shares between the Compan and APF, LLC. (Incorporated by
reference to Exhibit 10.39 of the Company's Annual Report on Form 10.22
10-KSB for the year ended December 31, 1996, File No. 0-25530).
33
<PAGE>
EXHIBIT
NO. DESCRIPTION (METHOD OF FILING)
- --- ------------------------------
10.23 Non-Statutory Stock Option Agreement, dated March 4, 1997, covering
10,333 shares between the Compan and APF, LLC. (Incorporated by
reference to Exhibit 10.40 of the Company's Annual Report on Form 10.23
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 10.27
December 31, 1996, File No. 0-25530).
10.28 Convertible Subordinated Promissory Note, dated March 28, 1997, issued
by the Company to The Atlanta Cardiology Group, PC. (Incorporated by
reference to Exhibit 10.33 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996, File No. 0-25530).
10.29 Mutual Release, dated March 28, 1997, between the Company and The
Atlanta Cardiology Group, P.C. (Incorporated by reference to Exhibit
10.34 of the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996, File No. 0-25530).
10.30 Note dated May 12, 1997 in the principal amount of $1,000,000 issued to
Medtronic, Inc. (Incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1997, File No. 0-25530).
10.31 Employment Agreement, dated August 18, 1997, between the Company and
David J. Chinsky. (Incorporated by reference to Exhibit 10.6 of the
Company's Current Report on Form 8-K dated November 26, 1997, File No.
0-25530).
10.32 Letter Agreement, dated November 10, 1997, among the Company, APF, LLC
and Anthony P. Furnary, M.D. (Incorporated by reference to Exhibit 10.3
of the Company's Current Report on Form 8-K dated November 26, 1997,
File No. 0-25530).
10.33 Letter Agreement, dated November 10, 1997, between the Company and the
Atlanta Cardiology Group, P.C. (Incorporated by reference to Exhibit
10.4 of the Company's Current Report on Form 8-K dated November 26,
1997, File No. 0-25530).
34
<PAGE>
EXHIBIT
NO. DESCRIPTION (METHOD OF FILING)
- --- ------------------------------
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. (Incorporated by reference to
Exhibit 10.43 of the Company's Annual Report on 10-KSB for the year
ended December 31, 1998, File No. 0-25530).
10.44 Conversion Agreement dated February 23, 1999 by and between the Company
and Medtronic, Inc. (Incorporated by reference to Exhibit 10.44 of the
Company's Annual Report on 10-KSB for the year ended December 31, 1998,
File No. 0-25530).
35
<PAGE>
EXHIBIT
NO. DESCRIPTION (METHOD OF FILING)
- --- ------------------------------
23.1 Consent of Independent Auditors. (Filed herewith.)
27.1. Financial Data Schedule. (Filed herewith.)
36
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 15, 2000, 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, 1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 27, 2000
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF EARNINGS AND THE BALANCE SHEET AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 101
<SECURITIES> 0
<RECEIVABLES> 6
<ALLOWANCES> 0
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<CURRENT-ASSETS> 107
<PP&E> 75
<DEPRECIATION> 71
<TOTAL-ASSETS> 113
<CURRENT-LIABILITIES> 78
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