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As filed with the Securities and Exchange Commission on May 17, 2000
Registration No. 333-32934
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT No. 1
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
LIFEF/X, INC.
(Exact Name of Registrant as Specified in its Charter)
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Nevada 7370 84-1385529
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
Lucille S. Salhany
153 Needham Street, Building One
Newton, Massachusetts 02464
Tel: (617) 964-4200
Fax: (617) 964-4233
(Name, Address, Telephone Number and Facsimile Number of Agent For Service of
Process)
Copies of all communications to:
DAVID C. FISCHER, ESQ. ANDREW H. SEIDEN, ESQ.
Loeb & Loeb LLP Loeb & Loeb LLP
345 Park Avenue 10100 Santa Monica Boulevard, Suite 2100
New York, New York 10154-0037 Los Angeles, California 90067
Tel: (212) 407-4000 Tel: (310) 282-2000
Fax: (212) 407-4990 Fax: (310) 282-2192
</TABLE>
Approximate Date of Proposed Sale to the Public: As soon as possible after the
Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
We amend this Registration Statement on any date or dates as may be necessary to
delay its effective date until we file a further amendment which specifically
states that this Registration Statement will become effective as provided in
Section 8(a) of the Securities Act or until this Registration Statement becomes
effective on a date the Securities and Exchange Commission, acting under Section
8(a), may determine.
<PAGE>
PRELIMINARY PROSPECTUS - SUBJECT TO COMPLETION
MAY __, 2000
17,510,053 Shares
LIFEF/X, INC.
Common Stock
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The Offering: Trading Market:
Our Common Stock is quoted on the OTC Bulletin Board under
17,510,053 shares of our Common Stock are being offered by the symbol "LEFX"
selling stockholders identified on pages 39 through 45.
This investment involves risk. See "Risk Factors" beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the securities or
determined that this prospectus is complete or accurate. Any representation to the contrary is a criminal offense.
- ----------------------------------------------------------------------------------------------------------------------------
The date of this Prospectus is May __, 2000
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TABLE OF CONTENTS
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Page
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Prospectus Summary......................................................... 1
Risk Factors............................................................... 4
Forward-looking Statements................................................. 8
Market Price for the Common Stock.......................................... 10
Dividend Policy............................................................ 10
Capitalization............................................................. 11
Management's Discussion and Analysis or Plan of Operation.................. 12
Business................................................................... 18
Management................................................................. 24
Security Ownership of Certain Beneficial Owners and Management............. 31
Certain Relationships and Related Transactions............................. 33
Description of Securities.................................................. 36
Plan of Distribution....................................................... 38
Selling Securityholders.................................................... 39
Shares Eligible for Future Sale............................................ 46
Legal Matters.............................................................. 46
Experts.................................................................... 46
Changes in Registrant's Certifying Accountants............................. 46
Additional Information..................................................... 47
Index to Consolidated Financial Statements ................................ F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
You should read this entire prospectus and our Consolidated Financial
Statements and related notes carefully. Unless the context requires otherwise,
"we," "us," "our" and similar terms, as well as references to "LifeF/X,",
refer to Lifef/x, Inc. and Lifef/x, Inc.'s subsidiary, Lifef/x Networks,
Inc.
. Our Company
Our LifeF/X technology enables computers to animate digital human faces
extremely realistically. If we successfully develop applications of our
LifeF/X technology, personal computers will be able to produce photo-realistic
3D digital animated human faces from ordinary photographs and transmit real-
time animations over the Internet using dial-up modem connections as slow as
28.8 kbps.
Our products are in the research and development phase. We have not yet
released any of these products, and we have no revenue to date, other than
revenue related to discontinued operations we have sold.
We believe we can provide software that can be used with all of the major
personal computer operating systems and will provide computer users with a means
of differentiated, personalized communications.
Our primary focus is to commercialize the LifeF/X technology for Internet
applications, including:
. electronic commerce
. e-mail, chatrooms
. distance learning
. bill presentment
. electronic direct mail
. training
. product support
. human resources
. supply chain software and
. PC gaming.
The LifeF/X technology enables the creation of interactive virtual humans as:
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. individual sales help
. guides
. corporate spokespersons
. teachers
. entertainers
. game characters
. personal digital human characters, and
. advertising personalities
In addition to our core business, we intend to explore other applications for
our technology, including applications in the entertainment industry.
. Secondary Offering
All of the common stock in this offering is being sold by stockholders; we
will receive none of the proceeds of this offering .
. Corporate Information
We were incorporated as Fin Sports U.S.A., Inc. (Fin Sports), in Nevada, on
June 18, 1987. We changed our name to Lifef/x, Inc. one day following
completion of a merger with Pacific Title/Mirage, Inc. (Pac Title/Mirage) on
December 14, 1999. Our corporate offices are located at 153 Needham Street,
Building One, Newton, Massachusetts 02464. Our telephone number at that
location is (617) 964-4200 and our facsimile number is (617) 964-4233. The URL
for our web site is http://www.lifefx.com.
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<PAGE>
Summary Financial Information
(In Thousands, except Share and Per Share Data)
The following table provides summary financial data for LifeF/X that is
derived from our financial statements. Because for accounting purposes Pac
Title/Mirage was considered to have acquired Fin Sports' subsidiary, the
financial statements presented below and elsewhere in this prospectus are those
of Pac Title/Mirage, not Fin Sports. The financial information below should be
read in connection with "Management's Discussion and Analysis or Plan of
Operation" and the Consolidated Financial Statements and related notes and other
financial information included in other portions of this prospectus.
The weighted average shares do not include any common stock equivalents
because such inclusion would be anti-dilutive. See the Consolidated Financial
Statements and related notes elsewhere in this prospectus for the
determination of shares used in computing basic and diluted net loss per share.
Information for 1997 includes only the period from the inception of Pac
Title/Mirage on June 1, 1997 through December 31, 1997.
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Years Ended December 31, Three Months Ended March 31,
------------------------------ -----------------------------
1997 1998 1999 1999 2000
------- --------- -------- --------- ----------
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Statement of Operations Data: (Unaudited)
Revenue.................................. $ -- $ -- $ -- $ -- $ --
Loss from continuing operations.......... $ (658) $ (1,444) $ (14,065) $ (373) $ (1,726)
Loss on discontinued operation........... $ (370) $ (4,061) $ (18,552) $(20,552) $ --
Net loss................................. $ (1,028) $ (5,505) $ (32,617) $(20,925) $ (1,726)
Net loss per common share on
a basic and diluted basis:
Continuing operations.................. $ (1.88) $ (4.12) $ (11.08) $ (1.07) $ (.09)
Discontinued operation................. $ (1.06) $ (11.60) $ (14.61) $ (58.70) $ --
-------- -------- ---------- -------- -----------
$ (2.94) $ (15.72) $ (25.69) $ (59.77) $ (.09)
======== ======== ========== ======== ===========
Weighted average
common shares outstanding................ 350,107 350,107 1,269,824 350,107 19,000,127
======== ======== ========== ======== ===========
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As of December 31,
--------------------------------------- As of March 31,
1997 1998 1999 2000
---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
(Unaudited)
Balance Sheet Data
Working capital (deficiency).................. $ 110 $(4,571) $ 6,559 $13,981
Total assets.................................. $7,686 $ 8,144 $21,473 $16,156
Total liabilities............................. $ 713 $ 6,671 $10,820 $ 1,920
Shareholders' equity.......................... $6,972 $ 1,473 $10,653 $14,235
</TABLE>
3
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment in LifeF/X. The risks and uncertainties described below are not the
only ones facing LifeF/X, and there may be additional risks that we do not
presently know of or that we consider immaterial. All of these risks may impair
our business operations. If any of the following risks actually occurs, our
business, financial condition or results of operations could be materially
adversely affected. In such case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
We have no completed products and may be unable to complete a commercially
viable product.
All products we intend to introduce are currently in planning or research and
development . It may be more difficult or complicated to complete these
products than we now believe, so we may encounter delays or greater costs than
we expect or find that we cannot make any product at a commercially viable
price. Early stage ventures like LifeF/X have a high failure rate.
Before we can release any product, we must develop or acquire text-to-speech
software and integrate that software with our LifeF/X technology. Our failure
to successfully integrate text-to-speech technology would cause our product
offerings to fail.
We must develop or acquire text-to-speech software to complete our first
product offerings, and may be unable to do so economically. Our technical
personnel have little experience with text-to-speech technology.
No market exists or may develop for our planned products and services.
In the absence of a market for digital photo-realistic animation products and
services, our business will fail. We have only limited means to determine the
interest our products will generate. We expect this uncertainty to continue at
least to the second half of 2001, when we first expect to receive revenue from
our proposed products.
Our business will fail unless we establish market recognition quickly.
We believe it is imperative to our long term success that we obtain
significant Internet market share for our products and services, before other
competitors enter the Internet communication and entertainment media market. We
have very limited experience conducting marketing campaigns for technology
services, and we may fail to generate significant interest. We must make
substantial expenditures on product development, strategic relationships and
marketing initiatives in an effort to establish our brand awareness. We cannot
be certain that we will have sufficient resources to build our brand and realize
commercial acceptance of our products and services.
Substantial competition may prevent us from establishing market
recognition.
The market for computer-generated characters is new, and we expect it to be
competitive. A computer-generated character is a graphic image that is
displayed on a monitor and animated by software instructions. The principal
competitive products in the computer-generated character market that we know of
include Microsoft V-Chat 2.0, Microsoft Agent, Haptek, Famous Tech, Blaxxun,
Worlds Ultimate 3D Chat, Animatek International, Sven Technologies, Oz
Ineractive, Simberon Avatars, NetSage, Boston Dynamics, Extempo, Virtual Human,
Virtual Personalities, Virtual Celebrities, Radical Mail and Avatarme. Microsoft
has substantially more financial, technical, marketing, distribution and other
resources, greater name recognition, stronger market presence
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and longer operating histories than we do, which might result in greater market
acceptance of their products than ours . Additionally, Internet portals and
other Internet gatekeepers that control access to transactions could promote our
competitors or charge us substantial fees, reducing our revenue and increasing
our costs.
Release of inferior products by competitors could taint the market, creating
barriers to acceptance of our products, and causing us to fail.
Our existing or potential competitors could reduce our market opportunity by
establishing a first-mover advantage, even if achieved with inferior products.
This could result in loss of market share, confusion in the marketplace, or, if
the early products fail to meet market expectations, such products could
temporarily or permanently dampen user enthusiasm for our product offerings.
This could result in permanent inability for LifeF/X to successfully launch its
products and require substantial expenditures of funds to differentiate LifeF/X
from competitors.
Failure of a number of established Internet and consumer product companies to
adopt our technology standard would significantly curtail our growth.
We must pursue strategic partnerships with complementary businesses to gain
market acceptance for our technology. At present, we have no commitments or
agreements with any strategic partner.
As described below under "Business: Marketing and Distribution", we intend to
distribute free characters and software to gain consumer acceptance of our
products. Speedy distribution of the free products may require the cooperation
of web portals and e-mail providers.
In addition, our business plan contemplates our receiving substantial revenue
from corporate users and strategic partners.
We will need substantial additional funding in approximately 12 months.
We only have sufficient capital to fund operations through early 2001. We
cannot be certain of the amount of additional capital we will need.
Our future capital needs depend on many factors, including:
. the success and timing of our development efforts
. market acceptance of our LifeF/X technology
. the level of promotion and advertising required to launch our services
. changes in technology and
. unanticipated competition.
We cannot be certain that additional funds will be available when needed on
satisfactory terms, if at all.
Our business requires extremely technically qualified personnel. Our failure to
hire or retain key personnel would cause us to fail.
Development of the LifeF/X technology is highly technical and we depend on
key technical personnel, who combine specialized technical knowledge of photo-
realistic 3D digital human animation with broad knowledge of the Internet.
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Competition for qualified technical personnel is intense. Even though we have
been able to acquire the necessary resources to date, we cannot assure that we
can successfully locate, hire, assimilate and retain qualified key management
personnel needed for our business to be successful.
There are four key technical employees, the loss of any of whom would be a
setback to our product development schedule, although not necessarily fatal to
our long-term development efforts. Each of these key technical employees is
under contract to LifeF/X and incentivized with stock options.
If we are initially successful, we may have difficulty managing our growth.
Our reputation and our ability to attract, retain and serve our customers will
depend upon the reliable performance of both our planned Web site and our
infrastructure and systems. If we experience extensive interest in our
products and services, we may fail to meet the expectations of customers due to
the strains their demand will place on our infrastructure and systems. We have
only a limited basis upon which to evaluate the capability of our systems.
We do not own all of the LifeF/X technology.
We license a portion of the LifeF/X technology from Auckland UniServices
Limited (UniServices). Termination of our development relationship with
UniServices, which could occur if we fail to make development fee payments,
could substantially delay our introduction or distribution of our products.
Personal relationships of key personnel are important to LifeF/X's business and
prospects.
Dr. Ian Hunter is a director of, and technical consultant to, LifeF/X. Dr.
Hunter's brother, Peter Hunter, is one of the UniServices technical personnel
driving development of the technology LifeF/X licenses from UniServices. Peter
Hunter, as the leader of the UniServices scientific development team supporting
LifeF/X technology development, is also LifeF/X's key interface at UniServices.
Our relationship with UniServices is critical to our business and prospects. We
have an excellent working relationship with Ian Hunter, Peter Hunter and
UniServices. This positive relationship is an asset to LifeF/X but, conversely,
deterioration of the relationship between the brothers or our relationship with
either of them or with UniServices could delay our product development.
System failures could harm our business and operating results.
Download and sale of our planned LifeF/X product offerings from our planned
Web site depends on the efficient and uninterrupted operation of our computer
and communications hardware systems. Our systems and operations will be
vulnerable to damage or interruption from a number of sources, including fire,
flood, power loss, telecommunications failure, physical facility break-ins,
earthquakes and similar events. Our servers may also be vulnerable to computer
viruses, physical or electronic break-ins and similar disruptions. Any
substantial interruption in any of our systems could result in the loss of data
and could completely impair our ability to generate revenues from our planned
product offerings.
Online security failures could result in substantial litigation exposure,
putting us out of business.
A significant barrier to electronic commerce and communications is the secure
transmission of confidential information over public networks. Anyone who
circumvents our security measures could misappropriate
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confidential information or cause interruptions to our operations. We may be
required to expend significant capital and other resources to protect against
potential security breaches or to alleviate problems caused by any breach.
We face risks related to the Internet industry
Our failure to rapidly modify and improve our products would cause them to
become obsolete and cause our business to fail.
Because we are a technology provider, there will be continued demands to
improve the technology. While our technology would continue to have some value
without further improvements, that value would rapidly erode. To remain
competitive, we must continue to enhance and improve the responsiveness,
functionality and features of our LifeF/X product offerings prior to or
immediately following competitors' product upgrades. The Internet and the
electronic commerce industry are characterized by:
. rapid technological change
. changes in user and customer requirements and preferences and
. the emergence of new industry standards and practices.
We will have to expend substantial development resources to frequently upgrade
our LifeF/X technology and systems.
The success of our business will depend on acceptance by consumers of the
Internet as a medium for advertising, commerce and communications.
This practice is at an early stage of development and long-term market
acceptance is uncertain. We cannot predict the extent to which consumers will
be willing to shift their habits from traditional media to online media.
We may be unable to continue operations if burdensome government regulations are
adopted which apply to us.
We are not currently directly regulated by any domestic or foreign
governmental agency, other than regulations which apply to businesses
generally. However, due to the increasing popularity and use of the Internet, it
is possible that laws and regulations may be adopted with respect to the
Internet, relating to:
. defamation
. user privacy, and
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. trade regulation.
Defamation laws could be modified to make us liable for statements or actions
by standins created by others in the likeness of public figures or private
individuals, exposing us to significant litigation risk. Laws protecting user
privacy could prevent redistribution of our computer-generated digital human
characters (Standins), limiting use of our products and substantially reducing
revenues. Trade regulations could be adopted prohibiting use of animated
characters for commercial purposes, substantially limiting our potential revenue
sources.
We plan to offer our LifeF/X product offerings over the Internet in all states
of the United States and many foreign countries. These jurisdictions may claim
that we are required to qualify to do business as a foreign corporation in each
state or foreign country. Our failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties. Other states and foreign countries may also attempt to regulate our
business or prosecute us for violations of their laws. Further, we might
unintentionally violate the laws of foreign jurisdictions. These claims and
attempted regulations could seriously harm our business, financial condition and
results of operations.
We face risks related to this offering.
Future sales of our Common Stock or shares issuable upon exercise of stock
options or stock warrants could adversely affect our stock price and our ability
to raise funds in new stock offerings.
We currently have 19,191,414 shares of Common Stock outstanding and 52,699,718
shares of Common Stock outstanding on a fully diluted basis, assuming the
exercise of all outstanding options and warrants. 27,951,312 shares of Common
Stock would be issued on exercise of currently outstanding stock warrants.
5,556,992 shares of Common Stock would be issued on exercise of currently
outstanding stock options. Options to purchase 219,023 shares of the 5,556,992
shares require shareholder approval of the modifications to the LifeF/X 1999
Long-Term Incentive Plan approved by the board of directors on March 14, 2000.
17,510,053 shares are being registered in this offering, including 160,395
shares to be issued on exercise of warrants. Following this offering, we will
have registered all of our outstanding shares and 160,395 shares which are not
yet outstanding but will be issued upon the exercise of warrants issued in our
private placement and options. Under the terms of our lock-up/leak-out
agreements with certain of our shareholders, 10% of the 17,333,251 shares being
registered for Selling Shareholders and 10% of the 1,614,000 shares of our
Common Stock held by certain pre-merger Fin Sports shareholders could be sold
immediately after this registration statement becomes effective. Sale of
substantial amounts of our Common Stock, or the perception that such sales could
occur, could reduce the market price of our Common Stock .
FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus that are not related to historical
results, including statements regarding our business strategy and objectives and
future financial position, are forward-looking statements within the meaning of
the federal securities laws. Although we believe that the assumptions on which
these forward-looking statements are based are reasonable, we cannot assure that
they will prove to be accurate. Actual results could be substantially different
from those discussed in the forward-looking statements, due to
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a variety of factors, including unforeseen changes in regulatory policies,
competition from other similar businesses, market factors and general economic
conditions. All forward-looking statements contained in this prospectus are
qualified in their entirety by this statement.
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MARKET PRICE FOR COMMON STOCK
Our Common Stock was approved for trading on the OTC Bulletin Board under the
symbol "FNSP" on August 23, 1999 and commenced trading on December 15, 1999.
Our symbol was changed to "LEFX" on December 16, 1999. The high and low sales
prices of the Common Stock as reported on the OTC Bulletin Board for the time
periods indicated are set forth on the table below. All sales prices do not
reflect any commissions or discounts of any nature.
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Price Range
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High Low
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Fiscal Year Ended December 31, 1999:
December 15, 1999 to December 31, 1999...................................................... 23 12 7/16
Fiscal Year Ending December 31, 2000:
January 1, 2000 to March 31, 2000........................................................... 32 13
April 1, 2000 to May 11, 2000............................................................... 32 14 1/2
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As of May 11, 2000 there were 19,191,414 shares of our Common Stock
outstanding and approximately 323 shareholders of record.
DIVIDEND POLICY
We have not paid any cash or stock dividends on our Common Stock since our
incorporation and anticipate that, for the foreseeable future, any earnings will
be retained for use in our business.
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CAPITALIZATION
The following table sets forth LifeF/X's debt and equity capitalization as of
March 31, 2000 on a historical basis and excludes 27,951,312 shares reserved for
issuance upon the exercise of stock warrants and 5,518,437 shares reserved for
issuance upon the exercise of stock options at March 31, 2000. The information
in the table should be read together with "Management's Discussion and Analysis
or Plan of Operation" and the Consolidated Financial Statements and notes
included elsewhere in this prospectus.
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As of
March 31,
2000
--------------
(Unaudited)
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Short-term debt................................................................................ $ --
Long-term debt................................................................................. $ --
Shareholders' equity:
Common stock, $.001 par value; 100,000,000 shares authorized;
19,010,946 shares issued and outstanding.................................................. $ 19,011
Additional paid-in capital.................................................................. 57,071,258
Deferred compensation related to stock options.............................................. (1,979,279)
Accumulated deficit......................................................................... (40,875,513)
------------
Total shareholders' equity............................................................... 14,235,477
------------
Total capitalization........................................................................... $ 14,235,477
============
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read along with the "Summary Financial
Information" and the Consolidated Financial Statements and the related notes
appearing elsewhere in this prospectus.
Background -- Merger Transaction and Sale of Non-LifeF/X Technology Assets
On December 14, 1999, Fin Sports acquired all of the outstanding capital stock
of Pac Title/Mirage as a result of the merger of a newly-formed subsidiary of
Fin Sports into Pac Title/Mirage, which was the surviving corporation. Fin
Sports was formed in 1987 and was involved in the manufacture and marketing of
sports equipment. From September 1993 until the December 14, 1999 merger, Fin
Sports had no active business operations.
Since the shareholders of Pac Title/Mirage received the majority voting
interests in the combined company, Pac Title/Mirage is the acquiring enterprise
for financial reporting purposes, and the financial statements presented are
those of Pac Title/Mirage, not Fin Sports. Following the merger, Fin Sports'
name was changed to Lifef/x, Inc., and the name of its wholly owned subsidiary
was changed from Pac Title/Mirage to Lifef/x Networks, Inc. Lifef/x Networks,
Inc. is a wholly-owned subsidiary of Lifef/x, Inc.
Pac Title/Mirage was formed in 1997 as the combination of the LifeF/X
technology , contributed by Mirage Technologies LP, and an optical 2D and
restoration business acquired from Pacific Title and Art Studio, a post
production company founded in 1918. From Pac Title/Mirage's inception until the
merger, Pac Title/Mirage operated primarily as a visual effects company
providing services to the U.S. film and television entertainment industry. Its
operations consisted of four activities: LifeF/X technology development; optical
2D effects and film restoration; film scanning and recording services; and
digital effects. Because of the combined effects of unfavorable market
conditions in the film entertainment industry and continued operating losses,
the digital effects division was closed in early 1999. The LifeF/X technology
development is continuing as the primary business of LifeF/X.
Pac Title/Mirage incurred losses from its inception. Safeguard Scientifics,
Inc. (Safeguard), which owned approximately 49% of Pac Title/Mirage, loaned Pac
Title/Mirage significant amounts to support the operations of the business and
to finance capital expenditures. In March 1999, Pac Title/Mirage's Board of
Directors decided to concentrate Pac Title/Mirage's efforts on LifeF/X
development, with primary emphasis on Internet applications, and initiated steps
to dispose of the remaining non-LifeF/X operations, to reduce cash outflows
from the non-LifeF/X operations and reduce or eliminate Pac Title/Mirage's bank
debt. Therefore, the non-LifeF/X operations have been reflected as a
discontinued operation in the accompanying Consolidated Financial Statements
for all periods presented.
Pac Title/Mirage needed additional capital for its technology development. Pac
Title/Mirage believed that investors interested in providing the needed capital
required that Pac Title/Mirage become a publicly traded entity and that none of
the proceeds of their investment would be used for non-LifeF/X operations. Pac
Title/Mirage also desired to gain access to the public equity markets and to
provide liquidity for its existing shareholders at a reasonable cost. See
"Liquidity and Capital Resources" later in this section.
Fin Sports, while publicly traded, had no business operations and no assets.
Fin Sports sought a private operating company as a merger partner to increase
shareholder value.
Pac Title/Mirage and Fin Sports were introduced to each other by MG
Securities, which acted as a broker in the private placement . The transaction
was negotiated at arm's length. After four months of negotiations, Pac
Title/Mirage and Fin Sports agreed that the pre-private placement shareholders
of Fin Sports would receive approximately 9% of post-merger LifeF/X common stock
outstanding immediately after completion of the merger, subject to dilution on
exercise of warrants and options.
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In March 2000, LifeF/X sold its remaining non-LifeF/X operations, which
consisted of optical 2D film restoration and scanning and recording services, to
PTM Productions, Inc. PTM Productions, Inc. is owned by the pre-merger Pac
Title/Mirage shareholders. This sale is more fully described under "Certain
Relationships and Related Transactions" later in this prospectus. The sale
included a transfer of all liabilities associated with the discontinued
operation, including all debt. As a result, LifeF/X is debt-free, other than
accounts payable and accrued expenses. In addition, Safeguard has fully
indemnified LifeF/X against all liabilities associated with the discontinued
operation. See Note 1 to the accompanying Consolidated Financial Statements.
Results of Operations
Quarter Ended March 31, 2000 Compared to Quarter Ended March 31, 1999
Revenue--All of our products are currently in planning or research and
development and there has been no revenue from the LifeF/X technology through
March 31, 2000 and we do not expect any revenue until 2001.
General and administrative expenses--General and administrative expenses were
$1,242,970 for the quarter ended March 31, 2000 compared to $53,919 for the
quarter ended March 31, 1999. This increase in 2000 is primarily due to the
following items:
(1) In December 1999, LifeF/X recorded deferred stock compensation of
$2,928,689 on stock options issued to an officer. This amount is being
amortized as options vest over the two year vesting period of
the options. The related expense recorded in the quarter ended March
31, 2000 and included in general and administrative expenses was
$292,869. See Note 6 to the Consolidated Financial Statements.
(2) Administrative salaries and wages increased by $209,000 for the
quarter ended March 31, 2000 over the comparable period last year as a
result of the increased number of employees.
(3) Professional services were $510,000 higher than the same period of
1999 due to significant legal and professional expenses relating to
the registration of LifeF/X Common Stock and other filings, plus
general corporate matters relating to corporate organization.
Research and development expenses--Research and development expenses were
$677,717 for the quarter ended March 31, 2000 compared to $311,948 for the
quarter ended March 31, 1999, an increase of $365,769. Research and development
consists of costs related to LifeF/X development activities. Salaries and wages,
related personnel benefits and outside consultants expenses for the LifeF/X
development personnel included in research and development were $494,000 for the
quarter ended March 31, 2000 compared to $179,000 for the quarter ended March
31, 1999, an increase of $315,000. This reflects increased full-time research
and development personnel and consulting staff, primarily at LifeF/X's Boston
office, over the comparable period of last year.
LifeF/X has an exclusive, world-wide, perpetual license agreement with
UniServices for the modeling technology that is used in LifeF/X development.
Annual license and development fees paid under the agreement included in
research and development costs were $112,500 for the quarter ended March 31,
2000 and $125,000 for the quarter ended March 31, 1999.
Results for the quarter ended March 31, 2000 include interest income of
$209,353. This interest income relates to the proceeds from the private
placement offering that are being held in highly liquid short-term
investments.
Discontinued operation--In March 1999, Pac Title/Mirage's Board of Directors
decided to concentrate on LifeF/X development and initiated steps to dispose of
non-LifeF/X operations. Results from the discontinued
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operation for the quarter ended March 31, 1999 consist of the following:
(1) An operating loss on discontinued operation prior to the March
31, 1999 measurement date of $3,002,332 that includes a
$1,400,000 impairment loss on long-lived assets, and
(2) a provision for a $17,549,874 loss on disposal of discontinued
operation for an $11,949,874 reserve for estimated operating
losses on discontinued operation from March 31, 1999 through the
estimated remaining disposal period and an estimated loss on
disposal of $5,600,000.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue--All of our products are currently in planning or research and
development and there has been no revenue from the LifeF/X technology through
December 31, 1999. We do not expect any revenue until 2001.
General and administrative expenses--General and administrative expenses of
$1,493,590 for the year ended December 31, 1999 represented an increase of
$1,311,648, or 721%, over the prior year. The majority of the increase in 1999
over 1998 is related to the following:
(1) In 1999, LifeF/X recorded deferred stock compensation of
$2,928,689 on stock options issued to an officer. This amount is
being amortized as options vest over a two year vesting period .
The related expense recorded in 1999 and included in general and
administrative expenses was $656,541. See Note 6 to the
Consolidated Financial Statements.
(2) 1999 includes $507,511 of accrued severance expense for a former
executive. In addition, occupancy costs increased approximately
$42,000 in 1999 over 1998, because Pac Title/Mirage occupied its
new facility for only a portion of 1998.
Research and development expenses--Research and development expenses increased
by $551,491, or 46%, to $1,754,253 for the year ended December 31, 1999 from
$1,202,762 for the year ended December 31, 1998. Salaries and related personnel
benefits of the LifeF/X development personnel have historically been the major
portion of our research and development cost. Personnel costs included in
research and development were $1,145,167 for the year ended December 31, 1999
compared to $640,660 for the year ended December 31, 1998, an increase of
$504,507. LifeF/X has an exclusive, world-wide, perpetual license agreement with
UniServices for the modeling technology that is used in LifeF/X development.
Annual license and development fees under the agreement included in research and
development costs were approximately $500,000 for each of the years ended
December 31, 1999 and 1998.
Interest expense--On December 30, 1999, Safeguard exchanged $14,086,837 of Pac
Title/Mirage debt and related accrued interest owed to Safeguard for warrants
to buy 3,997,500 shares of LifeF/X Common Stock at an exercise price of $.01 per
share. In addition, Safeguard received warrants to purchase 5,862,500 shares of
LifeF/X Common Stock at an exercise price of $6.00 per share. The $23,389,176
value assigned to the warrants, less the $14,086,837 of debt and accrued
interest converted, or $9,302,339, was recorded as additional paid-in capital
and as interest expense in the year ended December 31, 1999.
In addition, LifeF/X recorded interest expense of $1,462,383 during the year
ended December 31, 1999. This amount represents the fair value of 10,375,000
warrants to purchase Pac Title/Mirage Common Stock issued to Safeguard in
relation to $9.5 million of loans made by Safeguard to Pac Title/Mirage in
1999.
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Discontinued operation--In March 1999, Pac Title/Mirage's Board of Directors
decided to concentrate on LifeF/X development and initiated steps to dispose of
non-LifeF/X operations. Results from this discontinued operation for the year
ended December 31, 1999 consist of the following: (1) An operating loss on
discontinued operation prior to the March 31, 1999 measurement date of
$3,002,332 that includes a $1,400,000 impairment loss on long-lived assets, and
(2) a provision for a $15,549,874 loss on disposal of discontinued operation for
a $7,449,874 reserve for operating losses on discontinued operation from March
31, 1999 until December 31, 1999 and a provision for estimated losses for the
remaining disposal period of $2,500,000 and estimated loss on disposal of
$5,600,000.
Year Ended December 31, 1998 Compared to the Seven Month Period From June 1,
1997 through December 31, 1997
General and administrative expenses--General and administrative expenses
amounted to $181,942 for the year ended December 31, 1998 compared to $18,705
for the seven month period ended December 31, 1997. Expenses in 1998 were
greater due to increased occupancy costs and because the results for 1998
reflect a full year of expenses while 1997 represents only a partial year for
the start-up of the operations.
Research and development expenses--Research and development expenses amounted
to $1,202,762 for the year ended December 31, 1998 compared to $624,900 for the
period from June 1, 1997 through December 31, 1997. License and development
fees under the license agreement with UniServices included in research and
development costs were $500,000 for the year ended December 31, 1998 and $85,000
for the seven month period ended December 31, 1997. The period ended December
31, 1997 includes only two months of expense for license and development fees,
as the term of the UniServices license and development agreement commenced
November 1, 1997.
Discontinued operation--The loss on discontinued operation for the year ended
December 31, 1998 was $4,060,980. This amount includes a write-off of $1.1
million of goodwill attributable to Pac Title/Mirage's digital division's
activities. The period ended December 31, 1997 reflects a loss on discontinued
operation of $369,658, which relates to the partial period from June 1, 1997 to
December 31, 1997.
Liquidity and Capital Resources
Since inception, we have financed our operations from private sales of
convertible preferred and common stock, loans from shareholders, bank loans and
lease financing.
Net cash used in operating activities was $929,000 for the three months ended
March 31, 2000. This use was primarily due to the $1.7 million net loss for the
period, partially offset by non-cash expense of $293,000 relating to stock
options and a $699,000 increase in accounts payable and accrued
liabilities.
Net cash used in operating activities was $11.0 million in 1999, $551,000 in
1998 and $1.1 million in the period ended December 31, 1997. The net cash used
in operating activities in 1999 was primarily due to the net loss for the
period, primarily from the discontinued operation that used $9.1 million of cash
in operating activities compared to $1.9 million used by continuing operations
of LifeF/X. Net cash used in operating activities in 1998 represented a use of
$1.3 million due to the loss on continuing operations partially offset by
$700,000 in net cash provided by operating activities of the discontinued
operation. Net cash used in operating activities in the period ended December
31, 1997 consisted of $500,000 used by continuing operations and $600,000 used
by the discontinued operation.
Net cash used in investing activities was $338,000 for the three months ended
March 31, 2000, $1.2 million in 1999, $2.6 million in 1998 and $16.0 million in
the period ended December 31, 1997. The net cash used in the three months ended
March 31, 2000, and the years 1999 and 1998, represents purchases of plant and
equipment. The net cash used in investing activities in the period ended
December 31, 1997 consisted of $15.5 million for the acquisition of Pacific
Title and Art Studio and $500,000 for purchases of plant and equipment.
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Net cash provided by financing activities for the three months ended March 31,
2000 was $8.9 million. This primarily represents the receipt of proceeds of $9.1
million from the sale of stock through the private placement that were held in
escrow at December 31, 1999. Net cash provided by financing activities was $19.9
million in 1999, $3.2 million in 1998 and $17.1 million in the period ended
December 31, 1997.
The net cash provided by financing activities in 1999 primarily represented
$12.3 million in loans provided by Safeguard and $7.2 million of net proceeds
received from the private placement. Net cash provided by financing activities
in 1998 primarily consisted of $3.2 million of loans from Safeguard. Net cash
provided by financing activities in the period ended December 31, 1997 primarily
consisted of $8.8 million in bank borrowings, $8 million in proceeds from the
sale of preferred and common stock and $600,000 in loans from Safeguard.
In the December 1999 offering, LifeF/X raised $18 million from a sale to
investors of 6,000,000 units at $3.00 per unit, each unit consisting of: (i) one
share of Common Stock and (ii) a warrant to purchase .01 share of Common Stock
at $7.50 per share, exercisable within 18 months after purchase. The private
placement was fully subscribed, and we have received all funds. The first
portion of the private placement closed in December 1999, and the second portion
closed in February 2000.
At December 31, 1999, only a portion of the $18 million was actually received
by us. Of this amount, $9,051,000 of escrow funds and cash from stock
subscriptions had been received by the escrow agent but had not yet been
transferred to us. This amount was carried as restricted cash in the
accompanying Consolidated Financial Statements at December 31, 1999. Subsequent
to year end, these funds in escrow were released to us. Offering costs of the
private placement amounted to $1,395,000, resulting in net proceeds of
$16,605,000 from the offering. These net proceeds, less funds for current
operations, have been, and will continue to be, invested in highly liquid short-
term investments.
The purpose of the private placement was to fund continuing LifeF/X technology
development, product marketing and distribution, acquisition of management and
support resources and construction of the infrastructure to facilitate future
growth. A significant portion of our expenses are allocated to developing the
technology to produce our photo-realistic digital human faces, which we call
Standins, and the enabling player for users to animate the Standins. Also, we
will develop improved systems for low cost image capture and the mass production
of Standins. We are and will continue to be engaged in discussions with
suppliers of voice and lip synch technologies as well as artificial
intelligence. We intend to pursue relationships with channels that will aid in
the sale and implementation of our products, including web site builders and
integrators of customer relationship management systems.
The proceeds from the private placement should fund development and operations
through the first quarter of 2001. Our plan does not provide for signficant
marketing or advertising expenses in 2000 or 2001 because we will be using viral
marketing to distribute our product and build brand awareness as discussed more
fully in "Business: Marketing and Distribution." Viral marketing is the
spontaneous distribution of free software from one user to another user.
Because of the mutual benefits derived from the software, senders and recipients
desire to expand the universe of users. The costs of producing the free copies
of the player and animation software are included in our cash expenditure
forecasts for 2000 and 2001.
As of March 31, 2000, we had approximately $15.4 million of cash on hand. Our
operating plan anticipates that we will not generate significant revenue until
2001 and that we will require additional funding in 2001. This funding may be
provided from a public or private offering of our common stock, exercise of
common stock warrants, debt issuance, funds from strategic partners or a
combination of these sources, depending upon market conditions.
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Quantitative and Qualitative Disclosure about Market Risks
The SEC's rule related to market risk disclosure requires that we describe and
quantify our potential losses from market risk sensitive instruments
attributable to reasonably possible market changes. Market risk sensitive
instruments include all financial or commodity instruments and other financial
instruments that are sensitive to future changes in interest rates, currency
exchange rates, commodity prices and other market factors. We are not exposed to
market risks from changes in foreign currency exchange rates, commodity prices
or other market factors. We do not hold derivative financial instruments nor do
we hold securities for trading or speculative purposes. At December 31, 1999 we
had $7.2 million of bank debt obligations included in net liabilities of
discontinued operation at variable interest rates. None of this debt is an
ongoing obligation of LifeF/X because all of this debt was assumed by PTM
Productions, Inc., the buyer of our discontinued operation, on March 20, 2000.
Proceeds from the private placement in December 1999 have been invested in
highly liquid short-term investments.
Inflation
We do not believe that inflation has had any material effect on our business
over the past two years.
Year 2000 Issues
The Year 2000 computer problem refers to the potential for system and
processing failure of date-related data as a result of computer-controlled
systems using two digits rather than four digits to define the applicable year.
For example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the Year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations including a temporary inability to process transactions, send
invoices or engage in similar normal business activities. To date, we have not
experienced any Year 2000 issues with any of our internal systems or services,
and we do not expect to experience any.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income (loss) depending on whether a derivative is designed as
part of a hedge transaction and, if so, the type of hedge transaction involved.
We do not expect that adoption of SFAS No. 133 will have a material impact on
our Consolidated Financial Statements as we currently do not hold any derivative
financial instruments.
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BUSINESS
We are a development stage company that is focused on producing software that
enables animation of photo-realistic digital human characters. Our products will
initially be used for Internet applications and may be expanded to include uses
for the entertainment industry. Our software is based, in part, on a modeling
technology that is licensed from UniServices under an exclusive, world-wide,
perpetual license agreement.
Our Strategy and Value Proposition
Our initial goal will be to achieve the rapid and widespread distribution of
our software to personalize interactive communication in Internet-related
business-to-business (B2B) and business-to-consumer (B2C) activities and other
computer-based applications. We anticipate distributing our system initially for
use in e-mail and instant messaging communication, enabling the sender to
replace written text with messages spoken first, by generic photo-realistic 3D
digital animated faces, and, later, by the sender's photo-realistic 3D digital
animated face. Because the computer instructions for animating the digital human
faces are very small, we believe we can achieve real-time animations over the
Internet utilizing modems as slow as 28.8kbps.
E-mail is the most widely adopted Internet application, ranging from a
personal messaging tool to a strategic business tool. According to Electronic
Mail and Messaging Systems, there were approximately 325 million e-mail accounts
in operation at the end of 1998. E-mail has surpassed the telephone as the
primary business communication tool, according to the American Marketing
Association. The volume of instant messaging is fast approaching that of e-
mail, making it a second universal means of online communication. E-mail and
instant messaging have increased in volume and improved in functionality, and
these trends are expected to continue. We expect the LifeF/X technology to
provide significant additional value, by permitting individuals to send e-mails
and online messages embedded with an avatar, an animated graphic intended to
represent, or stand in for, the user when the user communicates on the web.
As the Web continues to evolve, we expect many businesses and content
providers will seek to use interactive audio, video, and other multi-media
content, to enrich and differentiate their Web sites. We believe that a
substantial opportunity exists to furnish software solutions and content
aggregation and delivery services to provide compelling, interactive, animated
content through photo-realistic 3D models in real time, over bandwidths as slow
as 28.8kbps. We envision Web sites using photo-realistic 3D human models to
"stand in" on the Web for individuals and a multitude of corporate and public
representatives. See "Prospectus Summary: Our Company."
Growth of the Internet
The Internet has grown rapidly in recent years. This growth has been driven by
the development of the World Wide Web and graphically intuitive Web browsers,
the proliferation of multimedia PCs, the creation of increasingly robust network
architectures and the emergence of compelling Web-based content and commercial
applications. Both consumers and businesses are increasingly relying on the
Internet to access and share information. According to Internet industry analyst
International Data Corporation (IDC), at the end of 1998 an estimated 97 million
people were using the Internet to communicate with friends and family,
participate in discussion forums and obtain information about goods and
services. IDC projects that this user base will grow to 319 million by
2002.
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We believe that the growth in the Internet market represents a significant
opportunity for us as a unique provider of products and services that enhance a
Web user's experience.
All references in this Prospectus to industry, financial and statistical
information are based on trade articles, industry reports and other sources that
we believe to be reliable but that we have not independently verified.
LifeF/X Technology
The LifeF/X technology was originally developed for accurate modeling of soft
biological tissues that undergo large variable changes in size and shape. The
technology from which the LifeF/X Technology is derived was first used in a
professional medical application for tele-robotic surgery. The LifeF/X
technology is based on continuum modeling techniques, which are mathematical
tools that represent properties of solids, such as human or animal tissue, down
to the microscopic level, or to the cellular level in the case of biological
tissues. Large complex structures are broken down into smaller components with
geometrical shapes described by nodes and surfaces.
Movement or animation of a human face model is achieved by applying a set of
mathematical equations that mimic the changes associated with biological muscle
movement. The mathematical equations can replicate such properties as skin
elasticity, electrical impedance, thermal capacity, conductivity and optical
properties. By beginning with the exact representation of biological tissues and
then computing the interaction between structures, such as force generated by
muscles, skin elasticity and bone geometry, our technology can achieve photo-
realistic 3D animation.
Our initial Internet consumer applications will be driven by user-directed
text or speech input. Therefore, the initial Internet application will produce
real-time animated images of digital human faces that may not be as sharp as
film entertainment prototypes produced to date, but can operate in real time
over dial-up modems.
Products under Development
We have not commercialized any of our products, all of which are currently in
the research and development or planning phases. We plan to introduce both
consumer and business products.
LifeF/X Standins. Our lead consumer product is the LifeF/X Standin, a photo-
realistic 3D computer model of a face that can be animated in real time by text
or speech files. The simplest form of consumer Standin will be male and female
generic Standins. Later, we will create personalized Standins from 2D digital
images sent electronically to our planned Web site or from traditional analog
photos mailed to us.
We plan to deliver digital Standins to users via the Web and other media,
together with our LifeF/X Genesis Player, that plays the Standin animation, and
our LifeF/X Director software, which adds emotional content to the animations.
As our products will have a wide variety of uses, our products will be
compatible with numerous third party products and all Standin products will
use the same technology architecture.
Professional Standins. We intend to produce and sell more sophisticated and
articulated Standins using our proprietary motion capture system. Like the
consumer Standin, the Professional Standin will be animated and played using the
LifeF/X Genesis Player and LifeF/X Director Software.
LifeF/X Genesis Player. The LifeF/X Genesis Player is the software device
used to play LifeF/X Standins and Professional Standins on computers.
LifeF/X Director. Our LifeF/X Director software will enable the user to add
four basic emotions - happy, sad, angry and surprised - and simple motions to
the Standin sent to deliver messages.
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LifeF/X Creator Software. Our LifeF/X Creator software will be an advanced
tool controlling Standins intended for use in Web pages, e-mail or newly created
LifeF/X media files. LifeF/X e-Motor Packs, which are packages of emotional cues
for Standins, also will be available for use with the LifeF/X Creator. LifeF/X
Creator will have a graphical interface with variable intensity controls for
emotions and movements and will be user-friendly.
LifeF/X Pro-Creator Software. The LifeF/X Pro-Creator software is an
enhanced version of the basic LifeF/X Creator designed for the professional Web
designer. LifeF/X Pro-Creator will permit full animation and control of LifeF/X
Standins using a flexible and powerful graphical user interface.
LifeF/X Software Developer Kit. We also plan to offer a LifeF/X Software
Developer Kit to facilitate integration of LifeF/X Standins into a variety of
applications.
Test Results and Continuing Development
We developed the LifeF/X technology used in our Standins in our work on motion
picture industry projects over the past three years. The initial Standins we
created with our proprietary high-resolution motion capture systems were too
complex for online and real-time applications.
In the past six months we have:
. enhanced the performance, reliability and accuracy of our high-resolution
motion capture systems;
. created and tested a prototype of a less complex Standin, which our LifeF/X
Player, running on a high-end PC, can display in real-time over the Internet;
. improved LifeF/X internal tools to create sets of emotions for the Standin
and control the Standin's lip motion, matching the Standin's facial movement
to a text-to-speech engine;
. successfully tested our ability to create a Standin from a single photograph;
and
. developed and tested a prototype LifeF/X Player, demonstrating that the
player can interactively display faces in real-time on a high-end PC, that
the LifeF/X Standins can be made to speak correctly from text converted to a
synthetic voice using a text-to-speech engine, and that the player can be
integrated in Web pages.
Most of the remaining work required to produce consumer Standins involves the
following:
. to improve the efficiency of our LifeF/X Player, so that consumer PCs will be
able to display Standins in real-time over the Internet;
. to complete the e-mail and instant messaging system;
. to create the consumer and professional tools for Web authoring;
. to develop the software to implement lipsynching of the Standin's lip
movement to a recorded audio signal; and
. to automate production of the main elements of the face to facilitate mass
production of Standins.
We are close to releasing an alpha version of the LifeF/X Player V1.0, which
will then be tested by our quality assurance team. We plan to ship the LifeF/X
Player V1.0 by the end of the year.
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Future Enhancements
We plan to develop a full model of the human body, including higher neuro-
muscular activation of muscle groups that are responsible for expressions or
motion. Having already developed the generic human face now used as the basis
for LifeF/X Standins, we plan to add generic necks, torsos, arms and legs.
Marketing and Distribution
We plan to market to the user in a number of ways:
. Viral marketing - distributing free software that users will want to share
with other users
. Co-marketing with complementary software developers, such as text-to-speech
software
. Referrals to our Web site through traditional advertising and links to
software distribution Web sites
Initially we intend to distribute, free of charge, five million packages of
software, each of which will include a generic LifeF/X Standin, the LifeF/X
Genesis Player software and the LifeF/X Director software. This program, which
we expect to launch in late 2000, is intended to seed the market of consumer
users. This will have the dual result of spreading the software through viral
marketing and building an installed base of consumer users attractive to
potential corporate users that will purchase our more sophisticated products.
Other software developers, like ICQ, have proven this distribution model to be a
successful marketing tool.
Revenue Model
Our revenue model is based upon both unit charges and monthly or other
recurring fees. As noted above, each of the first five million consumer
customers will receive a free generic Standin with the LifeF/X Genesis Player
and Director software. After distribution of these five million free Standins,
we will charge each new consumer user a competitive fee for each generic
Standin. We will also charge all consumer users a competitive fee for each
personalized Standin and for each additional generic Standin.
We believe that consumer users will be repeat buyers because they will want
multiple Standins to represent themselves as their appearances change with
age, style, etc.
The bulk of our revenue will come from commercial Web sites. Commercial
sites that desire to use Standins on their Web pages as a result of the
extensive consumer base of Players developed through our viral marketing will be
charged a monthly fee. Commercial sites that use Professional Standins as
corporate spokespersons, site guides or other representatives, which will be
produced using motion capture techniques included in our proprietary and
patented technology, will pay a more substantial monthly fee.
Our Competition
The market for computer-generated characters is new, and we expect it to be
competitive. The principal competitive products in the computer-generated
character market include Microsoft V-Chat 2.0, Microsoft Agent, Haptek, Famous
Tech, Blaxxun, Worlds Ultimate 3D Chat, Animatek International, Sven
Technologies, Oz Ineractive, Simberon Avatars, NetSage, Boston Dynamics,
Extempo, Virtual Human, Virtual Personalities, Virtual Celebrities, Radical Mail
and Avatarme. In addition, there may be computer-generated characters being
developed by competitors of which we are not aware.
Computer-generated characters that are being, or may be, offered by the
competition have varying levels of detail and complexity. Some competitors'
characters are non-human characters and some are cartoon-like.
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Some competitors are using animation techniques that require the transmission of
a large amount of data, which results in very lengthy software downloads and
requires fast computers and large data storage capacity.
Our Technology Differentiator
Because of the automation that is inherent in our facial animation process,
our technology produces a more photo-realistic image having more natural
movements than images produced by conventional computer graphics.
The LifeF/X technology is partially derived from a finite element modeling
system licensed from UniServices. Finite element modeling consists of creating
a representation of an object that may be complex in shape, may be made of a
number of sub-components, and may vary over different regions. The
representation is then divided into numerous small pieces - like a 3D puzzle -
having simpler shapes and properties that can be handled mathematically using
relatively limited computer resources. The behavior, motion, deformation to
stress and similar characteristics of the complex object can then be determined
from the individual responses of the assembled pieces to replicate the behavior
of the whole object.
Our LifeF/X technology has enabled us to develop proprietary techniques for
generating accurate reproduction of expressions and tissue wrinkling. Unique
because of the richness of the data it uses, our technology allows us to create
mathematical models of human facial changes and expressions that are
automatically animated, just like human expressions.
Our development efforts are now focused on building the appropriate
interfaces to the Web, making the platform compatible with a wide variety of
browsers and integrating with text-to-speech and, later, speech-to-speech
technology from other vendors. We have already converted a 2D image to a 3D
model, driven a model with text input and ported the technology to the Windows
platform.
Our Intellectual Property
We rely on a combination of patent, trade secret, copyright and trademark laws
and contractual restrictions to establish and protect intellectual property
rights in our products, services, know-how and information. Much of our
intellectual property is protected by non-disclosure, confidentiality and non-
competition agreements with our employees which, if breached, may be very
expensive to enforce. We do not own all of the LifeF/X technology. We have an
exclusive, worldwide, perpetual license from UniServices to use their continuum
modeling technology in commercial applications for the entertainment industry
and, so long as we continue to pay the development fees described below, in all
other commercial applications, excluding professional medical, engineering and
scientific applications. The license requires license fees and development
payments to be made to the licensor.
Total license fees under the UniServices license agreement equal
$1,000,000. Remaining unpaid license fees due UniServices are approximately
$100,000, which are scheduled to be paid in full by August 2000. Development
fees for the first 5 years, from November 1, 1997 through October 31, 2002,
equal $150,000 per year, payable monthly in advance. The development fee for
development services after October 31, 2002 and for continuation of exclusivity
for all uses outside the entertainment industry, other than for professional
medical, engineering and scientific applications, will be $200,000 per year,
plus inflation adjustments after 2002 of the lesser of the increase in the
Consumer Price Index as compared to October 31, 2002 or 12% per year. We have
the right at our option to cancel the license at any time after November
2002.
We have filed three patent applications in the United States and other
countries specifically covering image capturing and creation. Two patents have
been issued ("Rapid High Resolution Image Capture System", U.S. Patent #
5,999,209 and "Apparatus and Method for Representation of Expression In a
Tissue Like System", U.S. Patent # 6,064,390) and one application is pending.
We plan to apply for other patents in the future. UniServices has not patented
the source code licensed to LifeF/X.
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Our Employees
Our executive officers are based in the Boston, Massachusetts metropolitan
area. We currently have a team of 17 officers, employees and contractors in the
Boston, Massachusetts area and seven employees in Los Angeles, California. We
intend to expand the Boston workforce significantly in 2000 and have leased
expanded facilities in the Boston, Massachusetts area.
Properties
We have leased approximately 2,000 square feet of research and development
space in the greater Los Angeles area under a two year lease with renewal
options. In addition, we have leased approximately 10,000 square feet of
administrative and research and development space in the greater Boston area
under a five year lease at a monthly rent of approximately $25,000. We believe
these facilities are adequate for our intended purposes.
Legal Proceedings
We are not involved in any claims or legal proceedings that may have a
significant effect on our financial position, nor have we been involved in any
legal proceedings that have had or may have a significant effect on our
financial position.
23
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth the names and ages of all of our directors,
executive officers and key employees as of May 11, 2000. All directors will
serve until the next annual meeting of shareholders or until their earlier
death, retirement, resignation or removal. Executive officers serve at the
discretion of the board of directors, and are appointed to serve until the first
board of directors meeting following the annual meeting of shareholders.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Michael Rosenblatt................ 49 Chairman and Co-President
Lucille S. Salhany................ 53 Chief Executive Officer, Co-President and
Director
Richard A. Guttendorf, Jr......... 58 Chief Financial Officer, Secretary and Director
Ian Hunter........................ 47 Director
Robert Verratti................... 56 Director
Stephen J. Andriole............... 50 Director
Serge Lafontaine.................. 50 Lifef/x Networks, Inc.'s Chief Technology Officer
Paul Charette..................... 37 Lifef/x Networks, Inc.'s Vice President and
Co-Director of Research and Development
Mark Sagar........................ 34 Lifef/x Networks, Inc.'s Vice President and
Co-Director of Research and Development
Keith Waters...................... 38 Lifef/x Networks, Inc.'s Senior Technology Officer
</TABLE>
Background and Experience
Michael Rosenblatt. Mr. Rosenblatt became Co-President and Chairman of
LifeF/X on December 14, 1999. Mr. Rosenblatt served as Vice Chairman and
director of Pac Title/Mirage from October 1998 until the merger and served as
Co-President and director of Pac Title/Mirage from 1997 to October 1998. Since
1995 he has been President of Mirage Technologies, Inc., the general partner of
Mirage Technologies L.P. which, together with Safeguard and Robert Verratti,
formed Pac Title/Mirage in October 1997. In 1974 Mr. Rosenblatt also founded
Atlantic Entertainment Group, Inc., which became one of the largest privately
held motion picture production and distribution companies in the United States.
Mr. Rosenblatt is also a member of the Executive Branch of the Motion Picture
Academy of Arts and Science.
Lucille S. Salhany. Ms. Salhany became Chief Executive Officer, Co-
President and a director of LifeF/X on December 14, 1999. Ms. Salhany was
President of JH Media, Ltd. an advisory company with offices in Boston and Los
Angeles from 1997 until December 1999. From 1994 through 1997, Ms. Salhany was
President and CEO of the United Paramount Network. Previously Ms. Salhany was
Chairman of the FOX Broadcasting Company, Chairman of Twentieth Television and a
member of the FOX, Inc. Board of Directors. Ms. Salhany guided the networks'
expansion from four to seven nights of programming and was instrumental in FOX's
acquisition of the broadcast rights to the NFL. Prior to that Ms. Salhany was
President, Paramount Domestic Television. Ms. Salhany serves on the Boards of
Directors of Compaq Computer Corporation, B.R.A. Corporation of Boston, Emerson
College and iMedium, Inc.
Richard A. Guttendorf, Jr. Mr. Guttendorf became Chief Financial Officer,
Secretary and a director of LifeF/X on December 14, 1999. Mr. Guttendorf has
been a director of Pac Title/Mirage since November 1997 and served as its
Chairman and Chief Executive Officer from October 1998 until the merger. From
September 1996 to date Mr. Guttendorf has been a Vice President of Safeguard.
Mr. Guttendorf was previously Chief Executive Officer of Laser Communications,
Inc. (LCI), a leading manufacturer of short haul, laser optic wireless
communications equipment. Prior to LCI, he was Chief Financial Officer of
InterDigital Communications Corporation, a manufacturer and licensor of digital
wireless telephone equipment and was Chief Financial Officer of Atlantic
Financial, an $8 billion financial institution.
24
<PAGE>
Dr. Ian Hunter. Dr. Hunter became a director of LifeF/X on December 14,
1999. Dr. Hunter has been a consultant to LifeF/X since January 4, 2000. Dr.
Hunter was Director of Research and Development of Pac Title/Mirage from October
1997 until the merger. Dr. Hunter has been a Professor of Mechanical
Engineering and Bio-Engineering at the Massachusetts Institute of Technology
since 1994.
Robert Verratti. Mr. Verratti became a director of LifeF/X on December
14, 1999. Mr. Verratti served as Chief Executive Officer and Chairman of the
Board of Pac Title/Mirage from 1997 to October 1998. Since 1980, Mr. Verratti
has been the President of Charlestown Investments, Ltd., a company specializing
in investments in companies in turnaround or undervalued situations. Mr.
Verratti is also a venture partner and consultant to the Chairman of Safeguard
and TL Ventures. Mr. Verratti serves on the boards of directors of Webvision,
Inc., and Lockstream.com.
Dr. Stephen J. Andriole. Dr. Andriole became a director of LifeF/X on
March 15, 2000. Since October 1997, Dr. Andriole has been Senior Vice President
and Chief Technology Officer of Safeguard Scientifics, Inc., where he is
responsible for the overall strategic vision of Safeguard through the
identification of technology and market trends. From March 1995 to October 1997,
Dr. Andriole was Chief Technology Officer and Senior Vice President for
Technology Strategy at CIGNA Corporation. Dr. Andriole serves on the boards of
directors of US Data; aligne, Inc.; iMedium, Inc.; Integrated Visions, Inc.; the
Ben Franklin Technology Center of Southeastern Pennsylvania; Broadreach
Consulting, Inc.; and STORM Systems.
Dr. Serge Lafontaine. Dr. Lafontaine became the Chief Technology Officer
of LifeF/X on December 14, 1999. From October 1997 until the merger, he was Co-
Director of Research of Pac Title/Mirage and Assistant Director of Research of
Mirage. Dr. Lafontaine has been a post-doctoral fellow in mechanical engineering
at the Massachusetts Institute of Technology (MIT) since 1999, and was
previously a post-doctoral associate in mechanical engineering at MIT from 1997
to 1999. Since 1998 Dr. Lafontaine has been a partner of Advanced
Instrumentation Systems, which builds instrumentation for drug discovery. From
1997 to 1998, Dr. Lafontaine was also a partner of BOMEC, which conducts
research in conducting polymers. From 1994 through 1997, Dr. Lafontaine was a
visiting research scientist at MIT.
Dr. Paul Charette. Dr. Charette became the Vice President and Co-Director
of Research and Development of Lifef/x Networks, Inc. on December 14, 1999. From
October 1997 until the merger, he was Co-Director of Research and Development of
Pac Title/Mirage. From 1994 to 1997, Dr. Charette held post-doctoral fellowships
at the Massachusetts Institute of Technology, in the department of mechanical
engineering and at the University of Auckland, New Zealand, in the department of
engineering science. Dr. Charette received his doctorate degree from McGill
University in 1994, where he worked under Dr. Ian Hunter, and received his
Bachelors degree in electrical engineering from McGill University in 1986.
Dr. Mark Sagar. Dr. Sagar became Vice President and Co-Director of
Research and Development of Lifef/x Networks, Inc. on December 14, 1999. From
October 1997 until the merger, he was Co-Director of Research and Development of
Pac Title/Mirage. Dr. Sagar has been a post-doctoral fellow at Dr. Ian Hunter's
laboratory at the Massachusetts Institute of Technology since 1996. From 1992
through 1996, Dr. Sagar was a member of Professor Peter Hunter's bio-engineering
group at the University of Auckland, where he developed an anatomically accurate
computer model of the human eye combining visual and mechanical realism for use
in robotic eye surgery and developed a new methodology and software for the
creation of complex solid based virtual anatomy for bio-engineering virtual
environments. These methods were used to create a photorealistic biomechanically
based virtual model of the heart. Dr. Sagar received a doctorate degree from the
University of Auckland in 1996 and a bachelor of science degree in Physics and
Mathematics from the University of Auckland in 1987.
Dr. Keith Waters. Dr. Waters has been Senior Technical Officer of Lifef/x
Networks, Inc. since December 14, 1999. From 1998 to December 1999, Dr. Waters
was a member of the technical staff at Compaq Computer Corporation's Cambridge
Research Laboratory, where he developed FaceWorks, a Windows-based multimedia
authoring tool for synthetic faces, in 1997. Dr. Waters was a member of the
technical staff at Digital Equipment Corporation from 1991 to 1998, where he
developed DECface, a real-time synthetic face
25
<PAGE>
that used a software text-to-speech engine. Dr. Waters received a Ph.D. in
computer graphics from Middlesex University in London, England. Dr. Waters is on
the editorial boards of the Graphics and Image Processing Journal and the
Computer Graphics and Visualization Journal.
26
<PAGE>
Executive Compensation
The following information is furnished for the named persons for the years
ended December 31, 1999 and December 31, 1998, and is based upon the Executive
Officers of LifeF/X and its operating predecessor, Pac Title/Mirage.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation Awards
-----------------------------
Restricted Securities
Stock Underlying All Other
Annual Compensation Awards Options/SAR (#) Compensation
---------------------- ------ --------------- ------------
Name and Principal Position Year Salary ($) Bonus ($)
---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Lucille S. Salhany ............... 1999 30,769(1) -- -- 1,952,459 --
Chief Executive Officer and 1998 -- -- -- -- --
Co-President
Michael Rosenblatt ............... 1999 73,769(2) -- -- 1,911,511 --
Chairman of the Board and 1998 51,000 -- -- -- --
Co-President
Richard A. Guttendorf, Jr. ...... 1999 -- (4) -- -- -- --
Chief Financial Officer 1998 -- (4) -- -- -- --
Secretary and Director
Robert Verratti .................. 1999 -- -- -- 50,001 --
Director 1998 150,631(3) -- -- -- --
Serge Lafontaine ................. 1999 15,385(1) -- -- 301,541 --
Chief Technology Officer 1998 -- -- -- -- --
LifeF/X Networks, Inc.
</TABLE>
- --------------
(1) Covers the period for December 1999, the month of the merger.
(2) Represents $50,000 paid through Pac Title/Mirage and $23,769 for December
1999, the month of the merger.
(3) Represents compensation as Chairman and CEO of Pac Title/Mirage.
(4) Mr. Guttendorf is a Vice President of Safeguard Scientifics, Inc. and is
compensated by that entity for his services, including services provided to
LifeF/X.
1999 Option Grants: 1999 Long-Term Incentive Plan
Pac Title/Mirage had a stock option plan which provided for the grant to
Pac Title/Mirage employees of incentive stock options and for the grant of
nonstatutory stock options, stock awards or restricted stock to Pac Title/Mirage
employees, directors and consultants. On December 14, 1999, this stock option
plan was terminated and LifeF/X adopted the Lifef/x, Inc. 1999 Long-Term
Incentive Plan with terms substantially similar to those of the Pac Title/Mirage
option plan. The LifeF/X 1999 option plan reserves up to 7,981,850 shares of
LifeF/X Common Stock for issuance under the LifeF/X plan. 2,452,475 of the
shares reserved for issuance under the LifeF/X Plan require shareholder approval
of the modifications to the LifeF/X plan approved by the board on March 14,
2000. Following the adoption of the LifeF/X plan, LifeF/X assumed the
obligations of outstanding options granted to Pac Title/Mirage employees under
the Pac Title/Mirage option plan.
27
<PAGE>
These outstanding option obligations included an option grant to Lucille
Salhany, the Chief Executive Officer, Co-President and a director of LifeF/X,
for 1,952,459 shares of Common Stock, after adjusting for the conversion from
Pac Title/Mirage shares to LifeF/X Common Stock shares. The options are
exercisable at $1.50 per share, as adjusted. 20% of the options vested at the
date of grant and the balance of the options vest on a quarterly basis over two
years.
For financial reporting purposes, LifeF/X has recorded deferred stock
compensation of $2,928,689 during the year ended December 31, 1999, representing
the difference between the exercise price, $1.50, and the fair value of
LifeF/X's Common Stock on the grant date of $3.00. This amount is being
amortized by a charge to operations over the two year vesting period, which
resulted in amortization expense of $656,541 for the year ended December 31,
1999 and $292,869 for the three months ended March 31, 2000. In addition,
LifeF/X recognized $25,950 of compensation expense for options granted to a non-
employee, representing the fair value of the options on the grant date.
In addition, as part of the merger, LifeF/X granted options to various
employees, which vest over time. Under the LifeF/X 1999 option plan, the strike
price for nonstatutory stock option grants must be at least 85% of fair market
value on the grant date and the strike price for incentive stock options must be
the fair market value on the grant date. Outstanding options under the LifeF/X
1999 option plan vest over periods established by the Compensation Committee and
expire on or before the tenth anniversary of the grant date, but terminate early
under some circumstances as provided in the LifeF/X 1999 option plan.
The following table presents information concerning individual grants of stock
options made during 1999 to each of the executive officers and directors of
LifeF/X.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Percent of Market
Securities Total Options/ Value on
Underlying SARs Granted Exercise Date of
Options/SARs To Employees Price Grant Expiration
Granted (#) in Fiscal Year ($/Share) ($/Share) Date
----------- -------------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Lucille S. Salhany ....................... 1,952,459 40.8% $1.50 $3.00 12/09/2009
Michael Rosenblatt ....................... 1,911,511 39.9% $3.00 $3.00 12/14/2009
Richard A. Guttendorf, Jr. .............. -- -- -- -- --
Ian Hunter ............................... -- -- -- -- --
Robert Verratti .......................... 50,001 1.0% $3.00 $3.00 12/14/2009
Stephen J. Andriole ..................... -- -- -- -- --
Serge Lafontaine ......................... 301,541 6.3% $3.00 $3.00 12/14/2009
</TABLE>
In 1998 Mr. Verratti was granted options to acquire 174,999 shares at $.91
per share. This per share price is adjusted for the conversion of Pac
Title/Mirage shares to LifeF/X shares in the December 14, 1999 merger. No
options were exercised by officers in 1998 or 1999 or in the first three months
of 2000.
28
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired on Value Options/SARs at In-the-Money
Exercise (#) Realized December 31, 1999 (#) Options/SARs at
Name Exercisable Unexercisable Exercisable Unexercisable December 31, 1999 (#)(1)
----------------------- ----------- ------------- ------------ -------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Lucille S. Salhany ............. -- -- 437,694 1,514,765 $7,878,492 $27,265,770
Michael Rosenblatt ............. -- -- 234,295 1,677,216 $3,865,868 $27,674,064
Richard A. Guttendorf, Jr. ..... -- -- -- -- -- --
Ian Hunter ..................... -- -- -- -- -- --
Robert Verratti ................ -- -- 174,999 50,001 $3,252,531 $ 825,017
Stephen J. Andriole.............. -- -- -- -- -- --
Serge Lafontaine ............... -- -- 60,309 241,232 $ 995,099 $ 3,980,328
</TABLE>
(1) Market value of underlying securities at December 31, 1999 ($19.50 per
share), less the exercise price. The values in the last two columns have not
been, and may never be, realized by the officers. Actual gains, if any, on
option exercises will depend on the value of LifeF/X's Common Stock on the
date of exercise.
Employment Agreements
Summary of Lucille Salhany's Employment Agreement
Ms. Salhany serves as our Chief Executive Officer and Co-President under an
employment agreement with a term of two years which commenced on December 1,
1999. Under the terms of her employment, Ms. Salhany's annual base compensation
is $400,000. She is entitled to annual consideration for a bonus based on her
personal performance and the performance of LifeF/X. Ms. Salhany has the option
to purchase 1,952,459 shares of LifeF/X Common Stock under LifeF/X's 1999
option plan. Ms. Salhany's right to purchase twenty percent of these shares
vested on grant and her right to purchase the balance will vest in equal
quarterly installments over a two year period until fully vested. If Ms.
Salhany's employment terminates due to her death, permanent disability or for
other good cause, as further described in the agreement, she would receive
accrued but unpaid base salary and vacation. If Ms. Salhany's employment is
terminated by LifeF/X for any other reason she would receive as severance
compensation her full base salary for the unexpired period of the term of her
employment, in addition to accrued but unpaid salary and vacation.
Summary of Michael Rosenblatt's Employment Agreement
Mr. Rosenblatt serves as our Chairman of the Board of Directors and as Co-
President under an employment agreement with a term of two years which commenced
on December 1, 1999. Under the terms of his employment, Mr.Rosenblatt's annual
base compensation is $335,000. He is entitled to annual consideration for a
bonus based on his personal performance and the performance of LifeF/X. Mr.
Rosenblatt has the option to purchase 1,952,459 shares of LifeF/X Common Stock
under LifeF/X's 1999 option plan. Mr. Rosenblatt's right to purchase twenty
percent of these shares vested on grant and his right to purchase the balance
will vest in equal quarterly installments over a two year period until fully
vested. If Mr. Rosenblatt's employment terminates due to his death, permanent
disability or for other good cause, as further described in the agreement, he
would receive receive accrued but unpaid base salary and vacation. If Mr.
Rosenblatt's employment is terminated by LifeF/X for any other reason, he would
receive as severance compensation his full base salary for the unexpired period
of the term of his employment, in addition to any accrued but unpaid salary and
vacation.
Summary of Serge Lafontaine's Employment Agreement
Dr. Lafontaine serves as our Chief Technology Officer under an employment
agreement with a term of two
29
<PAGE>
years which commenced on December 1, 1999. Under the terms of his employment,
Dr. Lafontaine's annual base compensation is $250,000. He is entitled to annual
consideration for a bonus based on his personal performance and the performance
of LifeF/X. Dr. Lafontaine has the option to purchase 400,491 shares of LifeF/X
Common Stock under LifeF/X's 1999 option plan. Dr. Lafontaine's right to
purchase twenty percent of these shares vested on grant and his right to
purchase the balance will vest in equal quarterly installments over a two year
period until fully vested. If Dr. Lafontaine's employment terminates due to his
death, permanent disability for other good cause, as further described in the
agreement, he would receive receive accrued but unpaid base salary and vacation.
If Dr. Lafontaine's employment is terminated by LifeF/X for any other reason, he
would receive as severance compensation his full base salary for the unexpired
period of the term of his employment, in addition to any accrued but unpaid
salary and vacation.
Director Compensation
Directors do not receive compensation for services provided as a director
or for participation on any committee of the Board of Directors.
Limitation on Liability and Indemnification Matters
Our Articles of Incorporation limit the liability of directors to the
maximum extent permitted by Nevada law. In addition, our bylaws require us to
indemnify our directors and officers, and allow us to indemnify our other
employees and agents to the fullest extent permitted by law. At present, there
is no pending litigation or proceeding involving any director, officer, employee
or agent where indemnification will be required or permitted. We are not aware
of any threatened litigation or proceeding that might result in a claim for
indemnification. If LifeF/X permits indemnification for liabilities arising
under the Securities Act to directors, officers or persons controlling LifeF/X
under these provisions, we have been informed that, in the opinion of the
Securities and Exchange Commission, this indemnification is against public
policy as expressed in the Securities Act and is unenforceable.
30
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table lists the beneficial ownership of our Common Stock by
each of our directors, each of our executive officers and all of our executive
officers and directors as a group as of May 11, 2000 and their percentages of
our total Common Stock . We are not aware of any other beneficial owner of more
than 5% of the outstanding shares of Common Stock.
The term beneficial ownership as used in this section, consistent with Rule
13d-3 under the Securities Exchange Act of 1934, is defined as the sole or
shared voting power over or sole or shared investment power over the security.
Each person has sole voting and investment power with respect to his or her
shares of Common Stock, except as otherwise indicated. Beneficial ownership
consists of a direct interest in the shares of Common Stock, except as otherwise
indicated. The address of those individuals for which an address is not
otherwise indicated is: 153 Needham Street, Building One, Newton, Massachusetts
02464.
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------
Number of Percentage
Shares of Total(1)
------ -----------
<S> <C> <C>
Directors and Officers
Michael Rosenblatt ....................................................... 2,752,742(2)(3) 13.8%
Lucille S. Salhany ....................................................... 780,984(4) 3.9%
Richard A. Guttendorf, Jr. .............................................. 40,000(5) 0.2%
Dr. Ian Hunter ........................................................... 1,935,885(6) 10.1%
Robert Verratti .......................................................... 524,997(7) 2.7%
Dr. Stephen J. Andriole .................................................. 30,000 0.2%
Dr. Serge Lafontaine ..................................................... 2,086,186(8) 10.8%
All Directors and Executive Officers (7 persons) ......................... 8,150,793(9) 38.7%
5% or More Beneficial Ownership
Safeguard Scientifics, Inc. ............................................. 2,364,113(10) 12.3%
435 Devon Park Drive
Wayne, PA 19087
Michael MacCloskey ....................................................... 967,856(11) 5.0%
2847 Thomas Avenue
Dallas, Texas 75204
Kingdon Capital Management, LLC............................................. 1,010,000(12) 5.3%
152 West 57th Street
New York, NY 10019
</TABLE>
(1) The percentages of shares held assume that options and warrants held by the
particular individual, if any, have been exercised, and no others.
(2) Michael Rosenblatt is the record holder of 1,731,272 shares and has the
right to acquire 776,889 shares within 60 days through options granted under
the LifeF/X 1999 option plan described under "Executive Compensation."
(3) Michael Rosenblatt's indirect beneficial ownership is as follows: (a)
167,501 shares representing his 29.3% ownership in Mirage Technologies LP
which owns 571,872 shares, (b) 43,750 shares owned by Mirage
31
<PAGE>
Technologies, Inc. a company 100% owned by Mr. Rosenblatt, and (c) 33,330
shares owned by family members. 546,872 of the shares held by Mirage
Technologies LP are pledged to Safeguard Scientifics, Inc. as collateral
for a $1,500,000 loan from Safeguard to Mirage Technologies LP.
(4) Lucille Salhany has the right to acquire 780,984 shares within 60 days
through options granted under under the LifeF/X 1999 option plan described
under "Executive Compensation."
(5) Richard Guttendorf, Jr.'s indirect beneficial ownership represents 40,000
shares owned by family and family trusts.
(6) Ian Hunter is the record holder of 1,774,102 shares and has an indirect
beneficial ownership interest in 161,783 shares, representing his 28.3%
ownership in Mirage Technologies LP, which owns 571,872 shares.
(7) Robert Verratti is the record holder of 349,998 shares and has the right to
acquire 174,999 shares within 60 days through options granted under under
the LifeF/X 1999 option plan described under "Executive
Compensation."
(8) Serge Lafontaine is the record holder of 1,774,102 shares and has the right
to acquire 150,301 shares within 60 days through options granted under
under the LifeF/X 1999 option plan described under "Executive
Compensation." In addition, he has an indirect beneficial ownership
interest in 161,783 shares representing his 28.3% ownership in Mirage
Technologies LP, which owns 571,872 shares.
(9) The number of shares shown as beneficially owned by all directors and
executive officers as a group includes stock options under which the named
officers and directors have the right to acquire 1,883,173 shares within 60
days.
(10) Safeguard Scientifics, Inc. is the record holder of 2,360,780 shares and
has the right to acquire 3,333 shares within 60 days through the exercise
of warrants.
(11) Michael MacCloskey is the record holder of 887,051 shares and has an
indirect beneficial ownership interest in 80,805 shares, representing his
14.1% ownership in Mirage Technologies LP, which owns 571,872 shares.
(12) Kingdon Capital Management, LLC manages four entities which own LifeF/X
shares - Kingdon Associates, Kingdon Family Partnership LP, Kingdon
Partners and M. Kingdon Offshore NV - which together are the record holders
of 1,000,000 shares and have the right to acquire 10,000 shares within 60
days through exercise of warrants.
32
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
UniServices License
We license a portion of the LifeF/X technology from UniServices under a
licensing agreement effective November 1, 1997. Under the UniServices licensing
agreement, we have an exclusive, worldwide, perpetual license from UniServices
to use their continuum modeling technology in commercial applications for the
entertainment industry and a perpetual license to use that technology for all
other uses with the exception of professional medical, engineering and
scientific applications. This license for other uses is exclusive through
October 31, 2002 and that exclusivity will be extended indefinitely as long as
LifeF/X continues to pay the applicable development fee described below.
Total license fees under the UniServices license agreement equal $1,000,000.
Remaining unpaid license fees due UniServices are approximately $100,000, which
are scheduled to be paid in full by August 2000. Development fees for the first
5 years, from November 1, 1997 through October 31, 2002, equal $150,000 per
year, payable monthly in advance. The development fee for development services
after October 31, 2002 and for continuation of exclusivity for all uses outside
the entertainment industry, other than for professional medical, engineering and
scientific applications, will be $200,000 per year, plus inflation adjustments
after 2002 of the lesser of the increase in the Consumer Price Index as compared
to October 31, 2002 or 12% per year. We have the right at our option to cancel
the license at any time after November 2002.
Dr. Ian Hunter, one of our directors, is the brother of Peter Hunter, the
leading developer of the licensed technology at the University of Auckland,
where he is a professor. UniServices acts as a licensing agent for the
University of Auckland in this relationship. Ian Hunter receives none of the
fees paid by LifeF/X to UniServices.
Sale of Assets of Discontinued Operation to Company Owned by Pre-Merger Pac
Title/Mirage Shareholders and Related Indemnification Agreements
On March 20, 2000, we sold all of the assets of our discontinued operation to
PTM Productions, Inc., a newly-organized company that was formed for the
specific purpose of holding these non-LifeF/X assets. PTM Productions, Inc. is
owned by the shareholders that owned Pac Title/Mirage prior to its merger with
Fin Sports U.S.A. Owners of PTM Productions, Inc. are our Chairman and Co-
President Michael Rosenblatt (11.31%), our director Ian Hunter (11.31%),
Safeguard Scientifics (59%), our director Robert Verratti (2%) , our Chief
Technology Officer Serge Lafontaine (11.31%), and our shareholder Michael
MacCloskey (5.07%). Messrs. Rosenblatt, Hunter, Lafontaine and MacCloskey own
their interests in PTM Productions, Inc. indirectly through Mirage Technologies
LP.
The transfer of the non-LifeF/X assets and liabilities to PTM Productions was
done because the operations of PTM Productions, which consist of providing post
production services to the film entertainment industry, is not germane to
LifeF/X operations. The sales price consisted of the buyer's assumption of all
of the liabilities of the discontinued operation. On the date of the sale, the
amount of our liabilities assumed by PTM Productions exceeded the carrying value
of the assets it acquired from us by assuming those liabilities. As part of this
sale, we transferred all of our bank debt to PTM Productions. Safeguard has
agreed to fully indemnify us against all losses and liabilities relating to or
arising from the bank debt and PTM Productions and Safeguard have agreed to
indemnify us for any liability related to the assets purchased and the
liabilities assumed.
The shareholders of PTM Productions, Inc. intend to sell its assets, and
negotiations are ongoing regarding a potential sale. Proceeds of any sale would
be allocated first to the repayment of bank debt, then to repayment of Safeguard
post-September 30, 1999 loans, with the remainder, if any, to be distributed to
the PTM Productions shareholders. As of March 31, 2000, the liabilities,
including the Safeguard post-September 30, 1999 debt, assumed by PTM Productions
exceeded the assets of our discontinued operation.
33
<PAGE>
Formation of Pac Title/Mirage
Pac Title/Mirage was formed in 1997 as the combination of the LifeF/X
technology contributed by Mirage Technologies LP and the post-production
services business that was acquired from Pacific Title and Art Studio, a post-
production company founded in 1918. In this transaction, Mirage Technologies LP
received $8 million of preferred equity for its technology contribution and
Safeguard received $8 million of preferred and common equity for the $8 million
in cash it contributed.
This $8 million cash, along with approximately $8 million from the proceeds of
bank borrowings, was used to purchase the post-production business in an arms-
length, negotiated transaction from unaffiliated owners of Pacific Title and Art
Studio for $15.5 million.
The owners of Mirage Technologies LP were Michael Rosenblatt, Life F/X
Chairman and Co-President, Dr. Serge Lafontaine, Dr. Ian Hunter, Dr. Ivan Gulas
and Michael MacCloskey. Dr. Serge Lafontaine is the Chief Technology Officer of
Lifef/x Networks, Inc., a wholly-owned subsidiary of Lifef/x, Inc. Dr. Ian
Hunter is a consultant to Lifef/x Networks, Inc. and a director of Lifef/x, Inc.
Dr. Ivan Gulas is also a consultant to Lifef/x Networks, Inc. At the time of the
formation of Pac Title/Mirage in 1997, Michael Rosenblatt and Dr. Ivan Gulas
each owned 25.5% of Mirage Technologies LP, Dr. Ian Hunter and Dr. Serge
Lafontaine each owned 19% and Michael MacCloskey owned 11%.
Dr. Ian Hunter serves as a technical and engineering consultant to Lifef/x
Networks, Inc. under a consulting agreeement with a term of one year which
commenced on January 4, 2000 at compensation of $150,000.
Dr. Ivan Gulas serves as a consultant to Lifef/x Networks, Inc. under a
consulting agreement with a term of three years which commenced on December 13,
1999 at an annual compensation of $200,000.
Subsequent to the formation of Pac Title Mirage, Robert Verratti, an officer
and director, acquired approximately 2% of the common stock from Safeguard in a
cash transaction.
Pac Title/Mirage incurred losses from its inception. Safeguard, which owned
approximately 49% of Pac Title/Mirage, loaned it significant amounts to support
its operations. From the time of Pac Title/Mirage's formation in 1997 until
September 30, 1999, Safeguard loaned it a total of $13,325,000. Safeguard's
consideration for making these loans included warrants to purchase common stock
of Pac Title/Mirage at exercise prices ranging from $1.00 to $2.50 per share.
These warrants were subsequently converted into warrants to purchase common
stock of Lifef/x, Inc. as part of the merger transaction with Fin Sports as more
fully described in "Business."
Subsequent to September 30, 1999, Safeguard has made additional loans to Pac
Title/Mirage, but these loans do not include any warrant or other equity
component. These post-September 30 loans from Safeguard, along with bank debt
and other debt related to non-LifeF/X operations, was transferred to PTM
Productions on March 20, 2000. See additional discussion in "Business."
Safeguard Administrative Services Agreement
On October 31, 1997, Pac Title/Mirage entered into an administrative services
agreement with Safeguard effective January 1, 1998 that provided for a monthly
fee to Safeguard of 1.5% of net revenues with minimum annual payments of
$100,000 and maximum annual payments of $600,000. This agreement had an initial
term through December 31, 2002 and was to continue thereafter unless terminated
by either party. The agreement was renegotiated to provide for a minimum annual
payment of $50,000 for the year 2000, and then further amended to provide that
the term of the agreement ended March 31, 2000. The total amount owed to
Safeguard of $535,692 as of December 31, 1999 was one of the liabilities assumed
by PTM Productions in its purchase of the discontinued operation, while the
$12,500 which accrued under the contract from December 31, 1999 to March 31,
2000 will be paid by LifeF/X.
34
<PAGE>
Mirage Administrative Services Agreement
In October 1997 Pac Title/Mirage entered into an administrative services
support agreement with Mirage Technologies L.P., an entity partially owned by
our Chairman and Co-President Michael Rosenblatt (29%), our director Ian Hunter
(29%) and our Chief Technology Officer Serge Lafontaine (29%) that provided for
a fee of $25,000 per month beginning November 1997. The agreement would have
expired on the earlier of October 31, 2002 or six months after a sale of the
Company. The agreement was cancelled on March 8, 2000 and Mirage agreed to
forgive the accrued management fee of $445,000.
35
<PAGE>
DESCRIPTION OF SECURITIES
General
Our authorized capital stock consists of 100,000,000 shares of Common Stock,
par value $.001 per share.
The following summary descriptions are qualified in their entirety by
reference to our Articles of Incorporation.
Common Stock
The authorized capital stock of LifeF/X consists of 100,000,000 shares of
Common Stock, $.001 par value per share. All shares have equal voting rights.
Voting rights are not cumulative, and, therefore, the holders of more than 50%
of the Common Stock could, if they chose to do so, elect all of the Directors.
Upon liquidation, dissolution or winding up of LifeF/X, our assets, after the
payment of our liabilities, will be distributed pro rata to the holders of the
Common Stock. The holders of the Common Stock do not have preemptive rights to
subscribe for any of our securities and have no right to require us to redeem or
purchase their shares.
Holders of Common Stock are entitled to share equally in dividends when, as
and if declared by our Board of Directors, out of funds legally available for
the payment of dividends. We have not paid any cash dividends on the Common
Stock, and it is unlikely that any dividends will be declared in the
foreseeable future.
Warrants
On May 11, 2000, we had 27,951,312 warrants outstanding: (i) 60,003 in the
private placement, (ii) 27,786,619 to Safeguard, other than warrants it
received in the private placement, (iii) 4,298 transferred by Safeguard to the
bank, as discussed under "Safeguard Warrants" below and (iii) 100,392 to service
providers, as discussed below.
We issued 6,000,000 shares of Common Stock and warrants for 60,003 shares of
Common Stock in our private placement. We issued the Common Stock and warrants
at two closings, which occurred on December 14, 1999 and February 2, 2000. By
December 31, 1999, we or our escrow agent had received over $17,000,000 in
proceeds from the private placement. At the first closing, we issued to
investors 2,983,000 shares of Common Stock and warrants for 29,830 shares of
Common Stock. At the second closing we issued to investors 3,017,000 shares of
Common Stock and warrants for 30,173 shares of Common Stock. Each unit included
one share of Common Stock and a warrant that entitled the holder to purchase, at
a price of $7.50 per share, .01 share of Common Stock for a period of 18 months
from the date of issuance. At the first closing, we also issued (a) warrants to
purchase 100,000 shares of our common stock to MG Securities Group, Inc., the
placement agent in the private placement, and (b) 39,167 shares of Common Stock
and warrants to purchase 392 shares of Common Stock to attorneys for legal
services for the private placement.
The exercise price of the warrants will be adjusted in a stock split of, or
stock dividend on, or a subdivision, combination, or recapitalization of the
Common Stock. In a liquidation, dissolution or winding up of LifeF/X, holders
of the warrants, unless exercised, will not be entitled to participate in our
assets. Holders of the warrants will have no voting, preemptive, liquidation or
other rights of a stockholder, and no dividends will be declared on the
warrants.
36
<PAGE>
Safeguard Warrants
As part of the merger, warrants for 17,587,500 shares of our Common Stock
were issued to Safeguard for its existing Pac Title/Mirage warrants. The
warrants entitle Safeguard to purchase 5,862,500 shares of our Common Stock at
an exercise price of $2.50 per share, 5,862,500 shares of Common Stock at an
exercise price of $5.00 per share, and 5,862,500 shares of Common Stock at an
exercise price of $6.00 per share. In addition, we issued warrants for
10,203,417 shares of Common Stock at an exercise price of $0.01 per share to
Safeguard in exchange for Pac Title/Mirage debt owed to Safeguard. The warrants
have a term of 10 years and are exercisable one year after the merger, but may
be exercised early as explained in the warrants. The exercise prices of the
warrants will be adjusted for a stock split of, or stock dividend on, or a
subdivision, combination, or recapitalization of the Common Stock. As an
incentive for the bank to consent to the sale of assets to PTM Productions,
Inc., Safeguard transferred to the bank warrants to purchase 4,298 shares of
Common Stock at an exercise price of $0.01 per share.
Registration Rights
We agreed to file a Registration Statement to register under the Securities
Act all of the Common Stock issued as part of the Units and the Common Stock to
be issued on exercise of the warrants issued as part of the Units. This
prospectus is a part of that Registration Statement. We also agreed to include
in the Registration Statement the 11,294,084 shares of Common Stock issued in
the merger to the pre- merger Pac Title/Mirage shareholders, the 39,167 shares
of Common Stock issued to service providers for work in the private placement
and 100,392 shares of Common Stock to be issued on exercise of warrants granted
to service providers for work in the private placement. We agreed to pay all
expenses for registration of the securities. In addition, we agreed to comply
with all necessary state securities laws so as to permit the sale of the Common
Stock by the investors.
We agreed to use our best efforts to cause the Registration Statement to
become effective on or before May 12, 2000 (within 150 days after the date of
the merger). We also agreed that, if the Registration Statement has not been
declared effective by the close of business on May 12, 2000, we will pay to the
investors from the first closing of the private placement liquidated damages on
a pro rata basis totaling $2,983 per day for each day between May 13, 2000 and
the effective date of the Registration Statement. In addition, we agreed that,
if the Registration Statement has not been declared effective by the close of
business on July 1, 2000, we will pay to the investors from the second closing
of the private placement liquidated damages on a pro rata basis totaling $3,017
per day for each day between July 2, 2000 and the effective date of the
Registration Statement.
In addition, to enable public sale of the 27,790,917 shares of Common Stock to
be issued to Safeguard on the exercise of the warrants which were issued to
Safeguard, we granted Safeguard the right to require us to prepare registration
statements and file them with the SEC on unlimited occasions if we are eligible
to file our registration statements on Form S-3, or on two occasions if we are
not eligible to file our registration statements on Form S-3.
Lock-Up/Leak-Out
Until June 12, 2001, which is 18 months following the merger on December 14,
1999, no more than 10% of a Selling Shareholder's shares covered by this
prospectus may be sold in any consecutive three month period. If less than 10%
of the Selling Shareholder's shares covered by this prospectus are sold in any
three month period, the difference between 10% of those shares and the amount
actually sold may be sold during any prospective three month periods. Once sold
under these restrictions, shares become freely tradeable without
restriction.
Duane Jenson, Briar Creek Investment LLC and Leonard Burningham, who were pre-
merger shareholders of Fin Sports U.S.A., Inc. and who held 1,614,000 shares of
Common Stock on December 15, 1999, have agreed to lock up these shares of Common
Stock until June 12, 2001 under the restrictions applicable to Selling
Shareholders.
Transfer of any shares acquired on exercise of options will be restricted by
substantially identical Lock-
37
<PAGE>
Up/Leak-Out provisions.
LifeF/X may waive any of these restrictions if a waiver would be beneficial
to us or would facilitate an orderly trading market for the Common Stock.
Nevada Anti-Takeover Provisions
The anti-takeover provisions of Sections 78.411 through 78.445 of the Nevada
Corporation Law apply to LifeF/X. Section 78.438 of the Nevada law prohibits us
from merging with or selling LifeF/X or more than 5% of our assets or stock to
any shareholder who owns or owned more than 10% of any stock or any entity
related to a 10% shareholder for three years after the date on which the
shareholder acquired the LifeF/X shares, unless the transaction is approved by
LifeF/X's Board of Directors. The provisions also prohibit us from completing
any of the transactions described in the preceding sentence with a 10%
shareholder who has held the shares more than three years and its related
entities unless the transaction is approved by our Board of Directors or a
majority of our shares, other than shares owned by that 10% shareholder or any
related entity. These provisions could delay, defer or prevent a change in
control of LifeF/X.
Transfer Agent
American Registrar & Transfer Company, 342 East 900 South, Salt Lake City,
Utah 84111, serves as Transfer Agent for our Common Stock.
PLAN OF DISTRIBUTION
The Selling Securityholders may offer shares of Common Stock from time to time
in one or more transactions in the over-the-counter market, which may involve
brokers or dealers, or in private transactions. We have not entered into any
agreement, arrangement or understanding with brokers or dealers regarding the
shares that may be offered by this prospectus.
38
<PAGE>
SELLING SECURITYHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock of each Selling Securityholder and as adjusted to give
effect to the sale of the Common Stock offered through this prospectus.
<TABLE>
<CAPTION>
Before Offering After Offering
Number of Number of Number of
Shares of Shares of Shares of
Name of Beneficial Owner Common Stock Common Stock Common Stock
Held Being Offered Held
------------------- ---------------- ------------------
<S> <C> <C> <C>
David Alteneau 10,938 10,938 -0-
Stephen Andriole(1) 30,000 30,000 -0-
Aspira Capital Management, L.P 40,400 (3) 40,400 -0-
Phil Berger 6,733 (3) 6,733 -0-
Bergl Nominees Ltd 50,500 (3) 50,500 -0-
The Berkshire Group 10,100 (3) 10,100 -0-
Brad and Mira Bernstein, JTWROS 10,100 (3) 10,100 -0-
Harvey Bernstein 30,300 (3) 30,300 -0-
Michele Beuerlein(2) 7,575 (3) 7,575(3) -0-
Deirdre Blackburn 12,000 12,000 -0-
Robert A. Blatt 20,200 (3) 20,200 -0-
Michael G. Bolton(4) 20,000 20,000 -0-
Amory Bradley 1,000 1,000 -0-
Lucille Bradley 1,000 1,000 -0-
Stephanie Bradley 1,000 1,000 -0-
Leonard W. Burningham(5) 40,400 (3) 40,400(3) -0-
Alice G. Burt 13,500 13,500 -0-
James M. Bye 16,834 (3) 16,834 -0-
Matthew Carley 40,400 (3) 40,400 -0-
Sheila Chaifetz 20,200 (3) 20,200 -0-
David Chapman 20,200 (3) 20,200 -0-
Cleveland Charles Cleary 20,200 (3) 20,200 -0-
Thomas Cochran 10,100 (3) 10,100 -0-
Bear Stearns Security Corp. C/F James Conen IRA 21,000 21,000 -0-
Conen Family Investments LLC 21,000 21,000 -0-
William D. Courturie 20,200 (3) 20,200 -0-
Bruce Cowen 40,400 (3) 40,400 -0-
D2JR Capital LLC 10,100 (3) 10,100 -0-
DBA Properties 11,784 (3) 11,784 -0-
DH Blair Investment Banking Group 80,800 (3) 80,800 -0-
Gary Joseph De Decker 80,800 (3) 80,800 -0-
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C> <C>
Europa International Inc 10,100 (3) 10,100 -0-
Excalibur Limited Partnership 168,334 (3) 168,334 -0-
Edward and Kathryn Green Feigeles, JTWROS 40,400 (3) 40,400 -0-
Mark Fischer 25,000 25,000 -0-
Stephanie Fischer 25,000 25,000 -0-
Bradley Fishkin 1,000 1,000 -0-
Carly Fishkin 1,000 1,000 -0-
Elyse Fishkin 1,000 1,000 -0-
Kenneth R. Fishkin 1,000 1,000 -0-
Fixer Ltd 20,200 (3) 20,200 -0-
Fox Family Partnership 80,800 (3) 80,800 -0-
Thomas Fuchs 20,200 (3) 20,200 -0-
Caroline Gappelberg 40,400 (3) 40,400 -0-
Joseph Giamanco 60,600 (3) 60,600 -0-
Joseph Giamanco, Jr 60,600 (3) 60,600 -0-
Ari Scott Goldman 6,733 (3) 6,733 -0-
Rinda Goodrich 1,000 1,000 -0-
Perry Green 40,400 (3) 40,400 -0-
Hillary Grinker 400,000 400,000 -0-
Mary A. Guttendorf(6) 10,000 10,000 -0-
Richard A. Guttendorf, Jr. G.R.A.T.(7) 24,000 24,000 -0-
Richard A. Guttendorf III(8) 3,000 3,000 -0-
John K. Halvey(9) 10,000 10,000 -0-
Trust of Colin L. Halvey dtd 5/27/99(10) 5,000 5,000 -0-
Trust of Grace Ann Halvey dtd 12/19/97(11) 5,000 5,000 -0-
Alex W. Hart and Mary T. Hart 67,000 67,000 -0-
Alex W. Hart Irrevocable Trust 8,000 8,000 -0-
Stan Heifetz 10,100 (3) 10,100 -0-
Helca Trust Reg. Trust Enterprise Incorporated in Liechtenstein, Vadnz 40,400 (3) 40,400 -0-
Jeffrey Henick 20,200 (3) 20,200 -0-
Gary Herman 80,800 (3) 80,800 -0-
Paul Hertz 20,200 (3) 20,200 -0-
Jeanette Himes 20,200 (3) 20,200 -0-
Richard J. Hindlian, as Trustee of the Dornstein Trust, U/I/D dated 6,666 6,666 -0-
12/29/99
Richard J. Hindlian, as Trustee of the MSR Trust, U/I/D dated
12/29/99(12) 26,664 26,664 -0-
Michael Hirtenstein 40,400 (3) 40,400 -0-
Derek Hompes 40,400 (3) 40,400 -0-
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C> <C>
Joseph D. Housepian 20,200 (3) 20,200 -0-
Ian Hunter(13) 1,774,102 1,774,102 -0-
Peter Jacobson 20,200 (3) 20,200 -0-
Duane S. Jensen 57,233 (3) 57,233 -0-
Delbert W. Johnson 50,000 50,000 -0-
Jeri L. Johnson 1999 Trust dtd 5/27/99(14) 7,000 7,000 -0-
Jerry L. Johnson(15) 86,000 86,000 -0-
Jonathan W. Johnson 1999 Trust dtd 5/27/99(16) 7,000 7,000 -0-
M. William Johnson 101,000 (3) 101,000 -0-
Troy W. Johnson 40,400 (3) 40,400 -0-
David Jordan 20,200 (3) 20,200 -0-
Robert Kaplan 20,200 (3) 20,200 -0-
Emmanuel Karavas and Stefanos Kourtis, as Joint Tenants 20,200 (3) 20,200 -0-
Howard Kaye Family Fund 20,200 (3) 20,200 -0-
Jeffery Kesner 8,080 (3) 8,080 -0-
David Kestenberg 249,470 (3) 249,470 -0-
Bruce E. and Theresa Kidwell 5,000 5,000 -0-
Kingdon Associates 151,500 (3) 151,500 -0-
Kingdon Family Partnership, LP 40,400 (3) 40,400 -0-
Kingdon Partners 121,200 (3) 121,200 -0-
M. Kingdon Offshore NV 696,900 (3) 696,900 -0-
Nicholas Kouzoukas 20,200 (3) 20,200 -0-
Serge Lafontaine(17) 1,774,102 1,774,102 -0-
Leonardo, L.P 84,840 (3) 84,840 -0-
Seymour Lippman 323,200 (3) 323,200 -0-
David Liptak 70,700 (3) 70,700 -0-
Pasquale J. Livecchi 20,200 (3) 20,200 -0-
Loeb Ventures I LLC(18) 20,200 (3) 20,200 -0-
John D. Loewenberg 50,000 50,000 -0-
Simon Long 128,270 (3) 128,270 -0-
Thomas Lynch(19) 70,000 70,000 -0-
Michael MacCloskey(20) 887,051 887,051 -0-
Arnold Malakoff 10,100 (3) 10,100 -0-
Philip and Stacey Malakoff 10,100 (3) 10,100 -0-
Seymour G. and Miriam G. Mandell, as JTWROS 101,000 (3) 101,000 -0-
Vincent Manngard 40,400 (3) 40,400 -0-
S. Maritz 80,800 (3) 80,800 -0-
Frank Marshall 100,000 100,000 -0-
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C> <C>
Jeffrey L. Martin, MD Money Purchase and Profit Sharing Plan 6,734 (3) 6,734 -0-
Sidney Martin (IRA) 6,734 (3) 6,734 -0-
Mark D. Martino 10,100 (3) 10,100 -0-
Dan McKinney 10,000 10,000 -0-
Garrett D. Melby 10,000 10,000 -0-
Richard Messina 10,100 (3) 10,100 -0-
Jack L. Messman(21) 75,000 75,000 -0-
MG Securities(22) 100,000 (23) 100,000 -0-
Barbara B. Miles 5,000 5,000 -0-
Michael W. Miles. Cust. for Amy Moran Miles 5,000 5,000 -0-
Mirage Technologies, Inc.(24) 43,750 43,750 -0-
Mirage Technologies, L.P.(25) 571,872 571,872 -0-
Mark S. Mitzner 40,400 (3) 40,400 -0-
Greg Moore 3,030 (3) 3,030 -0-
Sharon Moore 20,200 (3) 20,200 -0-
Ivan Moskowitz 3,535 (3) 3,535 -0-
Susan C. Moskowitz 6,060 (3) 6,060 -0-
Warren V. Musser(26) 200,000 200,000 -0-
John C. Natale 20,200 (3) 20,200 -0-
Stephen Nicholas 161,600 (3) 161,600 -0-
John Nickolas 30,000 30,000 -0-
Stanley Ostrau 20,200 (3) 20,200 -0-
James A. Ounsworth(27) 90,000 90,000 -0-
Outback Capital Ltd 43,430 (3) 43,430 -0-
John F. Owens 50,000 50,000 -0-
Preston Paine 20,200 (3) 20,200 -0-
Guy Peterson 40,400 (3) 40,400 -0-
Pete Petrochilos 20,200 (3) 20,200 -0-
Pincor Investments 151,500 (3) 151,500 -0-
Michelle Pujadas 10,000 10,000 -0-
Regent Asset Mgmt LP 40,400 (3) 40,400 -0-
Jack & Joyce Reynolds Family Trust 20,200 (3) 20,200 -0-
George Rioseco 20,200 (3) 20,200 -0-
Daniel J. Rosard Trustee u/t/a dated 11/3/99 15,000 15,000 -0-
Steven Rosard and Laurie B. Rosard JT 15,000 15,000 -0-
Michael Rosenblatt(28) 1,731,272 1,731,272 -0-
Jeff Ruland 20,200 (3) 20,200 -0-
Isaac Russo 20,200 (3) 20,200 -0-
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C> <C>
Scott Ryan 10,100 (3) 10,100 -0-
Safeguard 99 Capital L.P.(29) 14,406,666 (30) 336,666 4,070,000(36)
Safeguard 97 Capital L.P.(29) 8,233,282 (31) 2,027,365 6,205,917(36)
Safeguard Scientifics (Delaware), Inc.(32) 150,082 (31) 82 150,000(36)
Savage Holdings, Inc.(33) 461,082 (3) 461,082 -0-
Donald Scanlon 40,400 (3) 40,400 -0-
Virginia Schaefer 21,884 (3) 21,884 -0-
Jeffrey Schnipper 20,200 (3) 20,200 -0-
Jane Seidman 10,100 (3) 10,100 -0-
Lee Seidman 30,300 (3) 30,300 -0-
Leslie G. and Lesle Zide-Selbovitz, as JTWROS 2,020 (3) 2,020 -0-
Carl Sempier 70,000 70,000 -0-
Schlomo Sharbat 6,733 (3) 6,733 -0-
Robert Sharkansky 401K Profit Sharing Plan dated 10/14/84 67,165 (3) 67,165 -0-
John T. Sheehan 25,000 25,000 -0-
Joseph M. Shulman IRA FBO Joseph M. Shulman 3,535 (3) 3,535 -0-
Susan C. Shulman 13,130 (3) 13,130 -0-
Benjamin Smith 17,170 (3) 17,170 -0-
E. Barry Smith 12,000 12,000 -0-
Kevin Smith 5,469 5,469 -0-
M. Lazane Smith 100,000 100,000 -0-
SNI Construction Corp 40,400 (3) 40,400 -0-
Standard Bank Stockbrokers 40,400 (3) 40,400 -0-
Thomas J. Staniforth 20,200 (3) 20,200 -0-
Margot F. and Rica G. Feil Stein, JTWROS 20,200 (3) 20,200 -0-
Alan Steinberg 20,200 (3) 20,200 -0-
Gruntal FBO Arthur Steinberg IRA 60,600 (3) 60,600 -0-
Mitchell D. Steinberg 20,200 (3) 20,200 -0-
Robert Steinberg (IRA Rollover) 20,200 (3) 20,200 -0-
Abbott Stillman 20,200 (3) 20,200 -0-
Robert H. Strouse 70,000 70,000 -0-
Joe P. Sullivan 40,400 (3) 40,400 -0-
Terence C. Sullivan 10,100 (3) 10,100 -0-
Elliott Sumers 20,200 (3) 20,200 -0-
Bob Sunness 20,200 (3) 20,200 -0-
Diane Swiggard 20,494 20,494 -0-
Robert P. Toppe Jr 20,200 (3) 20,200 -0-
Gretchen E. Tucker(34) 3,000 3,000 -0-
</TABLE>
43
<PAGE>
<TABLE>
<S> <C> <C> <C>
Renee Typaldos 20,200 (3) 20,200 -0-
Valor Capital Management L.P 10,100 (3) 10,100 -0-
Robert Verratti(35) 349,998 349,998 -0-
Eli Wachtel 80,800 (3) 80,800 -0-
Geoffrey Waller 750 750 -0-
Jeanne Waller 750 750 -0-
Gerald M. Wilk 15,000 15,000 -0-
Matthew Wilk 5,000 5,000 -0-
Michael T. Wilk 5,000 5,000 -0-
Stephen Wilk 5,000 5,000 -0-
Alan Winters 60,600 (3) 60,600 -0-
Alan P. Yonack 10,100 (3) 10,100 -0-
Barry Zelin 10,100 (3) 10,100 -0-
Leonard B. Zelin 40,400 (3) 40,400 -0-
Dennis J. and Maureen Zwaan 5,000 5,000 -0-
Lawrence Zweibel MD PC Profit Sharing Plan 6,734 (3) 6,734 -0-
TOTALS 37,935,970 17,510,053 20,425,917
</TABLE>
- -------------------
(1) LifeF/X Director and Safeguard Senior Vice President and Chief Technology
Officer
(2) Former Partner of Loeb & Loeb LLP, which provides certain legal services
to LifeF/X
(3) Represents shares held plus shares issuable upon exercise of currently
exercisable warrants, exercisable at a per-share price of $7.50
(4) Safeguard Senior Vice President
(5) Former counsel to Fin Sports and father of Branden T. Burningham, Esq.,
legal counsel to LifeF/X
(6) Spouse of Richard A. Guttendorf, Jr., Chief Financial Officer, Secretary
and Director of LifeF/X and Safeguard Vice President
(7) Trust of Chief Financial Officer, Secretary and Director of LifeF/X and
Safeguard Vice President
(8) Son of Richard A. Guttendorf, Jr., Chief Financial Officer, Secretary and
Director of LifeF/X and Safeguard Vice President
(9) Safeguard Senior Vice President
(10) Trust for son of John L. Halvey, Safeguard Senior Vice President
(11) Trust for daughter of John L. Halvey, Safeguard Senior Vice President
(12) Trust for family of Michael Rosenblatt, LifeF/X Chairman and Co-President
(13) LifeF/X Director
(14) Trust for daughter of Jerry L. Johnson, Senior Vice President of Safeguard
(15) Safeguard Senior Vice President
44
<PAGE>
(16) Trust for son of Jerry L. Johnson, Senior Vice President of Safeguard
(17) Lifef/x Networks, Inc. Chief Technology Officer
(18) Investment vehicle of Loeb & Loeb LLP, counsel to LifeF/X with respect to
certain legal matters
(19) President of Comp-U-Com, Inc., a majority-owned subsidiary of Safeguard,
and former director of Pac Title/Mirage
(20) Partner of Mirage Technologies, L.P.
(21) Safeguard Director
(22) Placement agent for the private placement
(23) Represents warrants for stock issuable at an exercise price of $7.50 per
share
(24) Corporation owned by Michael Rosenblatt, Chairman and Co-President of
LifeF/X
(25) Partnership owned by Michael Rosenblatt, Chairman and Co-President of
LifeF/X; Serge Lafontaine, Chief Technology Officer of Lifef/x Networks,
Inc.; Ian Hunter, Director of LifeF/X; and Michael MacCloskey
(26) Safeguard Chairman and CEO and former director of Pac Title/Mirage
(27) Safeguard Chief Counsel
(28) Chairman and Co-President of LifeF/X
(29) Partnership controlled by Safeguard
(30) Represents the following:
<TABLE>
<S> <C>
Shares held .................................................................................... 333,333
Shares issuable upon exercise of warrant, exercisable at a per share price of $2.50 ............ 4,690,000
Shares issuable upon exercise of warrant, exercisable at a per share price of $5.00 ............ 4,690,000
Shares issuable upon exercise of warrant, exercisable at a per share price of $6.00 ............ 4,690,000
Shares issuable upon exercise of warrant currently exercisable at a per share price of $7.50 ... 3,333
</TABLE>
(31) Represents shares held plus shares issuable upon exercise of warrants,
exercisable at a per share price of $0.01
(32) Shareholder of LifeF/X
(33) Consultant to Fin Sports regarding the merger
(34) Daughter of Richard A. Guttendorf, Jr., Chief Financial Officer, Secretary
and Director of LifeF/X and Vice President of Safeguard
(35) LifeF/X Director and Safeguard consultant
(36) Represents shares issuable upon exercise of warrants not exercisable within
60 days
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The market price of our Common Stock could decline as a result of sales of a
large number of shares of our Common Stock in the market after this offering, or
the perception that such sales could occur. Such sales also might make it more
difficult for us to sell equity securities in the future at a time and price
that we deem appropriate. After this offering, 19,191,414 shares of Common Stock
will be outstanding, and no shares will be held as treasury stock. Following
this offering, all of the shares being offered by this prospectus are freely
tradable, if the sale does not violate the Lock-Up/Leak-Out restrictions. Refer
to "Description of Securities-Lock-Up/Leak-Out" elsewhere in this
prospectus.
LEGAL MATTERS
The validity of the shares of our Common Stock offered by this prospectus
will be passed upon for LifeF/X by Branden T. Burningham, Salt Lake City, Utah.
Branden T. Burningham is the son of Leonard W. Burningham, Esq. who is one of
the Selling Securityholders, and holds a 12.8% limited partnership interest in
the Leonard W. Burningham Fin Partnership, that owns approximately 100,000
shares of our Common Stock. Branden T. Burningham provides legal services to
Duane S. Jenson, who is a Selling Securityholder.
Loeb & Loeb LLP has passed on certain matters related to federal securities
laws for LifeF/X. Partners of Loeb & Loeb LLP own all of the equity interests in
Loeb Ventures I LLC, which owns 20,000 shares of LifeF/X Common Stock and
warrants to purchase 200 shares of LifeF/X Common Stock at an exercise price of
$7.50 per share. Loeb Ventures I LLC is a Selling Securityholder.
EXPERTS
The Consolidated Financial Statements of Lifef/x, Inc. at December 31, 1999
and 1998 and for the years then ended, and for the period June 1, 1997 to
December 31, 1997, and the cumulative period June 1, 1997 through December 31,
1999, included in this prospectus and Registration Statement have been audited
by KPMG LLP, independent certified public accountants, as indicated in their
report , a copy of which is attached to this prospectus, and are included in
this prospectus in reliance upon authority of KPMG LLP as experts in accounting
and auditing.
CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANTS
Mantyla, McReynolds & Associates, Salt Lake City, Utah, served as the
independent public accountants for Fin Sports up until the merger. KPMG served
as the independent public accountants for Pac Title/Mirage. Effective December
14, 1999, the date of the merger, we dismissed Mantyla as our independent
accountants, and engaged KPMG, the then-current independent public accountants
for Pac Title/Mirage, as our new independent accountants. The dismissal of
Mantyla and the retention of KPMG was approved by our Board of Directors.
Prior to the engagement of KPMG, neither we nor anyone on our behalf consulted
with KPMG regarding the application of accounting principles to a specified
transaction, either completed or uncompleted, or type of audit opinion that
might by rendered on LifeF/X's financial statements.
Mantyla audited Fin Sports' financial statements for the years ended December
31, 1997 and 1998. Mantyla's report for the covered periods did not contain an
adverse opinion or a disclaimer of opinion, nor was the report qualified or
modified as to uncertainty, audit scope or accounting principles except as to
Fin Sports' ability to continue as a going concern.
During the period from January 1, 1999 to December 14, 1999 and the years
ended December 31, 1997 and 1998, there were no disagreements with Mantyla on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Mantyla, would have caused Mantyla to refer to the
subject matter of the disagreements in its reports on Fin Sports' financial
statements. In addition, there were no events of these types as described under
Item 304 of
46
<PAGE>
Regulation S-B during the fiscal years ended December 31, 1997 and 1998 and the
subsequent interim periods through December 14, 1999.
Mantyla furnished Fin Sports with a letter dated December 7, 1999 addressed to
the Securities and Exchange Commission stating there were no disagreements
between Mantyla and Fin Sports, whether resolved or not resolved, on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure. A copy of Mantyla's letter is incorporated by
reference to Exhibit 16.1 to Form 8-K filed by Lifef/x, Inc. on December 15,
1999.
ADDITIONAL INFORMATION
We have filed with the Commission a registration statement on Form SB-2 under
the Securities Act covering the Common Stock offered by this prospectus. This
prospectus, which constitutes a part of the registration statement, omits some
of the information described in the registration statement under the rules and
regulations of the Commission. For further information on LifeF/X and the
Common Stock offered by this prospectus, please refer to the registration
statement and the attached exhibits . Statements contained in this prospectus
as to the content of any contract or other document referred to are not
necessarily complete, and in each instance, reference is made to the copy filed
as an exhibit to the registration statement; each of these statements is
qualified in all respects by that reference. The registration statement and
exhibits can be inspected and copied at the public reference section at the
Commission's principal office, 450 5th Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, the Commission's Regional Offices located at the
Northwestern Atrium Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661-2511, and 7 World Trade Center, 13th Floor, New York, New York
10048 and through the Commission's Web site (http://www.sec.gov). Copies may be
obtained from the Commission's principal office upon payment of the fees
prescribed by the Commission.
47
<PAGE>
LIFEF/X, INC.
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Independent Auditors' Report...................... F-2
Consolidated Balance Sheets....................... F-3
Consolidated Statements of Operations............. F-4
Consolidated Statements of Shareholders' Equity... F-5
Consolidated Statements of Cash Flows............. F-6
Notes to Consolidated Financial Statements........ F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
LifeF/X, Inc.
We have audited the accompanying consolidated balance sheets of LifeF/X, Inc. (a
development stage company) and subsidiary (the Company) as of December 31, 1998
and 1999 and the related statements of operations, shareholders' equity and cash
flows for the period from June 1, 1997 (inception) through December 31, 1997 and
for each of the years in the two-year period ended December 31, 1999 and for the
cumulative period June 1, 1997 (inception) through December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LifeF/X, Inc. (a
development stage company) and subsidiary as of December 31, 1998 and 1999 and
the results of their operations and their cash flows for the period from June 1,
1997 (inception) through December 31, 1997 and for each of the years in the two-
year period ended December 31, 1999 and for the cumulative period June 1, 1997
(inception) through December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Los Angeles, California
February 18, 2000, except for the last
paragraph of note 1(a), note 3 and the
last paragraph of note 4, which are as
of March 20, 2000, and the last paragraph
of note 6, which is as of March 15, 2000.
F-2
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------- -----------
Assets (note 3) 1998 1999 2000
---------------- ------------- -----------
<S> <C> <C> <C>
(Unaudited)
Current assets:
Cash and cash equivalents $ -- 7,778,040 15,430,917
Restricted cash from stock subscriptions - (note 5) -- 9,051,000 --
Interest receivable -- 17,249 12,442
Prepaid expenses -- 175,000 134,891
------------- ----------- ----------
Total current assets -- 17,021,289 15,578,250
Property, plant and equipment, net -- -- 331,165
Other assets -- -- 246,250
Net assets of discontinued operation - long-term (note 3) 8,143,697 4,451,701 --
------------- ----------- ----------
$ 8,143,697 21,472,990 16,155,665
============= =========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable to related party (note 9) $ 1,700,000 -- --
Accounts payable and accrued expenses 284,123 864,123 1,032,178
Accounts payable to PTM Productions, Inc. (note 3) -- -- 565,311
Net liabilities of discontinued operation - current (note 3) 2,586,648 9,598,372 --
------------- ----------- ----------
Total current liabilities 4,570,771 10,462,495 1,597,489
Other long-term liabilities -- 357,250 322,699
Long-term notes payable to related party (note 9) 2,100,000 -- --
------------- ----------- ----------
6,670,771 10,819,745 1,920,188
------------- ----------- ----------
Commitments and contingencies (notes 7 and 12)
Shareholders' equity (notes 2, 5 and 6):
Preferred Stock, $.01 par value. Authorized 20,000,000
shares (note 5):
Series A - issued and outstanding 8,000,000 shares in 1998 -- -- --
and none in 1999
Series B - issued and outstanding 7,680,000 shares in 1998
and none in 1999, stated at liquidation preference 7,996,799 -- --
Common stock, $.001 par value. Authorized 100,000,000
shares; issued and outstanding 18,999,917 shares (1999)
and 19,010,946 shares (2000) -- 18,992 19,011
Common stock, $.01 par value. Authorized 50,000,000 shares;
issued and outstanding 320,100 shares (1998) 3,201 -- --
Additional paid-in capital 6,000 52,635,250 57,071,258
Common stock subscribed (note 5) -- (579,000) --
Deferred compensation related to stock options (note 6) -- (2,272,148) (1,979,279)
Deficit accumulated during development stage (6,533,074) (39,149,849) (40,875,513)
------------- ----------- ----------
Total shareholders' equity 1,472,926 10,653,245 14,235,477
------------- ----------- ----------
$ 8,143,697 21,472,990 16,155,665
============= =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Period from Cumulative Cumulative
June 1, 1997 June 1, 1997 Three Months Ended June 1, 1997
(inception) (inception) ---------------------- (inception)
through Years ended December 31, through March 31, through
December 31, ------------------------------ December 31, --------------------- March 31,
1997 1998 1999 1999 1999 2000 2000
-------------- -------------- ------------- --------- --------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue (notes 1 and 3) $ -- -- -- -- -- -- --
-------------- -------------- ------------- --------- --------- ---------- -----------
Operating costs and expenses:
General and administrative 18,705 181,942 1,493,590 1,694,237 53,919 1,242,970 2,937,207
Research and development 624,900 1,202,762 1,754,253 3,581,915 311,948 677,717 4,259,632
----------- ----------- ----------- --------- --------- ---------- ----------
Total operating costs
and expenses 643,605 1,384,704 3,247,843 5,276,152 365,867 1,920,687 7,196,839
----------- ----------- ----------- --------- --------- ---------- ----------
Loss from operations (643,605) (1,384,704) (3,247,843) (5,276,152) (365,867) (1,920,687) (7,196,839)
Interest expense on borrowings 13,677 58,850 68,453 140,980 6,464 12,274 153,254
Interest expense - warrants
issued in connection with
debt conversion (note 5) -- -- 9,302,339 9,302,339 -- -- 9,302,339
Interest expense - warrants
issued in connection
with loans - (note 9) -- -- 1,462,383 1,462,383 72 -- 1,462,383
Interest income -- -- (17,249) (17,249) -- (209,353) (226,602)
----------- ----------- ----------- ---------- ---------- ---------- ----------
Loss from continuing operations
before income tax expense (657,282) (1,443,554) (14,063,769) (16,164,605) (372,403) (1,723,608) (17,888,213)
Income tax expense (note 8) 800 800 800 2,400 800 2,056 4,456
----------- ----------- ----------- ---------- ---------- ---------- ----------
Loss from continuing operations (658,082) (1,444,354) (14,064,569) (16,167,005) (373,203) (1,725,664) (17,892,669)
Discontinued operation (note 3):
Loss on discontinued operation (369,658) (4,060,980) (3,002,332) (7,432,970) (3,002,332) -- (7,432,970)
Loss on disposal, including
$7,449,874 for operating
losses from measurement date
until December 31, 1999 and
$2,500,000 for losses for the
remaining disposal period -- -- (15,549,874) (15,549,874) (17,549,874) -- (15,549,874)
--------- ----------- ----------- ---------- ---------- ---------- ----------
Net loss $ (1,027,740) (5,505,334) (32,616,775) (39,149,849) (20,925,409) (1,725,664) (40,875,513)
=========== =========== =========== ========== ========== ========== ==========
Net loss per common share on a
basic and diluted basis:
Continuing operations $ (1.88) (4.12) (11.08) (1.07) (0.09)
Discontinued operation (1.06) (11.60) (14.61) (58.70) --
----------- ----------- ----------- ---------- ----------
$ (2.94) (15.72) (25.69) (59.77) (0.09)
=========== =========== =========== ========== ==========
Weighted average common
shares outstanding 350,107 350,107 1,269,824 350,107 19,000,127
=========== =========== =========== ========== ==========
</TABLE>
F-4
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Pacific Title / Mirage, Inc. Preferred Stock
---------------------------------------------------------------------
Series A Series B
--------------------------------- ---------------------------------
Shares Amount Shares Amount
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance at June 1, 1997 (inception) -- $ -- -- $ --
Issuance of Series A Preferred Stock 8,000,000 -- -- --
Issuance of Series B Preferred Stock and
common stock -- -- 8,000,000 7,999,999
Conversion of Series B Preferred Stock
to common stock -- -- (320,000) (3,200)
Net loss -- -- -- --
--------------- --------------- --------------- ---------------
Balance at December 31, 1997 8,000,000 -- 7,680,000 7,996,799
Issuance of stock warrants (note 9) -- -- -- --
Net loss -- -- -- --
--------------- --------------- --------------- ---------------
Balance at December 31, 1998 8,000,000 -- 7,680,000 7,996,799
Issuance of stock warrants (note 9) -- -- -- --
Issuance of stock warrants (note 5) -- -- -- --
Conversion of PTM Preferred and common
stock into LifeF/X common stock and
warrants upon Merger (notes 2 and 5) (8,000,000) -- (7,680,000) (7,996,799)
Deferred compensation - stock options (note 6) -- -- -- --
Vesting of stock options issued
as compensation (note 6) -- -- -- --
Issuance of shares - private placement
offering (note 5) -- -- -- --
Private placement offering costs (note 5) -- -- -- --
Common stock subscribed (note 5) -- -- -- --
Net loss -- -- -- --
--------------- --------------- --------------- ---------------
Balance at December 31, 1999 -- -- -- --
Private placement offering costs (unaudited) -- -- -- --
Exercise of stock options (unaudited) -- -- -- --
Completion of stock subscriptions (unaudited) -- -- -- --
Vesting of stock options issued
as compensation (unaudited) -- -- -- --
Increase in capital on transfer of
assets and liabilities to PTM
Productions, Inc., net (unaudited) -- -- -- --
Net loss for the period (unaudited) -- -- -- --
--------------- --------------- --------------- ---------------
Balance at March 31, 2000 (unaudited) -- $ -- -- $ --
=============== =============== =============== ===============
<CAPTION>
Pacific Title / Mirage, Inc. Lifef/x, Inc.
common stock common stock
-------------------------------- ---------------------------------
Shares Amount Shares Amount
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance at June 1, 1997 (inception) -- $ -- -- $ --
Issuance of Series A Preferred Stock -- -- -- --
Issuance of Series B Preferred Stock and
common stock 100 1 -- --
Conversion of Series B Preferred Stock
to common stock 320,000 3,200 -- --
Net loss -- -- -- --
-------------- --------------- --------------- ---------------
Balance at December 31, 1997 320,100 3,201 -- --
Issuance of stock warrants (note 9) -- -- -- --
Net loss -- -- -- --
-------------- --------------- --------------- ---------------
Balance at December 31, 1998 320,100 3,201 -- --
Issuance of stock warrants (note 9) -- -- -- --
Issuance of stock warrants (note 5) -- -- -- --
Conversion of PTM Preferred and common
stock into LifeF/X common stock and
warrants upon Merger (notes 2 and 5) (320,100) (3,201) 12,960,750 12,601
Deferred compensation - stock options (note 6) -- -- -- --
Vesting of stock options issued
as compensation (note 6) -- -- -- --
Issuance of shares - private placement
offering (note 5) -- -- 6,000,000 6,000
Private placement offering costs (note 5) -- -- 39,167 391
Common stock subscribed (note 5) -- -- -- --
Net loss -- -- -- --
-------------- --------------- --------------- ---------------
Balance at December 31, 1999 -- -- 18,999,917 18,992
Private placement offering costs (unaudited) -- -- -- --
Exercise of stock options (unaudited) -- -- 10,938 19
Miscellaneous share adjustment (unaudited) -- -- 91 --
Completion of stock subscriptions (unaudited) -- -- -- --
Vesting of stock options issued
as compensation (unaudited) -- -- -- --
Increase in capital on transfer of
assets and liabilities to PTM
Productions, Inc., net (unaudited) -- -- -- --
Net loss for the period (unaudited) -- -- -- --
-------------- --------------- --------------- ---------------
Balance at March 31, 2000 (unaudited) -- $ -- 19,010,946 $ 19,011
============== =============== =============== ===============
<CAPTION>
Deferred
Common compensation Total
Additional stock related to Accumulated shareholders'
paid-in capital subscribed stock options deficit equity
--------------- --------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at June 1, 1997 (inception) -- -- -- -- --
Issuance of Series A Preferred Stock -- -- -- -- --
Issuance of Series B Preferred Stock and
common stock -- -- -- -- 8,000,000
Conversion of Series B Preferred Stock
to common stock -- -- -- -- --
Net loss -- -- -- (1,027,740) (1,027,740)
-------------- --------------- --------------- --------------- -----------
Balance at December 31, 1997 -- -- -- (1,027,740) 6,972,260
Issuance of stock warrants (note 9) 6,000 -- -- -- 6,000
Net loss -- -- -- (5,505,334) (5,505,334)
-------------- --------------- --------------- --------------- -----------
Balance at December 31, 1998 6,000 -- -- (6,533,074) 1,472,926
Issuance of stock warrants (note 9) 1,462,383 -- -- -- 1,462,383
Issuance of stock warrants (note 5) 23,389,176 -- -- -- 23,389,176
Conversion of PTM Preferred and common
stock into LifeF/X common stock and
warrants upon Merger (notes 2 and 5) 7,987,399 -- -- -- --
Deferred compensation - stock options (note 6) 2,928,689 -- (2,928,689) -- --
Vesting of stock options issued
as compensation (note 6) 25,950 -- 656,541 -- 682,491
Issuance of shares - private placement
offering (note 5) 17,994,000 -- -- -- 18,000,000
Private placement offering costs (note 5) (1,158,347) -- -- -- (1,157,956)
Common stock subscribed (note 5) -- (579,000) -- -- (579,000)
Net loss -- -- -- (32,616,775) (32,616,775)
-------------- --------------- --------------- --------------- -----------
Balance at December 31, 1999 52,635,250 (579,000) (2,272,148) (39,149,849) 10,653,245
Private placement offering costs (unaudited) (236,984) -- -- -- (236,984)
Exercise of stock options (unaudited) 9,981 -- -- -- 10,000
Completion of stock subscriptions (unaudited) -- 579,000 -- -- 579,000
Vesting of stock options issued
as compensation (unaudited) 958,144 -- 292,869 -- 1,251,013
Increase in capital on transfer of
assets and liabilities to PTM
Productions, Inc., net (unaudited) 3,704,867 -- -- -- 3,704,867
Net loss for the period (unaudited) -- -- -- (1,725,664) (1,725,664)
-------------- --------------- --------------- --------------- -----------
Balance at March 31, 2000 (unaudited) 57,071,258 -- (1,979,279) (40,875,513) 14,235,477
============== =============== =============== =============== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Period from Cumulative Cumulative
June 1, 1997 June 1, 1997 Three months ended June 1, 1997
(inception) (inception) ---------------------- (inception)
through Years ended December 31, through March 31, through
December 31, --------------------------- December 31, ----------------------- March 31,
1997 1998 1999 1999 1999 2000 2000
------------- ------------ ----------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Cash flows from
operating activities:
Net loss $ (1,027,740) (5,505,334) (32,616,775) (39,149,849) (20,925,409) (1,725,664) (40,875,513)
Adjustments to reconcile
net loss to net cash
(used in) operating
activities:
Depreciation expense -- -- -- -- -- 6,410 6,410
Loss on disposal -- -- 15,549,874 15,549,874 17,549,874 -- 15,549,874
Noncash interest expense -
warrants issued in
connection with debt conversion -- -- 9,302,339 9,302,339 -- -- 9,302,339
Noncash interest expense -
warrants issued in
connection with loans -- -- 1,462,383 1,462,383 72 -- 1,462,383
Noncash compensation
expense - stock options -- -- 682,491 682,491 -- 292,869 975,360
Changes in operating assets
and liabilities, net of
effects of acquisition of
Pacific Title and
Art Studio:
Other receivables, prepaid
expenses and other assets -- -- (192,249) (192,249) -- (201,334) (393,583)
Accounts payable, accrued
expenses and other
long-term liabilities 113,300 170,823 937,250 1,221,373 22,503 698,815 1,920,188
Net cash provided by (used in)
discontinued operation (176,858) 4,783,201 (6,079,122) (1,472,779) -- -- (1,472,779)
------------- ------------ ----------- --------- ---------- --------- ---------
Net cash (used in)
operating activities (1,091,298) (551,310) (10,953,809) (12,596,417) (3,352,960) (928,904) (13,525,321)
------------- ------------ ----------- ---------- ---------- --------- ----------
Cash flows from
investing activities:
Acquisition of Pacific Title
and Art Studio, net of
cash acquired (15,478,659) -- -- (15,478,659) -- -- (15,478,659)
Purchase of property, plant
and equipment (496,710) (2,623,631) (1,187,494) (4,307,835) -- (337,575) (4,645,410)
------------- ------------ ----------- ---------- --------- --------- ----------
Net cash (used in)
investing activities (15,975,369) (2,623,631) (1,187,494) (19,786,494) -- (337,575) (20,124,069)
------------- ------------ ----------- ---------- ---------- --------- ----------
Cash flows from financing
activities:
Proceeds from note payable
to related party 600,000 1,500,000 12,300,000 14,400,000 3,900,000 -- 14,400,000
Borrowings of long-term debt
from related party -- 1,700,000 -- 1,700,000 -- -- 1,700,000
Borrowings on debt 8,766,667 50,000 -- 8,816,667 -- -- 8,816,667
Proceeds from sale of
warrants exercisable into
600,000 shares of common stock -- 6,000 -- 6,000 -- -- 6,000
Proceeds from issuance of
Series B Preferred Stock
and common stock 8,000,000 -- -- 8,000,000 -- -- 8,000,000
Proceeds from sale of stock
through private placement -- -- 17,421,000 17,421,000 -- 579,000 18,000,000
Restricted cash from stock
subscriptions -- -- (9,051,000) (9,051,000) -- 9,051,000 --
Private placement
offering costs -- -- (1,157,956) (1,157,956) -- -- (1,157,956)
Proceeds from exercise of
stock options -- -- -- -- -- 10,000 10,000
Net cash provided by (used in)
financing activities -
discontinued operation (300,000) (81,059) 407,299 26,240 (547,040) (720,644) (694,404)
------------- ----------- ----------- ---------- ---------- --------- ---------
Net cash provided by
financing activities 17,066,667 3,174,941 19,919,343 40,160,951 3,352,960 8,919,356 49,080,307
------------- ----------- ----------- ---------- ---------- --------- ----------
Net increase in cash and
cash equivalents -- -- 7,778,040 7,778,040 -- 7,652,877 15,430,917
Cash and cash equivalents at
beginning of period -- -- -- -- -- 7,778,040 --
------------- ----------- ----------- ----------- ---------- ---------- ----------
Cash and cash equivalents
at end of period $ -- -- 7,778,040 7,778,040 -- 15,430,917 15,430,917
============= =========== =========== =========== ========== ========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the
period for:
Interest, including
discontinued operation $ 60,277 700,056 726,802 1,487,135 183,455 189,212 1,676,347
Income taxes -- 800 800 1,600 -- 2,506 4,106
============ =========== =========== ========= ========== ========== ==========
Supplemental disclosure of
noncash financing activities:
Common stock warrants $ -- -- 23,389,176 23,389,176 -- -- 23,389,176
Common stock subscribed -- -- 579,000 579,000 -- -- 579,000
Deferred compensation
related to stock options -- -- 2,928,689 2,928,689 -- -- 2,928,689
Transfer of assets and
liabilities of discontinued
to PTM Productions,
Inc., net -- -- -- -- -- 3,704,867 3,704,867
============= =========== =========== ========= ========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(1) Summary of Significant Accounting Policies
(a) Organization and Description of Business
On December 14, 1999, Fin Sports U.S.A., Inc. (FSI) completed a
transaction (the Merger), whereby FSI acquired all of the outstanding
capital stock of Pacific Title/Mirage, Inc. (PTM) through the merger
of a wholly owned subsidiary of FSI, with and into PTM, with PTM as
the surviving corporation. In connection with the Merger, FSI changed
its name to Lifef/x, Inc. (LifeF/X or the Company) and PTM changed its
name to Lifef/x Networks, Inc. For a detailed discussion of this
transaction, refer to note 2 - Acquisition of Pacific Title/Mirage,
Inc. by Fin Sports U.S.A., Inc.
LifeF/X, Inc. and its wholly-owned subsidiary, LifeF/X Networks, Inc.
have been engaged in the following operations: (1) the development of
LifeF/X technology, a mathematically based technology capable of
creating photo-realistic computer animation of biological entities,
including humans animated in real time, and (2) the non-LifeF/X
operations, which provides film title, credits, special effects,
digital effects and related services to the motion picture and
television industry.
The Company is a development stage enterprise as defined in Statement
of Financial Accounting Standards (SFAS) No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company is devoting
substantially all of its present efforts to developing technology.
Planned principal operations have commenced, but have not produced
LifeF/X technology revenue to date.
The Company's inception was June 1, 1997 when development of LifeF/X
technology commenced, and the Company was formally incorporated on
September 11, 1997.
On September 30, 1997, Mirage Technologies, LP (Mirage) contributed
certain of its technologies and net assets to the Company in exchange
for 8,000,000 shares of Series A Preferred Stock and 25 shares of
common stock. This transaction was accounted for as a reorganization
of entities under common control and, accordingly, the assets and
liabilities were recorded at their historical cost basis in a manner
similar to a pooling of interests. Since there was no historical-cost
basis for the technology contributed by Mirage, no value was assigned.
The Company assumed net liabilities from Mirage totaling $792,878 that
consisted primarily of the fixed assets and expenses related to the
LifeF/X development activities of Mirage.
F-7
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
On October 30, 1997, Safeguard Scientifics, Inc. (Safeguard) invested
$8 million in cash in the Company in exchange for 8,000,000 shares of
Series B Preferred Stock and 75 shares of common stock. On October 30,
1997, Safeguard converted 320,000 of its Series B Preferred Stock into
320,000 shares of common stock and transferred these shares to an
officer of the Company.
On October 31, 1997, the Company acquired certain assets and
liabilities of Pacific Title and Art Studio (PTAS) for net purchase
consideration of approximately $15.5 million. The acquisition was
accounted for as a purchase and the results of PTAS' operations are
included in the results of operations of the Company from the date of
acquisition. The aggregate purchase price has been allocated to the
assets and liabilities of PTAS based upon their respective fair market
values. The excess of the purchase price over the fair value of net
assets acquired was approximately $7.3 million and is being amortized
over the expected useful life. Refer to item (f) of note 1 - Summary
of Significant Accounting Policies.
The Company has incurred losses from its inception (June 1, 1997) to
date. During this period, Safeguard has loaned the Company significant
amounts to support the operations of the business and to finance
capital expenditures. In 1999, the Board of Directors decided to
concentrate the Company's efforts on LifeF/X development, with primary
emphasis on Internet applications and, accordingly, initiated steps to
dispose of the non-LifeF/X operations, and thereby reduce cash
outflows and raise cash through the sale of non-LifeF/X assets to
repay the Company's bank debt. The Company is focusing on development
of LifeF/X technology for potential commercial uses with primary
emphasis on Internet applications. Therefore, the non-LifeF/X
operations have been reflected as a discontinued operation in the
accompanying consolidated financial statements for all periods
presented. Refer to note 3 - Discontinued Operation and Spin Off
Transaction.
On March 20, 2000, LifeF/X sold its non-LifeF/X assets, to PTM
Productions, Inc., an entity owned by the pre-Merger Pac Title/Mirage
shareholders. The sale included a transfer of all liabilities
associated with the discontinued operation, including all debt.
In addition, Safeguard has fully indemnified LifeF/X against all
liabilities associated with the discontinued operation. Refer to
note 3 - Discontinued Operation and Spin Off Transacton.
F-8
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(b) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of LifeF/X, Inc. and its wholly-owned subsidiary LifeF/X
Networks, Inc. All significant intercompany accounts, intercompany
profits and intercompany transactions are eliminated.
(c) Cash and Cash Equivalents
Cash and cash equivalents are comprised of highly liquid investments
with original maturities of three months or less.
(d) Revenue Recognition
Revenue related to the Company's discontinued non-LifeF/X operations
are from film title and special effects service contracts and are
recognized on a percentage-of-completion basis based on costs incurred
to estimated total costs to be incurred. Unbilled receivables amount
to $576,450 and $1,374,874 as of December 31, 1998 and 1999,
respectively, and represent revenue that has been earned by the
Company, but not yet billed to the customer. All unbilled receivables
are related to the discontinued operation and included in net
liabilities of discontinued operation - current. Refer to note 3 -
Discontinued Operation and Spin off Transaction. Any anticipated
losses on contracts are expensed when identified.
Revenue for continuing operations is expected to be derived from the
sale of software products and services of the LifeF/X technology.
Revenues will be recognized upon shipment. To date, no LifeF/X
technology revenues have been recognized.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. All property, plant and equipment are
related to the discontinued operation and included in net assets of
discontinued operation - long-term. Depreciation of property, plant
and equipment is calculated using the straight-line method over the
estimated useful lives of the assets, generally 3 to 15 years or, for
leasehold improvements, the term of the lease, if shorter. The
Company also utilizes equipment that is subject to operating and
capital leases. Refer to note 7 - Commitments. Refer to note 3 -
Discontinued Operation and Spin Off Transaction for a discussion of
the transfer of all of these lease obligations to PTM Productions,
Inc.
F-9
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(f) Excess of Cost over Net Assets Acquired
The Company continually evaluates the recoverability of goodwill for
indication of impairment based on the undiscounted future cash flows
from the related business activity. During 1998, the Company assessed
the goodwill attributable to its digital effects business and
consequently wrote off approximately $1,113,000 which is included in
loss on discontinued operation in the accompanying consolidated
statements of operations. The remaining excess of cost over net assets
acquired is being amortized on a straight-line basis over 20 years. As
of December 31, 1999, excess of cost over net assets acquired was
$5,202,185, net of accumulated amortization of $1,000,000, which is
included in net assets of discontinued operation - long-term.
(g) Research and Development Costs
Research and development costs related to designing, developing and
testing the LifeF/X and other technologies are charged to expense as
incurred.
(h) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes reflect the impact of
"temporary differences" between assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and
regulations.
(i) Concentration of Credit Risk
Substantially all of the Company's past business activity has been
related to its discontinued operation, primarily customers in the
motion picture and television industry located in Southern California.
The Company performs ongoing credit evaluations of its customers but
does not require collateral. The Company maintains reserves for
potential credit losses and such losses have been within management's
expectations. Although the Company does not currently foresee credit
risk associated with its receivables in excess of amounts provided for
in the allowance for doubtful accounts, repayment is dependent upon,
among other things, the financial stability of its customers and the
industry and geographic location in which the Company operates.
F-10
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
One customer represented approximately 21% of the Company's 1999 net
revenue related to the discontinued operation, and two customers
represented approximately 40% and 14% of the Company's accounts
receivable as of December 31, 1999, which is included in net
liabilities of discontinued operation - current.
(j) 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 reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(k) Accounting for Stock Options
The Company accounts for stock option grants under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which permits the use of the intrinsic-value method for
grants to employees in accordance with Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations.
(l) Earnings (Loss) per Share
Basic earnings (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number
of common shares outstanding during the period in accordance with SFAS
No. 128, "Earnings Per Share." Diluted earnings (loss) per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then
shared in the earnings of the entity. Diluted earnings (loss) per
share is computed similarly to fully diluted earnings (loss) per share
pursuant to APB Opinion No. 15.
There were 1,514,835, 5,529,375 and 5,518,437 (unaudited) common stock
options outstanding at December 31, 1998 and 1999, and March 31, 2000,
respectively, and 27,951,312 warrants to purchase shares of common
stock at December 31, 1999 and March 31, 2000 which were not included
in the computation of diluted loss per share because the impact would
have been antidilutive .
F-11
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(m) Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. All long-lived assets are included in
net assets of discontinued operation - long-term. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of the assets to future undiscounted operating cash flows
expected to be generated by the assets. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets.
In March 1999, the Company reviewed its long-lived assets in light of
operating losses that the Company continued to recognize. The future
undiscounted cash flows were compared to the net carrying value of the
related assets. The future undiscounted cash flows were not sufficient
to recover the net carrying value of the assets, and a $1.4 million
impairment charge was recorded by the Company and is included in the
loss on discontinued operation in the year ended December 31, 1999.
Refer to note 3 - Discontinued Operation and Spin Off Transaction.
(n) Other Comprehensive Income (Loss)
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income (loss) and its
components in a full set of financial statements. Comprehensive income
(loss) consists of net income (loss) and net unrealized gains (losses)
on securities and is presented in the statements of shareholders'
equity and comprehensive income (loss). The statement requires only
additional disclosures in the financial statements; it does not affect
the Company's financial position or results of operations. The Company
does not have any transactions or other economic events that qualify
as other comprehensive income (loss) as defined under SFAS No. 130. As
such, net income (loss) equaled comprehensive income (loss) for all
periods.
F-12
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(o) Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes a standard for the way public
business enterprises are to report selected information about
operating segments. The determination of an entity's operating
segments is based upon a management approach, including the way
management organizes the segment within the enterprise for making
operating decisions and assessing performance. Management currently
reviews financial data at the highest level, the commercial
application of LifeF/X technology and film title and special effects
services (non-LifeF/X operations). Therefore, under the management
approach of SFAS No. 131, there are two operating segments, one of
which is treated as a discontinued operation. Refer to note 3 -
Discontinued Operation and Spin Off Transaction.
(p) Unaudited Interim Financial Statements
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information. In the opinion of
management, the accompanying unaudited consolidated financial
statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, for the fair
statement of the Company's financial condition as of March 31, 2000
and its results of operations and cash flows for the three months
ended March 31, 1999 and 2000.
(2) Acquisition of Pacific Title/Mirage, Inc.
by Fin Sports U.S.A., Inc.
On December 14, 1999, Fin Sports U.S.A., Inc. acquired all of the
outstanding capital stock of PTM through the merger of a wholly owned
subsidiary of FSI with and into PTM, with PTM as the surviving corporation.
Since the shareholders of PTM received the majority voting interests in the
combined company, PTM is the acquiring enterprise for financial reporting
purposes. The transaction was recorded as a reverse acquisition using the
purchase method of accounting whereby equity of PTM was adjusted for the
fair value of the acquired tangible net assets of the wholly owned
subsidiary of FSI.
Because PTM is the acquirer for accounting purposes, the consolidated
financial statements presented at December 31, 1998 and for the period from
June 1, 1997 (inception) through December 31, 1997 and for the year ended
December 31, 1998 are therefore those of PTM, not FSI. In addition, the
operating results for the period January 1, 1999 through the date of the
transaction, December 14, 1999, reflect those of PTM, not FSI. Operating
results thereafter reflect the combined operations of PTM and FSI.
F-13
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
The operating results reflected in the accompanying consolidated financial
statements do not include FSI's operating activities prior to December 14,
1999, the date of the Merger. The following summarized pro forma
information assumes the Merger occurred on June 1, 1997 (inception),
January 1, 1998 and January 1, 1999, respectively:
<TABLE>
<CAPTION>
Period from
June 1, 1997
(inception)
through Years ended December 31,
December 31, --------------------------------
1997 1998 1999
------------------- --------------- -------------
<S> <C> <C> <C>
Revenue $ -- -- --
Loss from continuing operations (658,352) (1,447,033) (17,167,322)
Loss per share from continuing operations (.05) (.11) (1.29)
Weighted average shares outstanding 12,999,917 12,999,917 13,295,807
</TABLE>
In December 1999, prior to the Merger, Savage Holdings, Inc. (SHI), a
consultant, entered into an option agreement with Duane Jenson (Jenson),
principal shareholder of FSI for services rendered to Jenson for the benefit of
FSI. Pursuant to the terms of the option agreement, Jenson granted to SHI an
option to receive 64% of any proceeds from the sale of FSI common stock owned
by Jenson. The option exercise price was $500,000 and the option was exercisable
only during the ten-day period immediately following the Merger.
After the Merger, SHI exercised this option. SHI has no voting rights or any
other rights of a common shareholder. Jenson deposited shares of FSI common
stock equal to 64% of his holdings into an escrow account. FSI ascribed a value
of $3.1 million to this option at the date of grant and accordingly, FSI
recognized a charge to its results of operations, prior to the Merger.
(3) Discontinued Operation and Spin Off Transaction
As discussed in note 1 - Summary of Significant Accounting Policies, the
Company's Board of Directors decided to dispose of the non-LifeF/X
operations in March 1999 and the Company has accounted for the non-LifeF/X
operations as a discontinued operation.
F-14
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
The condensed operating results of the discontinued operation are as
follows:
<TABLE>
<CAPTION>
Period from
June 1, 1997
(inception)
through Years ended December 31,
December 31, -----------------------------
1997 1998 1999
--------------- ------------ ------------
<S> <C> <C> <C>
Revenue $ 2,971,759 21,633,151 14,059,769
Loss from discontinued operation, including
$1,400,000 impairment charge in 1999 (369,658) (4,060,980) (3,002,332)
Loss on disposal, including $7,449,874 for
operating losses from measurement date
until December 31, 1999 and $2,500,000
for losses for the remaining disposal
period -- -- (15,549,874)
=============== ============ ===========
</TABLE>
The accrued liability for estimated operating losses of the discontinued
operation for the period from January 1, 2000 to the date of the spin-off, March
20, 2000, include: (1) estimated fees payable to the bank of approximately
$200,000 related to the restructured bank facility (note 4) and, (2) a charge of
approximately $800,000 related to modification of terms of certain stock options
held by employees of the discontinued operation (note 6).
The operating loss incurred by the discontinued operation during the period
from January 1, 2000 to March 20, 2000 was $1,839,500 (unaudited). This amount
was applied to the accrued liability for estimated operating losses of
discontinued operation for the remaining disposal period, established in the
year ended December 31, 1999.
F-15
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
The net assets (liabilities) of the discontinued operation are summarized
as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1999
------------------- -------------------
<S> <C> <C>
Current assets $ 3,530,391 4,728,178
Current portion of long-term bank debt (note 4) (1,600,000) (4,666,667)
Bank line of credit (note 4) (2,550,000) (2,484,000)
Short-term notes payable to related party (note 9) -- (2,775,000)
Current liabilities - other (1,967,039) (1,900,883)
Accrued liability for estimated operating losses of discontinued
operation for remaining disposal period -- (2,500,000)
------------------- -------------------
Net liabilities of discontinued operation - current $ (2,586,648) (9,598,372)
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1999
------------------- -------------------
<S> <C> <C>
Property, plant and equipment, net $ 8,962,970 7,287,839
Excess of cost over net assets acquired, net 5,502,185 5,202,185
Other assets 115,325 42,400
Long-term bank debt, net of current portion (note 4) (4,666,667) --
Other long-term debt to related parties (note 9) (570,497) (980,692)
Long-term liabilities - other (1,199,619) (1,500,031)
Accrued loss on disposal of discontinued operation -- (5,600,000)
---------------- ----------------
Net assets of discontinued operation - long-term $ 8,143,697 4,451,701
================ ================
</TABLE>
F-16
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
On March 20, 2000, the Company sold all of its non-LifeF/X assets
and liabilities (collectively, the "Spin Off Assets and Liabilities")
detailed above to PTM Productions, Inc. (PTM Productions), an entity owned
by the pre-Merger PTM stockholders. The Spin Off Assets and Liabilities
consist primarily of the assets and liabilities relating to PTM's Optical
Division, Scanning and Recording Division and now defunct Digital Division,
including: certain leased and owned real property, outstanding bank debt
and certain debt owed to Safeguard for loans made by Safeguard to PTM
during the period between October 1, 1999 and the consummation of the spin
off transaction (the Post September 30 Debt).
All the Spin Off Assets and Liabilities were transferred to PTM
Productions, effective with the March 20, 2000 sale. Neither the Company
nor its stockholders will be entitled to any beneficial interest in the
Spin Off Assets and Liabilities. At the date of the spin off transaction,
the liabilities of the non-LifeF/X operations exceeded the assets of the
non-LifeF/X operations, and as a result, the Company recorded additional
paid-in capital in March 2000 of $3,704,867 (unaudited) to reflect that
the liabilities assumed by PTM Productions exceeded net assets transferred
to PTM Productions.
In connection with the spin off transaction, the Company obtained consents
from a number of third parties, including its bank lender, which holds a
lien covering all of its assets, including the LifeF/X technology. Assets
relating to the LifeF/X technology were released in conjunction with the
spin off. As part of the spin off transaction, the Company transferred
this bank debt to PTM Productions and Safeguard has agreed to indemnify the
Company from and against any and all losses and liabilities relating to or
arising from the bank debt. In addition, in connection with the spin off
transaction, PTM Productions and Safeguard have provided certain
indemnities to the Company for the Spin Off Assets and Liabilities. In
consideration for the Safeguard indemnification, subject to any senior
liens, Safeguard has been granted a security interest in the Spin Off
Assets and Liabilities and will be entitled to any excess operating
proceeds or sale proceeds from the Spin Off Assets and Liabilities to
secure repayment of the Post September 30 Debt and reimbursement of
indemnification amounts paid by Safeguard to the Company.
F-17
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
In addition to the Safeguard indemnity described above, Safeguard will
indemnify the Company for shortfalls in the day-to-day operating expenses
of the Optical and Scanning and Recording Divisions under contracts and
other arrangements entered into in the ordinary course of business of such
Divisions, but not for claims, losses or liabilities outside the ordinary
course of the day-to-day operations of these Divisions or any other unusual
claims or liabilities including, without limitation, any disputes,
litigation or other proceedings whether arising under contracts or other
arrangements entered into in the ordinary course or otherwise, claims by
present or former employees and claims relating to any sale or transfer
(whether or not consummated) of any or all of the Spin Off Assets and
Liabilities.
Neither PTM Productions nor Safeguard will indemnify the Company for any
losses or liabilities relating to any Spin Off Assets and Liabilities to
the extent they are actually used in the LifeF/X business.
At March 31, 2000, the consolidated balance sheet reflects a $565,311
(unaudited) payable to PTM Productions, Inc. by LifeF/X. This represents
disbursements by PTM Productions for LifeF/X payroll and other operating
expenses that were reimbursed by LifeF/X subsequent to March 31, 2000
(unaudited).
(4) Long-Term Bank Debt and Lines of Credit
The Company has a $3,000,000 revolving credit facility with a bank that has
been extended until May 29, 2000. Borrowings under the credit facility bear
interest, which is payable monthly, at prime (7.75% at December 31, 1998
and 8.5% at December 31, 1999) plus .25%. There was $2,550,000 and
$2,484,000 outstanding on the credit facility at December 31, 1998 and
1999, respectively, which is included in net liabilities of discontinued
operation- current. Refer to note 3-Discontinued Operations and Spin Off
Transaction. The credit facility is collateralized by accounts receivable
and a $2,000,000 guarantee by Safeguard.
The Company's term loan agreement and revolving credit facility contain
various covenants related to financial ratios, minimum levels of net worth
and other limitations. The Company was in compliance with these covenants
through October 31, 1998. The Company was not in compliance with certain
financial covenants as of December 31, 1998. Notwithstanding the fact that
the Company has not been in compliance since December 31, 1998, the bank,
based on the continued support provided by Safeguard and the timeliness of
the Company's scheduled loan payments, has not declared any defaults or
pursued any remedies against the Company to date. Refer to note 3 -
Discontinued Operation and Spin Off Transaction, for a discussion of
Safeguard's indemnification obligations. As of December 15, 1999, the
Company entered into a consent letter with the bank pursuant to which the
bank agreed, subject to certain terms and conditions (including an increase
in principal payments as noted below), to extend the repayment of the
credit facility to February 29, 2000 and which has subsequently been
extended to May 29, 2000 through a forbearance agreement with the bank.
F-18
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
The following is a summary of long-term bank debt included with assets
(liabilities) of discontinued operation. Refer to note 3 - Discontinued
Operation and Spin Off Transaction:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1999
------------------- -----------------
<S> <C> <C>
Term loan with bank $ 6,266,667 4,666,667
Less current portion 1,600,000 4,666,667
---------------- ----------------
Long-term debt, net of current portion $ 4,666,667 --
================ ================
</TABLE>
Under the original term loan agreement, the term loan was payable in 60
monthly principal installments through November 2002 of $133,333 plus
interest at prime (7.75% at December 31, 1998 and 8.5% at December 31,
1999) plus .25%. In December 1999, the Company agreed to increase the
principal payments to $158,333 per month from January 2000 through February
2000 and $183,333 per month until November 2002. On March 20, 2000, the
Company entered into a restructure agreement with the bank that allowed the
Company to extend repayment of the amounts outstanding under its line of
credit to May 29, 2000 and obtained a forbearance with respect to the debt
covenants from the bank on the long-term debt through May 29, 2000.
However, there is no assurance that the bank will extend the term past May
29, 2000. Therefore, all of the term debt has been classified in net
liabilities of discontinued operation -current, in the December 31, 1999
consolidated financial statements. The term loan is secured by all assets
of the Company's discontinued operation (excluding equipment subject to
capitalized leases). In connection with this restructure agreement, the
Company agreed to reimburse the bank for certain legal fees incurred,
estimated at $100,000 and Safeguard has agreed to transfer warrants to
purchase LifeF/X common stock at an exercise price of $0.01 per share to
the bank valued at $100,000. Such amounts have been included in accrued
liability for estimated operating losses of discontinued operation.
F-19
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(5) Shareholders' Equity
Prior to the Merger, the Company had 20,000,000 shares of Preferred Stock
authorized, with 8,000,000 shares of Series A Preferred Stock and 7,680,000
shares of Series B Preferred Stock outstanding. All of the shares of the
Series B Preferred Stock and 1,760,000 shares of the Series A Preferred
Stock were owned by Safeguard. In conjunction with the Merger, the Series A
Preferred Stock was converted into LifeF/X Common Stock using a conversion
factor of 1.0937432, resulting in the issue of 8,749,846 shares. The Series
B Preferred Stock was converted into LifeF/X Common Stock using a
conversion factor of .2856811467, resulting in the issue of 2,194,031
shares. In addition, the Series B Preferred Stock converted into warrants
to purchase LifeF/X common stock at an exercise price of $.01 per share
using a conversion factor of .8080621094, resulting in the issue of
6,205,917 warrants to Safeguard.
Effective upon the Merger, Safeguard converted $14,086,837 of PTM debt and
accrued interest thereon of $761,837 owed to Safeguard into the right to
receive warrants for 3,997,500 shares of LifeF/X common stock. The warrants
have a term of ten years (expiring December 2009) and are exercisable
beginning December 14, 2000 (one year after the Merger), at an exercise
price of $.01 per share subject to certain early exercise events specified
in the warrants.
In connection with the Merger, warrants for 11,725,000 PTM shares held by
Safeguard prior to the Merger carried forward on a share-for-share basis as
warrants for LifeF/X common stock. The warrants have a term of ten years
(expiring December 2009) and are exercisable beginning December 14, 2000
(one year after the Merger), subject to certain early exercise events
specified in the warrants. 50% of the warrants held by Safeguard were
carried forward as warrants to purchase 5,862,500 shares of LifeF/X common
stock at an exercise price of $2.50 per share and the remaining 50% to
purchase 5,862,500 shares of LifeF/X common stock at $5.00 per share. In
addition, Safeguard received warrants to purchase 5,862,500 shares of
LifeF/X common stock at an exercise price of $6.00 per share.
Upon issuance, the Company estimated the fair value of the warrants using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.5%; dividend yield of 0%;
volatility factor of the expected market price of the Company's common
stock of 60%, and a weighted-average expected life of the warrants of
seven years. The range of values assigned to the warrants was $1.94 to
$3.00 per share, and the total value assigned was $23,389,176. The value
assigned to the warrants, less the $14,086,837 in debt and accrued
interest converted, amounted to $9,302,339, which was recorded as
additional paid-in capital and as additional interest expense during
the year ended December 31, 1999.
F-20
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
Concurrently with the Merger, LifeF/X, Inc. initiated a private placement
offering for $18 million through the sale of 6,000,000 units at $3.00 per
unit to certain investors. Each unit consisted of (i) one share of common
stock and (ii) a warrant to purchase .01 share of common stock at $7.50 per
share, exercisable pursuant to the holder's put right, all on certain terms
and conditions.
The private placement occurred in two stages. The first portion of the
placement closed in December 1999 and the Company received the proceeds
relating to 2,983,000 units. The second portion of the placement closed in
February 2000 at which time Company received the balance of the proceeds
relating to 3,017,000 units. At December 31, 1999, the balance sheet
reflects $9,051,000 in escrow funds and cash from stock subscriptions which
had been received but not yet paid to the Company. Subsequent to year end,
the funds in escrow were released to the Company.
At December 31, 1999, the Company had unit subscriptions for $579,000 which
were funded subsequent to year end. These are reflected as common stock
subscribed in the shareholders' equity section of the consolidated balance
sheet. At December 31, 1999 the costs of the offering were estimated at
$1,157,956 and were deducted from additional paid-in capital, offsetting
the gross proceeds of the offering. During the three months ended March 31,
2000, the Company incurred additional costs of $236,984 (unaudited)
directly related to the offering which were deducted from additional paid-
in capital in the quarter ended March 31, 2000.
Safeguard purchased 333,333 units of the offering for $1,000,000 ($3.00 per
unit), receiving 333,333 shares of common stock and related warrants for
the purchase of 3,333 shares.
Refer to note 2 - Acquisition of Pacific Title/Mirage, Inc. by Fin Sports
U.S.A., Inc., for a discussion of the acquisition of all of PTM's capital
stock by FSI in conjunction with the Merger in December 1999.
(6) Stock Option Plan
PTM had a stock option plan (the 1997 Compensation Plan) which provided for
the grant to PTM employees of incentive stock options and for the grant of
nonstatutory stock options, stock awards or restricted stock to PTM
employees, directors and consultants. Effective upon the Merger, this stock
option plan was terminated and LifeF/X, Inc. adopted the 1999 Long-Term
Incentive Plan (the Plan) with terms substantially similar to those of the
PTM plan. The new Plan reserves up to 5,529,375 shares of LifeF/X common
stock for issuance under the Plan. Following the adoption of the new plan,
LifeF/X, Inc. assumed the obligations of outstanding options granted to
PTM employees under the PTM plan.
F-21
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
These outstanding option obligations included an option grant to Lucille
Salhany (the Chief Executive Officer, Co-President and a director of the
Company) for 1,952,459 shares of common stock (after adjusting for the
conversion from PTM shares to FSI shares). The options are exercisable at
$1.50 per share (as adjusted). 20% of the options vested at the date of
grant and the balance of the options vest on a quarterly basis over two
years. For financial reporting purposes, the Company has recorded deferred
stock compensation of $2,928,689 during the year ended December 31, 1999,
representing the difference between the exercise price and the fair value
of the Company's common stock on the grant date. This amount is being
amortized by a charge to operations ratably over the two year vesting
period. Such amortization expense amounted to $656,541 for the year ended
December 31, 1999 and $292,869 for the quarter ended March 31, 2000
(unaudited).
In addition, the Company recognized $25,950 of compensation expense for
options granted to a non-employee, representing the fair value of such
options on the grant date.
In addition, in connection with the Merger, LifeF/X, Inc. granted options
to various employees subject to vesting schedules. Nonstatutory stock
options granted must be at least 85% of fair market value at grant date.
Outstanding options under the Plan vest in varying increments and expire on
or before the 10th anniversary of the grant date or upon earlier
termination.
Restricted stock purchase options may be subject to vesting contingencies
or other specified conditions.
F-22
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
The following table summarizes stock option activity for the period from
June 1, 1997 (inception) through December 31, 1997 and for the two years
ended December 31, 1999, (as adjusted for the conversion of PTM shares to
LifeF/X shares at a factor of 1.0937432 LifeF/X shares per PTM share): All
option grants (except the 1,952,459 options granted to Lucille Salhany as
described above), were at exercise prices which approximated or exceeded
the fair market value of the underlying common stock at the date of grant.
<TABLE>
<CAPTION>
Weighted-
average
Number of exercise price
shares per share
------------------- -------------------
<S> <C> <C>
Balance at December 31, 1997 -- $ --
Granted 1,514,835 .91
------------------- -------------------
Balance at December 31, 1998 1,514,835 .91
Granted 4,788,362 2.39
Canceled (773,822) (.91)
------------------- -------------------
Balance at December 31, 1999 5,529,375 2.19
Exercised (unaudited) (10,938) .91
------------------- -------------------
Balance at March 31, 2000 (unaudited) 5,518,437 $ 2.19
=================== ===================
Reserved for future issuance at December 31, 1999 --
===================
Reserved for future issuance at March 31, 2000 (unaudited) --
===================
</TABLE>
In March 2000, the Company's Board of Directors granted stock options for
an additional 219,023 shares pending the approval of the Company's
shareholders. Shareholder approval is necessary in order to expand the
number of shares authorized under the Plan from 5,529,375 shares of
LifeF/X stock to 7,981,850 shares. As shareholder approval had not been
obtained as of March 31, 2000, all options granted in excess of the
original 5,529,375 shares authorized are not considered outstanding and
have not been included in the preceding analysis. Management will seek
shareholder approval at the next annual meeting of shareholders. Once
shareholder approval is obtained, the additional options will be
effectively granted and the appropriate APB 25 and SFAS 123 calculations
can be completed.
F-23
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
If the Company had elected to recognize compensation cost based on the fair
value at the date of grant, consistent with the method as prescribed by
SFAS No. 123, "Accounting for Stock Based Compensation," loss from
continuing operations before discontinued operation for the years ended
December 31, 1998 and 1999 would have changed to the pro forma amount
indicated below:
<TABLE>
<CAPTION>
1998 1999
-----------------------------------
<S> <C> <C>
Loss from continuing operations:
As reported $ (1,444,354) (14,064,569)
Pro forma (1,832,000) (15,465,000)
Basic and diluted loss per
share from continuing
operations - pro forma (5.23) (12.18)
==================================
</TABLE>
The fair value of options granted during 1999 was determined using a Black-
Scholes option pricing model with the following assumptions: risk-free
interest rate of 6.5%, dividend yield of 0%, expected volatility of 60% and
an expected life of 5 years. At date of grant, the fair value of the stock
options ranged from $1.73 to $2.19 per option in 1999. The fair value of
options granted during 1998 was determined using a Black-Scholes option
pricing model with the following assumptions: risk-free interest rate of
6.0%, dividend yield of 0%, expected volatility of 0% and an expected life
of 5 years. At date of grant, the fair value of the stock options was $.28
per option in 1998.
F-24
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding
-----------------------------------------------------------------------------------------------------------------------------
Weighted-
average Weighted- Weighted-
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
-------------- ------------------ ------------------ ------------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C>
$ .91 741,013 8.3 years $ .91 522,491 $ .91
1.50 1,952,459 9.9 years 1.50 437,694 1.50
3.00 2,835,903 9.9 years 3.00 310,958 3.00
--------------- ------------
5,529,375 1,271,143
=============== ============
</TABLE>
In March 2000, the Company's Board of Directors accelerated the vesting of
certain stock options and made other modifications to the Plan for options
held by employees of the discontinued operation that will no longer be
LifeF/X employees after the date of the spin-off. The Company has accounted
for this modification of terms and the increase in the intrinsic value of
these stock options, which totaled $812,745. In addition, during the
quarter ended March 31, 2000 (unaudited), the Company extended the exercise
period for stock options held by a former employee of the discontinued
operation. This modification of terms resulted in an expense of $145,399
(unaudited). These items, which totaled $958,144, were provided for in the
accrued liability for estimated operating losses of the discontinued
operation, established in the year ended December 31, 1999 and were applied
to that account in the quarter ended March 31, 2000, with an offsetting
increase in additional paid-in capital.
F-25
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(7) Commitments
The Company has an exclusive, worldwide, perpetual license and support
agreement for the use of certain continuum modeling technology in
commercial applications, excluding professional, medical, engineering and
scientific applications. The license requires quarterly license fees and
monthly development fee payments to be made to the licensor. At December
31, 1999 LifeF/X had three quarterly license fee payments of $25,000
remaining. The development fee payments are $12,500 per month through
October 2002. The Company has the option to extend the agreement for one or
more additional one-year terms for an annual development fee of $200,000
(subject to adjustments for inflation).
The Company conducts a portion of its discontinued operation in a leased
facility under a lease expiring in 2007 and leases certain machinery and
equipment under operating leases expiring at various dates through 2003.
Rent expense on the facility and operating lease expense of its
discontinued operation during disposal period is included in the provision
for loss on disposal of discontinued operation. The Company is obligated
under various capital leases for computer hardware and software equipment
that expire at various dates during the next three years. Refer to note 3-
Discontinued Operation and Spin Off Transaction.
F-26
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and lease payments
for real estate, as well as future minimum capital lease payments as of
December 31, 1999, including leases related to its discontinued operation,
are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
--------------- ---------------
<S> <C> <C>
Year ending December 31:
2000 $ 476,696 2,707,490
2001 368,975 1,467,445
2002 224,964 620,820
2003 12,435 657,178
2004 8,438 655,889
Thereafter -- 2,222,740
--------------- ---------------
Total minimum lease payments 1,091,508 $ 8,331,562
===============
Less amount representing interest 211,465
---------------
Present value of minimum capital lease payments 880,043
Less current installments of obligations under capital leases,
included in net assets of discontinued operation - current 373,639
---------------
Obligations under capital leases, excluding current
installments, included in net assets of discontinued
operation - long-term $ 506,404
===============
</TABLE>
Total future minimum lease payments under the operating lease relating to
the facility lease were $5,137,982.
Facility rent expense and operating lease payments for the period ended
December 31, 1997 (seven months) and for the years ended December 31, 1998
and 1999 was approximately $111,000, $2,596,000 and $3,342,000,
respectively, which is included in loss from discontinued operation.
During the quarter ended March 31, 2000, the Company entered into an office
lease for its headquarters in Boston, Massachusetts. The lease has a five
year term with monthly lease payments that total $240,000 (unaudited) per
year for the five year term of the lease.
F-27
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(8) Income Taxes
The provision for income taxes consists of minimum franchise taxes for the
state of California.
The difference between the Company's U.S. Federal statutory income tax rate
of 34%, as well as its state and local rate, net of a Federal benefit, when
compared to its effective rate of zero is principally comprised of its
valuation allowance.
The components of the net deferred tax asset at December 31, 1998 and 1999
are presented below:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 793,497 6,081,024
Credit carryforwards 71,383 105,383
--------------- ---------------
Gross deferred tax assets 864,880 6,186,407
Less valuation allowance (864,880) (6,186,407)
--------------- ---------------
Deferred tax assets, net of valuation allowance $ -- --
=============== ===============
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences and loss carryforwards become
deductible. Due to the uncertainty as to whether the Company will realize
the benefits of these deductible temporary differences, a full valuation
allowance has been established as of December 31, 1998 and 1999.
F-28
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
At December 31, 1999, the Company has net operating loss carry forwards for
federal tax reporting purposes of approximately $17,000,000 which expire at
various dates, primarily in years 2012 through 2019. The Company has
research and experimentation credit carry forwards of approximately
$105,000, which expire in 2019.
The net operating loss and credit carryforwards may be subject to certain
limitations due to changes in ownership, which may inhibit the Company's
ability to use these carryforwards in the future.
(9) Related Party Transactions
(a) Management Fees
In connection with the initial capitalization of the Company discussed
in note 1 - Summary of Significant Accounting Policies, Mirage
contributed certain assets to the Company which included certain
patent applications. The Company entered into an administrative
services support agreement with Mirage which provides for a fee of
$25,000 per month beginning November 1997. The agreement will expire
on the earlier of October 31, 2002 or six months after a sale of the
Company. The total amount owed to Mirage as of December 31, 1998 and
1999 was $246,000 and $445,000, respectively, which has been included
in net assets of discontinued operation - long-term as of December 31,
1998 and 1999. In March 2000, the agreement was cancelled and Mirage
agreed to forgive the accrued management fee of $445,000 (unaudited).
On October 31, 1997, the Company entered into an administrative
services agreement with Safeguard effective January 1, 1998 that
provided for a monthly fee to Safeguard of 1.5% of net revenues
subject to minimum and maximum annual payments of $100,000 and
$600,000, respectively. This agreement has an initial term through
December 31, 2002 and will continue thereafter unless terminated by
either party. The agreement has been renegotiated to provide for a
minimum annual payment of $50,000 for the year 2000, and will revert
to the above schedule thereafter. The agreement will terminate early
if the Company is sold. The total amount owed to Safeguard as of
December 31, 1998 and 1999 was $324,497 and $535,692, respectively.
Safeguard has agreed not to require payment for at least the next 12
months. The liability as of December 31, 1999 has been transferred to
PTM Productions and has been included in net assets of discontinued
operation - long-term as of December 31, 1998 and 1999 as it is
related to the discontinued operation. All future amounts accruing
under this contract after December 31, 1999 are related to the
continuing operations and will be paid by the Company. At March 31,
2000, LifeF/X had an accrued liability of $12,500 (unaudited) for
the management fee payable to Safeguard.
In May 2000, Safeguard terminated the administrative services
agreement with the Company, effective April 1, 2000.
F-29
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(b) Safeguard
Short-term notes payable to Safeguard consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Notes payable to Safeguard, payable on demand at an annual interest
rate of prime (7.75% and 8.5% at December 31, 1998 and 1999,
respectively) plus 1%, with interest payable monthly $ 1,000,000 2,775,000
Demand note payable to Safeguard, payable upon demand, at an annual
interest rate of prime (7.75% at December 31, 1998), plus 1%,
payable at maturity 700,000 --
---------------- ---------------
$ 1,700,000 2,775,000
================ ===============
</TABLE>
The note payable balance at December 31, 1999 of $2,775,000 reflected
above, represents Post September 30 Debt that is included in the Spin Off
Assets and Liabilities transferred to PTM Productions subsequent to year
end as discussed in note 3 - Discontinued Operation and Spin Off
Transaction. Therefore, at December 31, 1999 this item was included in the
net liabilities of discontinued operation - current.
F-30
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
Long-term notes payable to Safeguard consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1999
---------------- ---------------
<S> <C> <C>
Term note payable to Safeguard, interest payable monthly at the
prime rate (7.75% at December 31, 1998), due the earlier of an
initial public offering, sale of the Company or March 2001 $ 600,000 --
Term note payable to Safeguard, interest payable monthly at the
prime rate (7.75% at December 31, 1998), due the earlier of an
initial public offering, sale of the Company or March 2001 1,500,000 --
---------------- ---------------
$ 2,100,000 --
================ ===============
</TABLE>
In March 1998, in conjunction with granting of a $1.5 million loan and a
payment of $6,000, Safeguard was issued a warrant to purchase 600,000
shares of PTM common stock at an exercise price of $2.50 per share at any
time between April 1, 1998 and April 2, 2005. As of the issuance date, the
warrant was estimated to have a nominal fair value.
In November 1998, in conjunction with the receipt of a note payable for
$1.0 million, the Company issued a warrant to Safeguard to purchase 750,000
shares of the Company's common stock at an exercise price of $2.00 per
share. This warrant had an expiration date of November 30, 2005. As of the
issuance date, the fair value of the warrant was nominal.
From January 1999 through September 1999, Safeguard provided unsecured
loans to PTM totaling $9.5 million at an interest rate of prime plus 1%.
The principal plus the accrued interest was payable on demand. In
conjunction with these unsecured loans, the Company issued additional
warrants to Safeguard to purchase 10,375,000 shares of common stock at an
exercise price of $1.00 per share, bringing the total warrants outstanding
to 11,725,000. These warrants had expiration dates ranging from February
2006 through August 2006.
F-31
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
Upon issuance, the Company estimated the fair value of the warrants
using a Black-Scholes option pricing model with the following weighted-
average assumptions: risk-free interest rate of 6.5%; dividend yield of
0%; volatility factor of the expected market price of the Company's
common stock ranging from 20% to 60%, depending on the grant date, and a
weighted-average expected life of the warrants of seven years. The range
of values assigned to the warrants was $0.01 to $0.66 per share, and the
total value assigned was $1,462,383. This amount was recorded as
additional paid-in capital and as interest expense during the year ended
December 31, 1999.
In connection with the Merger, the warrants for 11,725,000 PTM shares
held by Safeguard prior to the Merger carried forward on a share-for-
share basis as warrants for common stock of LifeF/X. The warrants have a
term of ten years (expiring December 2009), and are exercisable
beginning December 14, 2000 (one year after the Merger), subject to
certain early exercise events specified in the warrants. 50% of the PTM
warrants held by Safeguard were carried forward as warrants to purchase
5,862,500 shares of LifeF/X common stock at an exercise price of $2.50
per share and the remaining 50% to purchase 5,862,500 shares of LifeF/X
common stock at $5.00 per share. In addition, Safeguard received
warrants to purchase 5,862,500 shares of LifeF/X common stock at an
exercise price of $6.00 per share.
The total number of shares of LifeF/X common stock that are subject to
exercise under the warrants held by Safeguard after the Merger amounts
to 27,794,250 shares of LifeF/X common stock.
(10) 401(k) Plan
The Company has a retirement plan under Section 401(k) of the Internal
Revenue Code (the Plan). The terms of the Plan provide that employees over
21 years of age who have completed at least six months of employment are
eligible to participate in the Plan. Contributions to the Plan by the
employees are set aside in a separate trust. The Company makes matching
contributions at 25% of the first 6% of each employee's contribution and
may discontinue matching contributions at any time. For the period ended
December 31, 1997 (seven months) and the years ended December 31, 1998 and
1999, the Company made contributions to the Plan of approximately $12,000,
$93,000 and $85,000, respectively.
F-32
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(11) Severance Obligation
Certain of the Company's employees are covered under a collective
bargaining agreement, under which the Company must provide for severance
payments to be paid to these employees based on qualified years of service.
The Company has a severance liability recorded of $523,199 and $517,071 at
December 31, 1998 and 1999, respectively, which has been included in net
assets of discontinued operation - long-term.
(12) Contingencies
The Company is involved in legal proceedings with outside parties involving
routine business matters. Management believes that the ultimate resolution
of these matters will not have a material adverse effect on the Company's
financial condition or results of operations.
F-33
<PAGE>
LIFEF/X, INC.
__________________
PROSPECTUS
__________________
<PAGE>
PART II
Item 24. Indemnification of Directors and Officers
The Company's Articles of Incorporation includes provisions which limit the
liability of our directors. As permitted by applicable provisions of the Nevada
Law, directors will not be liable to the Company for monetary damages arising
from a breach of their fiduciary duty as directors in certain circumstances.
This limitation does not affect liability for any breach of a director's duty to
the Company or our stockholders (i) with respect to approval by the director of
any transaction from which he or she derives an improper personal benefit, (ii)
with respect to acts or omissions involving an absence of good faith, that the
director believes to be contrary to the best interests of the Company or our
stockholders, that involve intentional misconduct or a knowing and culpable
violation of law, that constitute an unexcused pattern or inattention that
amounts to an abdication of his or her duty to the Company or our stockholders,
or that show a reckless disregard for duty to the Company or our stockholders in
circumstances in which he or she was, or should have been aware, in the ordinary
course of performing his or her duties, of a risk of serious injury to the
Company or our stockholders, or (iii) based on transactions between the Company
and our directors or another corporation with interrelated directors or based on
improper distributions, loans or guarantees under applicable sections of Nevada
Law. This limitation of directors' liability also does not affect the
availability of equitable remedies, such as injunctive relief or rescission. In
addition, the Company has granted contractual indemnification rights to (a) its
director, Robert Verratti, under an indemnification agreement dated as of
December 14, 1999, (b) its director Ian Hunter under his consulting agreement
and (c) its executive officers Lucille Salhany, Michael Rosenblatt and Serge
Lafontaine under their respective employment agreements.
The Company has been advised that it is the position of the Commission that
insofar as the provision in the Company's Articles of Incorporation, as amended,
may be invoked for liabilities arising under the Securities Act, the provision
is against public policy and is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution
Lifef/x, Inc. is not issuing any Common Stock under this Registration
Statement. All Common Stock registered pursuant to this Registration Statement
is being registered on behalf of Selling Securityholders. Lifef/x, Inc. has
agreed to pay all costs of this Registration Statement. The estimated expenses
for the distribution of the Common Stock registered hereby, other than
underwriting commissions, fees and Representative's nonaccountable expense
allowance are set forth in the following table:
<TABLE>
<CAPTION>
Item Amount
<S> <C>
SEC Registration Fee.......................................................................... $129,434
Transfer Agent Fees........................................................................... 500
Legal Fees.................................................................................... 100,000
Accounting Fees............................................................................... 50,000
Printing and Engraving Costs.................................................................. 60,000
Miscellaneous................................................................................. 10,000
Total................................................................................... $349,934
</TABLE>
Item 26. Recent Sales of Unregistered Securities
The following is information for all securities sold by Lifef/x, Inc., Fin
Sports, U.S.A., Inc. or Pac Title/Mirage, Inc. within the past three years
without registering the securities under the Securities Act:
December 1999/February 2000 Fin Sports U.S.A./Lifef/x, Inc. $18 million Private
Placement
In order to raise capital, the Company executed a private placement for up to
$18 million of the Company's units at a price of $3.00 per unit. Each unit
consisted of one share of the Company's Common Stock and a warrant
II-1
<PAGE>
to purchase .01 shares of the Company's Common Stock at an exercise price of
$7.50 per share. The private placement was fully subscribed and we received all
funds. By December 31, 1999, the Company or its escrow agent had received over
$17,000,000 in proceeds from the private placement. The Company issued 6,000,000
shares of Common Stock and warrants for 60,003 shares of Common Stock at two
closings, which occured on December 14, 1999 and February 2, 2000. All shares of
Common Stock sold in the private placement and all shares of Common Stock which
would be issued on exercise of warrants sold in the private placement are being
registered pursuant to this Registration Statement.
The principal terms of this private placement of securities were:
Dates of Sale - first closing on December 14, 1999 and second closing on
February 2, 2000
Title of Securities - Common Stock and warrants to purchase common stock for
$7.50 per share
Amount Sold - 6,000,000 shares of Common Stock and warrants to purchase 60,000
shares
Names of Principal Underwriters - MG Securities and Axiom Capital Management
Persons or Class of Persons to Whom Sold - accredited investors
Total Offering Price - $18,000,000
Total Underwriting Commissions - $616,220
Exemption From Registration Under Federal Securities Laws - Rule 506 of
Regulation D
Formation of Pac Title/Mirage
In Pac Title/Mirage's capitalization on October 30, 1997, it issued 8 million
shares of Series A Preferred Stock (par value $1.00 per share) to Mirage
Technologies LP and 25 shares of common stock to Mirage Technologies, Inc. (the
general partner of Mirage Technologies LP) in exchange for Mirage Technologies'
contribution of technology and $8 million of Series B Preferred Stock (par value
$1.00 per share) and 75 shares of common stock to Safeguard Scientifics, Inc. in
exchange for $8,000,000 in cash.
The other principal terms of this private placement of securities were:
Date of Sale - October 30, 1997
Names of Principal Underwriters - None
Total Underwriting Commissions - None
Exemption From Registration Under Federal Securities Laws - Federal Securities
Act Section 4(2)
Issuance of Pac Title/Mirage Warrants to Safeguard Scientifics, Inc. as
Inducement to Safeguard Scientifics, Inc.'s to Make Loans to Pac Title/Mirage
Pac Title/Mirage incurred losses from its inception. Safeguard, which owned
approximately 49% of Pac Title/Mirage, loaned Pac Title/Mirage significant
amounts to support its operations. From the time of Pac Title/Mirage's
formation in 1997 until September 30, 1999, Safeguard Scientifics, Inc. and its
affiliates (collectively, "Safeguard") loaned it a total of $13,325,000.
Safeguard's consideration for making these loans included warrants to purchase
common stock of Pac Title/Mirage at exercise prices ranging from $1.00 to $2.50
per share. These warrants were subsequently converted into warrants to purchase
common stock of Lifef/x, Inc. as part of the merger transaction with Fin Sports
as more fully described in "Business."
Issuance date, number of shares, exercise price, expiration date and loans
made are set forth on the
II-2
<PAGE>
following table:
<TABLE>
<CAPTION>
Amount of
Safeguard Loan to
Date Number Exercise Expiration Pac Title/Mirage Interest
Issued of Shares Price Date Rate
<S> <C> <C> <C> <C> <C>
10/31/97 - - - $600,000 Prime + 1%
4/2/98 600,000 $2.50 3/31/05 $1,500,000 Prime + 1%
11/24/98 750,000 $2.00 11/30/05 $1,000,000 Prime + 1%
12/28/98 1,000,000 $1.00 1/1/06 $1,000,000 Prime + 1%
1/13/99 1,000,000 $1.00 2/1/06 $1,000,000 Prime + 1%
2/3/99 1,000,000 $1.00 3/1/06 $1,000,000 Prime + 1%
2/22/99 1,000,000 $1.00 3/1/06 $1,000,000 Prime + 1%
3/12/99 1,000,000 $1.00 4/1/06 $1,000,000 Prime + 1%
4/19/99 1,500,000 $1.00 5/1/06 $1,500,000 Prime + 1%
6/3/99 875,000 $1.00 7/1/06 $ 875,000 Prime + 1%
6/16/99 400,000 $1.00 7/1/06 $ 400,000 Prime + 1%
6/22/99 700,000 $1.00 7/1/06 $ 700,000 Prime + 1%
7/30/99 750,000 $1.00 8/1/06 $ 750,000 Prime + 1%
8/12/99 1,150,000 $1.00 8/13/06 $1,000,000 Prime + 1%
</TABLE>
The other principal terms of this private placement of securities were:
Title of Securities - warrants to purchase common stock
Names of Principal Underwriters - none
Total Underwriting Commissions - none
Exemption From Registration Under Federal Securities Laws - Federal Securities
Act Section 4(2)
Conversion of Safeguard's Pac Title/Mirage Warrants, Safeguard's Pac
Title/Mirage Stock and Certain Debt Owed to Safeguard By Pac Title/Mirage Into
Lifef/x, Inc. Warrants
The principal terms of this portion of the merger transaction were:
Date of Exchange - December 14, 1999
Title of Securities - warrants to purchase Lifef/x, Inc. common stock at
prices ranging from $0.01 per share to $6.00 per share as more fully set forth
in the table below:
II-3
<PAGE>
Pac Title/Mirage Securities Tendered by Safeguard:
Warrants to purchase 600,000 shares at $2.50 per share
Warrants to purchase 750,000 shares at $2.00 per share
Warrants to purchase 10,375,000 shares at $1.00 per share
Demand notes in an aggregate principal amount of $__________________ and
interest in the aggregate amount of $___________________.
7,680,000 shares of Pac Title/Mirage Series B Preferred Stock
75 shares of Pac Title/Mirage common stock
Lifef/x Securities Issued to Safeguard in Exchange for Safeguard's Pac
Title/Mirage Securities.
2,194,113 shares of Lifef/x, Inc. common stock
Warrants to purchase 5,862,500 shares at $6.00 per share
Warrants to purchase 5,862,500 shares at $5.00 per share
Warrants to purchase 5,862,500 shares at $2.50 per share
Warrants to purchase 10,203,417 shares at $0.01 per share
Names of Principal Underwriters - none
Total Underwriting Commissions - None
Exemption From Registration Under Federal Securities Laws - Federal Securities
Act Section 4(2)
Conversion Into Lifef/x, Inc. Common Stock of Pac Title/Mirage Stock Owned by
Shareholders Other Than Safeguard
The principle terms of this portion of the merger transaction were:
Date of Exchange: December 14, 1999
Names of Principal Underwriters: None
Total Underwriting Commissions: None
Exchange of Securities: Each share of Pac Title/Mirage Common Stock (25
total) and each share of Pac Title/Mirage Class A Preferred Stock
(8,000,000 total) was converted into 1.0937432 shares of Lifef/x, Inc.
Common Stock.
Exemption From Registration Under Federal Securities Laws - Federal Securities
Act Section 4(2)
II-4
<PAGE>
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
2.1 Agreement and Plan of Merger by and among Fin Sports U.S.A., Inc., PTM Acquisition Corp. and
Pacific Title/Mirage, Inc. dated December 14, 1999 (incorporated by reference to Form 8-K filed by
Lifef/x, Inc. on December 15, 1999)
3.1 Amendment to Bylaws of Fin Sports U.S.A., Inc. (incorporated by reference to Registration Statement
on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
3.2 Articles of Incorporation of Lifef/x, Inc. (incorporated by reference to Form 10-KSB filed by
Lifef/x, Inc. on March 30, 2000)
3.3 Bylaws of Lifef/x, Inc. (incorporated by reference to Form 10-KSB filed by Lifef/x, Inc. on March 30,
2000)
4.1 Registration Rights Agreement Dated December 14, 1999 (incorporated by reference to Registration
Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
4.2 Fin Sports U.S.A., Inc. Subscription Agreement (incorporated by reference to Registration Statement
on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
5.1 Legal Opinion of Branden T. Burningham, Esq. (incorporated by reference to Registration Statement on
Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.1 Employment Agreement dated December 1, 1999 re: Serge LaFontaine (incorporated by reference to
Registration Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.2 Employment Agreement dated December 1, 1999 re: Michael Rosenblatt (incorporated by reference to
Registration Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.3 Employment Agreement dated December 1, 1999 re: Lucille Salhany (incorporated by reference to
Registration Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.4 Consulting Agreement dated January 4, 2000 re: Ian Hunter (incorporated by reference to Registration
Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.5 Lifef/x, Inc. 1999 Long-Term Incentive Plan including Amendment (incorporated by reference to
Registration Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.6 Technologies License, Development, Consulting and Collaboration Agreement between Auckland
UniServices Limited and Pacific Title/Mirage, Inc. effective as of November 1, 1997
10.7 Indemnification Agreement dated December 14, 1999 (incorporated by reference to Registration
Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.8 Security Agreement dated March 20, 2000 (incorporated by reference to Registration Statement on Form
SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.9 Assignment and Assumption Agreement dated December 14, 1999 (incorporated by reference to
Registration Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
10.10 General Bill of Sale, Assignment and Assumption Agreement dated March 20, 2000 (incorporated by
reference to Registration Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.11 Software License Agreement dated March 20, 2000 (incorporated by reference to Registration Statement
on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.12 Indemnification Agreement dated December 14, 1999 re: Robert Verratti (incorporated by reference to
Registration Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.13 Lock-Up/Leak-Out Agreement dated December 14, 1999 (incorporated by reference to Registration
Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.14 Massachusetts Office Lease dated March 16, 2000 (incorporated by reference to Registration Statement
on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.15 Asset Purchase Agreement dated October 8, 1997 among Pacific Title and Art Studio, Pacific Title and
Mirage, Inc., Safeguard Scientifics, Inc. and Mirage Technologies, Limited Partnership
16.1 Letter of Mantyla McReynolds, a Professional Corporation dated December 7, 1999 (incorporated by
reference to Form 8-K filed by Lifef/x, Inc. on December 15, 1999)
21.1 Subsidiaries of Registrant (incorporated by reference to Registration Statement on Form SB-2 filed
by Lifef/x, Inc. on March 21, 2000)
23.1 Consent of KPMG LLP
23.2 Consent of Branden T. Burningham, Esq.
23.3 Consent of Loeb & Loeb LLP
24.1 Power of Attorney (incorporated by reference to Registration Statement on Form SB-2 filed by
Lifef/x, Inc. on March 21, 2000)
24.2 Certified Resolutions of the Board of Directors Dated March 16, 2000 Authorizing Signature of the
Lifef/x, Inc. Form SB-2 Registration Statement and amendments to the Registration Statement by
Power of Attorney (incorporated by reference to Registration Statement on Form SB-2 filed by Lifef/x,
Inc. on March 21, 2000)
27.1 Financial Data Schedule (incorporated by reference to Registration Statement on Form SB-2 filed by
Lifef/x, Inc. on March 21, 2000)
</TABLE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information
set forth in the Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement.
II-6
<PAGE>
(2) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described above in Item 24, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction of the question
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
(3) For purposes of determining any liability under the Securities Act,
to treat the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4), or
497(h) under the Securities Act as part of this Registration Statement as of
the time the Commission declared it effective.
(4) For the purpose of determining any liability under the Securities
Act, to treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the Registration
Statement, and the offering of such securities at that time as the initial
bona fide offering of those securities.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 1
to Registration Statement to be signed on its behalf by the undersigned, in the
City of Boston, State of Massachusetts, on the 17th day of May, 2000.
Lifef/x, Inc.
By: /s/ Lucille S. Salhany
----------------------------------
Lucille S. Salhany
Co-President and Chief Executive Officer
<TABLE>
<CAPTION>
Signature Title Date
--------- --------- ------
<S> <C> <C>
/s/ Lucille S. Salhany Co-President, Chief Executive May 17, 2000
- -------------------------------- Officer and Director
Lucille S. Salhany
/s/ Michael Rosenblatt Co-President and Chairman of the May 17, 2000
- -------------------------------- Board
Michael Rosenblatt
By /s/ Lucille S. Salhany
Lucille S. Salhany, Attorney-In-Fact
/s/ Richard A. Guttendorf, Jr. Chief Financial Officer Secretary May 17, 2000
- -------------------------------- and Director
Richard A. Guttendorf, Jr.
By /s/ Lucille S. Salhany
Lucille S. Salhany, Attorney-In-Fact
/s/ Dr. Ian Hunter Director May 17, 2000
- --------------------------------
Dr. Ian Hunter
By /s/ Lucille S. Salhany
Lucille S. Salhany, Attorney-In-Fact
/s/ Robert Verratti Director May 17, 2000
- --------------------------------
Robert Verratti
By /s/ Lucille S. Salhany
- --------------------------------
Lucille S. Salhany, Attorney-In-Fact
/s/ DR. Steven J. Andriole Director May 17, 2000
- --------------------------------
Steven J. Andriole
By /s/ Lucille S. Salhany
Lucille S. Salhany, Attorney-In-Fact
</TABLE>
II-8
<PAGE>
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the differences between -
original document : C:\WINDOWS\TEMP\LA _27641_1
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Additions appear as Bold+Dbl Underline text
II-9
<PAGE>
EXHIBIT 10.6
Technologies License, Development, Consulting and Collaboration
Agreement
Between
Auckland UniServices Limited, a New Zealand Company
and
Pacific Title/Mirage, Inc., a Delaware Corporation
Effective as of November 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1 - DEFINITIONS........................................................... 3
1.1 Defined Terms......................................................... 3
1.2 Other Definitions..................................................... 7
SECTION 2 - LICENSE AGREEMENT..................................................... 8
2.1 Grant of License...................................................... 8
2.2 Sub-licensees......................................................... 9
2.3 UniServices Exclusion................................................. 9
2.4 dCMISS................................................................ 9
2.5 Escrow Access......................................................... 9
SECTION 3 - NON-REFUNDABLE LICENSE FEE............................................ 10
3.1 Basic Fee............................................................. 10
3.2 Taxes................................................................. 10
3.3 Development Fees...................................................... 11
SECTION 4 - DEVELOPMENT SERVICES,
CONSULTING SERVICES, FEES AND CERTAIN OTHER MATTERS .................. 11
4.1 Reasonable Efforts and Hunter Guarantee............................... 11
4.2 Development Services.................................................. 12
4.3 Intellectual Property Rights.......................................... 14
4.4 Consulting Services................................................... 16
4.5 Development Fee....................................................... 17
4.6 Joint Ownership of Certain Inventions and Intellectual Property
Rights, and Trade Secret Infringement and Enforcement Rights
Generally with Respect to the Licensed and Jointly Owned
Technologies.......................................................... 17
4.7 Additional Licenses................................................... 22
4.8 Pacific's Responsibility for its Products and Services................ 23
SECTION 5 - DELIVERABLES, ESCROW OF SOURCE CODES.................................. 24
5.1 Delivery.............................................................. 24
5.2 Escrow of Source Code................................................. 25
5.3 Source Code........................................................... 25
5.4 Deposit............................................................... 26
5.5 Default in Development Services....................................... 26
SECTION 6 - EXTENSION............................................................. 27
6.1 Extension of Development Services..................................... 27
6.2 Extension of Exclusivity.............................................. 28
6.3 Perpetual Extension of Exclusivity.................................... 28
</TABLE>
i
<PAGE>
SECTION 7 - TERMINATION................................................... 28
7.1 Basic Fee Payment Default..................................... 28
7.2 Development Fee Payment Default............................... 29
7.3 Intellectual Property Rights.................................. 29
7.4 Pacific's Separate Technologies............................... 29
7.5 UniServices Separate Technologies............................. 30
SECTION 8 - WARRANTIES AND GENERAL PROVISIONS............................. 30
8.1 UniServices Warranties........................................ 30
8.2 Liability..................................................... 31
8.3 Indemnity..................................................... 31
8.4 Services of Professor Hunter.................................. 32
8.5 No Reverse Engineering........................................ 33
SECTION 9 - ADDITIONAL PROVISIONS......................................... 33
9.1 Resolution of Disputes........................................ 33
9.2 Force Majeure................................................. 35
9.3 Agreement Disapproved or Unenforceable........................ 36
9.4 Proprietary and Confidential Information...................... 36
9.5 Patent Perfection, and Copyright Registration................. 37
9.6 Independent Contractors....................................... 38
9.7 Time is of the Essence........................................ 39
9.8 Counterparts.................................................. 39
9.9 Notice of License and use of UniServices Name................. 40
9.10 Non Solicitation.............................................. 40
9.11 Survival...................................................... 40
9.12 The Plan...................................................... 41
9.13 Government Requirements and Approvals and Certain Laws........ 41
9.14 Conflict with Applicable Law.................................. 42
9.15 Effectiveness Subject to Prior Approval or Registration....... 42
SECTION 10 - MISCELLANEOUS PROVISIONS..................................... 43
10.1 Waiver........................................................ 43
10.2 Applicable Law................................................ 43
10.3 Entire Agreement.............................................. 43
10.4 Amendment..................................................... 43
10.5 Non-assignment................................................ 44
10.6 Agreement Binding............................................. 44
10.7 Consent to Jurisdiction....................................... 44
10.8 Waiver of Trial By Jury....................................... 44
10.9 Headings...................................................... 44
10.10 Rules of Construction......................................... 45
10.11 Notices....................................................... 45
10.12 Remedies...................................................... 45
ii
<PAGE>
Technologies License, Development, Consulting
and Collaboration Agreement
This Technologies License, Development, Consulting and Collaboration
Agreement (the "Agreement") is made effective as of November 1, 1997, by and
between Auckland UniServices Limited ("UniServices"), a New Zealand company with
its Registered Office at 58 Symonds Street, UniServices House, Level 7,
Auckland, New Zealand, and Pacific Title/Mirage, Inc., ("Pacific"), a Delaware
corporation having an office and place of business at 5055 Wilshire Blvd., Suite
300, Los Angeles, California, 90036, United States of America.
Whereas, the University of Auckland (The "University") has a Research Group
("Research Group") with skills in writing computer software and developing
computer algorithms. The Research Group has developed certain universal finite
element analysis and numerical computation computer software which it has named
CMISS, and which may be used for a variety of purposes including, but not
limited to, anatomically accurate modelling of organs of the human anatomy. The
University has previously assigned all of its Intellectual Property Rights in
CMISS to UniServices, and the University has previously agreed to make the
Research Group's services available to third parties through UniServices. The
Deed of Assignment of Intellectual Property dated February 28, 1997, which is
between the University of Auckland and UniServices, which made such assignment,
and related correspondence, is attached hereto as Exhibit A. UniServices has
previously initiated development on and is continuing to develop a derivative
product of CMISS known as "CMISS/animation" which is a
<PAGE>
customized version of CMISS and which is to be used for creating animated images
of all kinds and other Animation Applications (as defined herein).
Whereas, UniServices and Pacific intend to maintain their respective
objectives and interests under this mutual Agreement as close to being parallel
as reasonably possible, and to creatively work together to accomplish such
intent.
Whereas, UniServices is in the business of providing services and licensing
Intellectual Property Rights arising from research undertaken at the University.
UniServices is the owner of all Intellectual Property Rights, including all
copyright and trade secret rights relating to CMISS and to CMISS/animation
(except for those rights covered by the prior University of California at San
Diego software agreement, which is dated March 2, 1998, and is attached hereto
as Exhibit B), and UniServices has exclusive access to the Research Group for
commercial purposes. UniServices is interested in licensing CMISS/animation to
Pacific pursuant to this Agreement.
Whereas, UniServices also desires to undertake, and Pacific and its
Affiliates (as herein defined) may from time to time materially assist
UniServices in such undertaking, the management of the development of an
animation package, including enhanced or customized versions of CMISS/animation,
plus additional software for use in making animated films and for other media
technology Animation Applications.
Whereas, Pacific is in the business of providing subcontract products and
services for companies which make films, and in developing software for the
entertainment industry and for other Animation Applications. Pacific is
interested in working with UniServices to develop CMISS/animation for use in
making animated films and for other Animation Applications. Pacific also intends
to provide subcontract products and services to its customers who make and
2
<PAGE>
sell animated films, and for other Animation Applications and which consist of,
relate to or are derived from this animation package, and/or Pacific also
intends to market such animation package to the entertainment industry and for
other applications. Pacific also intends to make use of the skills, techniques
and services of the Research Group to develop CMISS/animation in order to be
able to provide such animation package for other Animation Applications.
Now, therefore, in consideration of the promises contained herein,
UniServices and Pacific hereby agree as follows:
SECTION 1 - DEFINITIONS
-----------------------
1.1 Defined Terms. The following terms shall have the following defined
-------------
meanings:
"Additional Field" shall mean all Animation Applications for use in any
----------------
field other than the Entertainment Field, but excluding professional medical,
engineering and scientific applications.
"Affiliate" shall mean as to any specified person, (a) any other person
---------
controlling, controlled by or under common control with such specified person,
(b) any officer, director or partner of such specified person, (c) any other
person of which such specified person is an officer, employee, agent, director,
shareholder or partner or (d) any member of the Family Group of such specified
person or of any individual who is an Affiliate of such specified person by
reason of clause (a) or (b) of this definition. The term "control," with respect
to any person, means possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of such person, whether
through the ownership of voting securities or
3
<PAGE>
a partnership interest, by contract or otherwise. "Family Group" shall mean, as
to any individual, such individual's spouse, ancestors, lineal descendants and
trusts or partnerships for the benefit of any of the foregoing, provided that
all the income beneficiaries and remainderman of any such trust or all partners
of any such partnership are such individual's spouse, ancestors or lineal
descendants and/or charitable tax-exempt organizations. Without limiting the
foregoing definitions, for purposes of this Agreement, Mirage Technologies
Limited Partnership, a Massachusetts Limited Partnership, and each of its
general partners and Safeguard Scientifics, Inc. shall be treated as Affiliates
of Pacific, and the Research Group and the University shall be treated as
Affiliates of UniSerivices.
"Animation Applications" shall mean creating, manipulating, scanning,
----------------------
recording, storing, playing, viewing, compressing, decompressing, and
transmitting animated images, moving human images, moving organic, inorganic or
imaginary images, graphics, any graphic use of images, and visual simulations,
in, on, or across any medium now existing or which may be developed in the
future, including video tape, computer disks, CD, internet, computer networks,
telephone, cable, satellite, wireless networks and other media.
"CMISS" shall mean all versions of the computer software package and
-----
related technologies which the Research Group has developed for universal
finite element and other numerical analysis techniques for purposes including,
but not limited to, simulation and anatomically accurate modelling of organs
of the human body and other subjects, all enhancements, extensions and/or
Derivative Works of such computer software (except for dCMISS, a software
package developed by the University of California at San Diego (herein
4
<PAGE>
"UCSD") and which includes some elements of an early version of CMISS, as
licensed by UniServices to UCSD pursuant to the attached Exhibit B).
"CMISS/animation" shall mean the customized CMISS executable object code
---------------
computer software package (including all enhancements, extensions and/or
Derivative Works) which contains a subset of CMISS designed specifically for
Animation Applications in the Entertainment Field and which may also be used in
the Additional Field.
"Command Files" shall mean, in applications, a set of instructions which is
-------------
recorded and saved as a text file and can be executed with a single command.
When the Command File is executed, the program carries out the instructions.
Program users create Command Files to save time by replacing often-used, and
sometimes lengthy series of commands with a single command.
"Derivative Work" and/or "derivative" and/or "derivative work" or "works"
---------------
shall mean: (i) for copyrightable or copyrighted material, any modification,
correction, addition, extension, upgrade, improvement, compilation, abridgement,
or other form in which an existing work may be recast, transformed, or adapted;
(ii) for patentable or patented material, any improvement thereon; and (iii) for
material which is protected by trade secret, or copyright rights, any new
material derived from such existing trade secret or copyright material, and
including new material which may be protected by copyright, patent, and/or trade
secret or confidentiality agreements or covenants.
"Development Services" shall mean the services described in Section 4
--------------------
hereof, other than the Consulting Services defined in Section 4.4 hereof, and
which are to be performed by
5
<PAGE>
UniServices and the University's Research Group, as provided herein, or are to
be performed jointly by either such parties pursuant to this Agreement and with
Pacific or any of its Affiliates.
"Enhancement" or "enhancement" shall mean the addition of functionalities,
----------------------------
functional attributes, or interface means to CMISS/animation or other software
package subject to this Agreement and which did not previously exist.
"Entertainment Field" shall mean: (1) Film Making, and (2) Animation
-------------------
Applications for use in the entertainment field, but excluding professional
medical, engineering and scientific applications.
"Film Making" shall mean recording sequences of pictures or images and/or
-----------
sound and/or information or data which may be read or observed or heard on film,
video tape or any other media.
"Intellectual Property Rights" or "Intellectual Property Ownership Rights"
---------------------------- --------------------------------------
shall mean the copyright, patent, trade secret, or other confidential software
package or other data or technologies or other items placed under development or
developed pursuant to this Agreement, and including any Source Code or
executable object code, and all Enhancements, extensions and Derivative Works
thereof, and whether related to then pending or subsequently filed patent and/or
copyright or other applications, continuations in part, reissues, adaptations,
modifications, or other valuable or invaluable technology developed hereunder
for the Entertainment Field or for the Additional Field.
"Jointly Owned Inventions and/or Jointly Owned Intellectual Property
-------------------------------------------------------------------
Rights" shall mean all enhancements, extensions and/or Derivative Works of
- ------
CMISS/animation or any other software package developed hereunder to the extent
Pacific or any of its Affiliates has made a
6
<PAGE>
joint and material contribution to the Development Services performed by
UniServices or its Affiliates for the applicable executable object code
computer software package or other significant technological component of such
software package (excluding CMISS, CMISS/animation and dCMISS, which was
previously licensed by UniServices to UCSD). The payment by Pacific to
UniServices of Development Fees pursuant to this Agreement shall not by itself
alone constitute a joint and material contribution to such Development Services.
To avoid any misunderstandings, CMISS and CMISS/animation shall never be
considered "Jointly Owned Inventions and/or Jointly Owned Intellectual Property
Rights" because they are now owned and are in the future to be owned solely by
UniServices.
"Person" or "person" shall mean corporations, trusts, partnerships, whether
------ ------
limited or general, limited liability companies, individuals and other entities
or organizations of every kind whatsoever, and without limitation.
"Research Group" shall mean the Research Group at The University of
--------------
Auckland currently headed by Professor Peter Hunter and currently comprising a
total of approximately 10 persons including Dr. Andrew Pullan, Dr. Poul Nielsen,
Dr. David Bullivant and their graduate students, post doctoral fellows and
programmers within the Department of Engineering Science at The University of
Auckland, 20 Symonds Street, Auckland, New Zealand and its membership as it may
change from time to time.
1.2 Other Definitions. Other words and phrases may be defined elsewhere in
-----------------
this Agreement, either by quotation marks within a parentheses, such as, for
example, the phrase Initial Term in Section 4.1 hereof, or by reference to their
context or usage within this Agreement and its Exhibits, or by reference to the
latest edition of Webster's Dictionary
7
<PAGE>
SECTION 2 - LICENSE AGREEMENT
-----------------------------
2.1 Grant of License. Subject to the terms and conditions of this
----------------
Agreement, UniServices grants to Pacific a universe wide, without geographic
limitation, as the universe is now known or as it may be hereafter discovered,
royalty-free license, but limited to the Entertainment Field and the Additional
Field, to use, make, have made, employ, import, export, and exploit in any other
commercially reasonable manner to its full commercial potential, and to
reproduce, [adapt, modify,] distribute, perform, and display CMISS/animation,
and to grant to sub-licensees the limited right to use CMISS/animation within
the Entertainment Field and/or within the Additional Field in accordance with
the terms and conditions of this Agreement. This license shall be exclusive and
in perpetuity for the Entertainment Field, and shall be exclusive for a period
of five years for the Additional Field, subject to the extension of such
exclusivity period as provided in Section 6 hereof. The licenses granted herein
to Pacific from UniServices do not transfer ownership to Pacific in any
Intellectual Property Rights in dCMISS, CMISS or CMISS/animation (including any
enhancements, extensions and/or Derivative Works thereof.) In addition, the
licenses granted herein to Pacific from UniServices do not provide Pacific with
any ownership or access to the Source Code of dCMISS, CMISS, or CMISS/animation
(including any enhancements, extensions and/or Derivative Works thereof),
except, as to access and use only pursuant to the terms and conditions hereof
and of such Escrow Agreement -- but not as to ownership, to the extent of the
release thereof from the Preferred Escrow Agreement pursuant to the terms and
conditions hereof and of such Escrow Agreement.
Pacific shall provide a detailed annual written notice to UniServices
during the month of November of each year and commencing in November 1998, as to
all sublicenses then in effect
8
<PAGE>
for CMISS/animation with Pacific's customers, or other third parties, and which
notice shall provide the term of each sublicense, and the name, address,
telephone and facsimile numbers of the parties thereto, and such other
information as Pacific may reasonably determine from time to time.
The words [adapt, modify] as used in this Agreement are in brackets since
such words would apply hereunder only if the Source Code is released from escrow
pursuant to this Agreement since at that time the adaption and modification
rights may be needed by Pacific for copyright purposes.
2.2 Sub-licensees. Pacific agrees that any sub-license it grants to any
-------------
third party pursuant to this Agreement shall be subject to the terms and
conditions of this Agreement.
2.3 UniServices Exclusion. Unless terminated pursuant to Section 7
---------------------
hereof, UniServices shall not license or make use of dCMISS, CMISS, or
CMISS/animation or any Enhancement or Derivative Work of any thereof for the
Entertainment Field in perpetuity, or for the Additional Field so long as the
license granted herein is maintained pursuant hereto as an exclusive license in
the Additional Field.
2.4 dCMISS. UniServices agrees and covenants that the use of
------
CMISS/animation by Pacific and its sublicensees will not infringe on any rights
of UCSD in dCMISS, and will not require any royalty, fee or other amount to be
paid to UCSD, or its successors or assigns, and UniServices hereby indemnifies
and holds Pacific harmless from any loss or damage it may incur in such regard
as the result of the breach of this covenant.
9
<PAGE>
2.5 Escrow Access. Pacific agrees and covenants that no sublicensee of
-------------
Pacific shall obtain access, whether directly or indirectly, to the Source Codes
which are held in escrow pursuant to Exhibit C of this Agreement.
SECTION 3 - NON-REFUNDABLE LICENSE FEE
--------------------------------------
3.1 Basic Fee. Pacific agrees to pay UniServices a non-refundable license
---------
fee (herein the "Basic Fee") of One Million Dollars ($1,000,000.00) in US
currency in installments, as follows:
a) Eighty-Seven Thousand Five Hundred Dollars ($87,500) upon signing
this Agreement;
b) an additional total of seven (7) payments of Eighty-Seven
Thousand Five Hundred Dollars ($87,500) each, the first such
payment to be due and payable on or before January 31, 1998, and
each additional such payment to be due and payable at the end of
each subsequent quarter annual period through to and including
July 31, 1999; and
c) an additional four payments of Seventy-Five Thousand Dollars
($75,000) each, the first such payment to be due and payable on
October 31, 1999, and at the end of each subsequent quarter
annual period thereafter through to and including July 31, 2000.
3.2 Taxes. To the extent required by then Applicable Law, and from time
-----
to time, Pacific shall be responsible for withholding and forwarding to the
relevant taxing authorities located within the United States of America, on
behalf of UniServices, any local, state and
10
<PAGE>
federal taxes imposed by any Federal, State or local United States taxing
authority in connection with this Agreement and the payments to be made to
UniServices hereunder. UniServices is solely responsible for the payment of all
its income taxes, if any, arising in connection with this Agreement, and its
receipt of the payments or its right to receive the payments to be made to
UniServices hereunder, and any local sales taxes, license or rental taxes, if
any, attributable to this Agreement or the payments to be made hereunder by
Pacific shall be paid by Pacific, and not by UniServices.
3.3 Development Fees. This Basic Fee does not include any payments to be
----------------
made by Pacific to UniServices for Development Services described in Section 4
or for additional Development Services, if any, requested from time to time by
Pacific.
SECTION 4 - DEVELOPMENT SERVICES,
---------------------------------
CONSULTING SERVICES, FEES AND CERTAIN OTHER MATTERS
---------------------------------------------------
4.1 Reasonable Efforts and Hunter Guarantee. UniServices agrees to obtain
---------------------------------------
and to use the reasonable efforts of the Research Group for a period of five
years (through October 31, 2002) (herein the "Initial Term") to substantially
develop CMISS/animation and to substantially develop enhanced and/or extended
versions and/or Derivative Works of CMISS/animation to meet Pacific's reasonable
requirements within the Entertainment Field and within the Additional Field, as
requested from time to time by Pacific, and whether pursuant to a Plan or
otherwise, and UniServices and the Research Group shall use their reasonable
efforts to provide to Pacific maintenance and support for CMISS/animation, as
requested from time to time by Pacific. UniServices further agrees to and does
hereby guarantee, as long as reasonably practicable, the availability of
Professor Peter Hunter to provide supervision and direct control for all
11
<PAGE>
Development Services to be provided by the Research Group pursuant to this
Agreement. UniServices further agrees to incorporate all future enhancements
made in CMISS into CMISS/animation to the extent needed or useful for
CMISS/animation.
4.2 Development Services.
--------------------
a. Each party may designate a Development Coordinator, which
designation may be changed by either party more than once, by
notice to the other party. The Development Coordinators may
prepare one or more Development Plans (the "Plans") from time to
time, which may include required specifications for
CMISS/animation enhancements and/or extended versions and/or
Derivative Works, as described herein. The Plan may also include,
if the parties reach such an agreement at such time, whether
Pacific is to provide a material contribution to such Development
Services, and it may specify the nature and extent of such
material contribution, and as a result of accomplishing such work
Pacific will become a Joint Owner of such Inventions or
Intellectual Property Rights created hereunder. The parties may,
however, proceed hereunder in the absence of such an
understanding, and reserve the question of such joint ownership
for future resolution. Once approved by both parties, a Plan may
only be changed with the written approval of both parties
respective Development Coordinators, or in the event of their
failure to agree, by the written agreement of an officer of both
parties. In the event of the failure of such officers to reach an
agreement for a Plan as above provided within
12
<PAGE>
a period of 60 days from the date of either party's first written
communication concerning the subject of a Plan, then either party may, if
it so chooses, submit the unagreed to terms of the Plan to mediation for
resolution, and as further provided in this Agreement.
b. The parties shall use reasonably diligent efforts to carry out their
respective obligations set forth in the Plan, or as otherwise established
hereunder, and in accordance with the Plan's timetable, if such a timetable
has been established by the parties. The parties hereto agree to use their
reasonable efforts to agree on and establish an appropriate and equitable
and fair timetable if one is needed hereunder.
c. Each party shall maintain reasonably detailed records to document the
Development Services performed and the work generated by the execution of
the Plan and any other Development Services performed or work produced
under this Agreement. Such records shall include, at a minimum, monthly
copies of archival in progress Source Codes, the names of all personnel
participating in each activity involving Development Services, a complete
list of all third party materials, such as, for example, compiler
computerized libraries used in developing such enhanced software, and
including copies of any signed license agreements authorizing the use of
such materials. Pacific shall have the right to inspect UniServices records
at reasonable times in the reasonable course of business upon at least one
week's prior notice.
13
<PAGE>
d. Each party shall notify the other party promptly after becoming aware
of any potential significant delay in the performance of the
Development Services and work accomplishment schedule under the Plan,
or in the work schedule as established from time to time by the
parties in the absence of such Plan. Any doubt with respect to whether
a delay will be significant shall be resolved in favor of giving such
notification.
e. Each party shall promptly respond to all inquiries made by the other
party's Development Coordinator which could be reasonably expected to
delay the Development Services or work accomplishment schedule.
f. The Plan shall specify the means by which each party shall carry out
its respective obligations regarding the confidentiality of the other
party's pre-existing works, any enhancements thereof, Derivative
Works, any trade secrets, and any other designated confidential
information.
g. Notwithstanding anything to the contrary contained in this Section
4.2, in the event the parties to this Agreement proceed with
Development Services without the establishment of a formal Plan or
work accomplishment schedule, UniServices shall be obligated to use
its reasonable efforts to perform Development Services and other work
hereunder of substantially equivalent value to the payments to be made
by Pacific hereunder for such Development Services.
4.3 Intellectual Property Rights. Other than any Jointly Owned Inventions
----------------------------
and/or Jointly Owned Intellectual Property Rights developed hereunder,
UniServices owns all
14
<PAGE>
copyright, trade secret, patent rights, if any, and other Intellectual Property
Rights in CMISS and any of its enhancements, extensions or Derivative Works,
including CMISS/animation, but excluding dCMISS, as provided in the UCSD
Agreement attached hereto as Exhibit B. Pacific acknowledges and agrees that
dCMISS (to the extent provided in the UCSD Agreement), CMISS and CMISS/animation
are presently trade secrets of and owned by UniServices, and that UniServices
has not previously sought any patent rights for such Intellectual Property
Rights by filing any patent application with respect thereto, although it may in
its discretion do so in the future. UniServices further agrees to use its
reasonable efforts to protect its Intellectual Property Rights in dCMISS (to the
extent provided in the UCSD Agreement), CMISS, CMISS/animation (including any
enhancements, extensions or Derivative Works) and any Jointly Owned Inventions
and/or Jointly Owned Intellectual Property Rights, and the confidentiality of
such trade secrets pursuant to the terms and conditions of this Agreement, from
any unauthorized or improper disclosure to third parties. Pacific is exclusively
licensed under all such Intellectual Property Rights, as provided in this
Agreement and subject to the exclusions and other terms and conditions hereof,
as if all such Intellectual Property Rights originally existed as of the date
this Agreement was entered into by the parties hereto. Inventions or
Intellectual Property made jointly by Pacific or any of its Affiliates and
UniServices or any of its Affiliates pursuant to this Agreement will be jointly
owned by both companies, subject to the terms and conditions hereof. With
respect to any Jointly Owned Inventions and/or Jointly Owned Intellectual
Property Rights, without otherwise limiting the application of any other
provision of this Agreement, the provisions of Section 4.6 hereof shall apply to
such Jointly Owned Inventions and/or Jointly Owned Intellectual Property Rights.
15
<PAGE>
In the event of any dispute regarding the Ownership of any Intellectual
Property Rights which arises hereunder, the parties agree to resolve such matter
themselves, or in the event of their inability to agree, by mediation pursuant
to this agreement, and in the event of their further failure to agree through
mediation, by arbitration pursuant to the terms of this Agreement. After
resolution of the ownership question for such Intellectual Property Rights, each
party agrees to subsequently cross license the other party hereto or its
Affiliates on commercially reasonable terms with respect to the previously
disputed Inventions or Intellectual Property Rights so that neither party is
denied the ability to use, make, have made, employ, import, export, and to
reproduce [adapt, modify] distribute, perform, display, sell and sublicense such
Intellectual Property Rights, regardless of the outcome of the ownership
question, pursuant to the terms and conditions of this Agreement. Commercially
reasonable terms for such cross license may include confidentiality undertakings
concerning any such Intellectual Property Rights which are trade secrets or are
otherwise maintained in confidence pursuant to confidentiality agreements or
covenants. The provisions of Section 4.6d. hereof, and which applies with
respect to the licensed technologies hereunder and the Jointly Owned Inventions
and/or Jointly Owned Intellectual Property Rights developed hereunder, shall
also apply to the above referenced cross license between the parties hereto with
respect to any third party infringement claim, and shall further apply with
respect to the legal remedies available to the parties hereto under such cross
license, and the other matters provided therein. All rights in images, graphics,
animations, etc. produced by or for Pacific or its sublicensees and using
CMISS/animation or any Enhancement or Derivative Work thereof shall be the sole
and exclusive property of Pacific or its sublicensees, and UniServices shall
have no rights therein.
16
<PAGE>
4.4 Consulting Services. During the Initial Term, and during any extended
-------------------
term or terms implemented pursuant to Section 6.1 hereof, and during any further
term or terms to which the parties hereto agree in writing in consideration of
an additional reasonable fee to be paid by Pacific to UniServices for such
further Consulting Services, UniServices will provide reasonable Consulting
Services to Pacific and its Affiliates, and will provide support and advice to
Pacific for CMISS/animation, and UniServices will manage the ongoing technical
development of CMISS/animation and its Enhancements and Derivative Works to the
extent that UniServices has available skills and resources to do so. Pacific
agrees to pay UniServices' travel and accommodation expenses if Pacific requires
advice or consultation from UniServices personnel which reasonably requires them
to temporarily travel outside of New Zealand.
4.5 Development Fee. As payment for the development, maintenance, support,
---------------
and consulting services described in this Section 4 for the Initial Term,
Pacific shall pay to UniServices a fee (the "Development Fee") of $150,000 per
year in U.S. dollars for five years, payable monthly in advance, with the first
payment due on November 1, 1997, and subsequent monthly payments to be paid on
the first day of each monthly period thereafter until a total of sixty payments
have been made in the amount of $12,500 each, for a total amount of Seven
Hundred Fifty Thousand U.S. Dollars ($750,000).
4.6 Joint Ownership of Certain Inventions and Intellectual Property
---------------------------------------------------------------
Rights, and Trade Secret Infringement and Enforcement Rights Generally with
- ---------------------------------------------------------------------------
Respect to the Licensed and Jointly Owned Technologies.
- ------------------------------------------------------
a. If there is any active or alleged infringement or trade secret
violation by any third party of the technologies licensed hereunder,
and if such matter comes to the
17
<PAGE>
attention of either party to this Agreement, such party shall promptly
notify the other party and concurrently provide such evidence as either
such party may then have in its possession or have access to and concerning
the nature and extent of the alleged infringement or violations.
b. Pacific shall have the obligation to reasonably enforce the licensed
technology within the Entertainment Field and within the Additional Field.
If Pacific decides to institute an action, it shall provide 30 days prior
written notice to UniServices and UniServices may, within such 30 days,
elect to join in the action as a plaintiff, and at its own expense. If
UniServices elects not to voluntarily join in the action as a plaintiff,
then UniServices agrees to cooperate with Pacific to the extent reasonably
necessary, including being named as a plaintiff, and Pacific shall
reimburse UniServices for its out-of-pocket expenses in connection with any
such cooperative legal activities. In either event, Pacific shall retain
all proceeds, recoveries or settlements received from any such action, but
shall not enter into any settlement, consent judgment, or other voluntary
final disposition of any such proceeding, and which may include cross
licenses or other licenses, without the written consent of UniServices,
which consent may not be unreasonably withheld or delayed. If Pacific
decides not to enforce the licensed technologies or if it shall decide to
abandon or terminate any such previously initiated legal action, it shall
provide prompt written notice of such decision to UniServices, and
UniServices shall have the right to institute or to continue, to the extent
legally permissible, any such legal action. Pacific shall cooperate with
UniServices in
18
<PAGE>
connection with any such matter to the extent reasonably necessary,
including being named as a plaintiff, and UniServices shall reimburse
Pacific for its out-of-pocket expenses in connection therewith. In
either event, UniServices shall retain all proceeds, recoveries or
settlements received from any such action, but shall not enter into
any settlement, consent judgment, or other voluntary final disposition
of any such proceeding, and which may include cross licenses or other
licenses, without the written consent of Pacific, which consent may
not be unreasonably withheld or delayed.
c. UniServices shall have the obligation to reasonably enforce the
licensed technology outside the scope of the Entertainment Field and
outside the Additional Field. If UniServices decides to institute an
action for any alleged trade secret violation or infringement, it
shall provide 30 days prior written notice to Pacific and Pacific may,
within such 30 days, elect to join in the action as a plaintiff, then
Pacific may, within such 30 days, elect to join in the action as a
plaintiff, and at its own expense. If Pacific elects not to
voluntarily join as a plaintiff, then Pacific agrees to cooperate with
UniServices to the extent reasonably necessary, including being named
as a plaintiff, and UniServices shall reimburse Pacific for its
out-of-pocket expenses in connection with any such cooperative legal
activities. In either event, UniServices shall retain all proceeds,
recoveries or settlements from any such action, but shall not enter
into any settlement, consent judgment, or other voluntary final
disposition of any such proceeding without the written consent of
Pacific, which consent may not be unreasonably withheld or delayed. If
UniServices decides not to enforce the licensed technologies, or if it
shall
19
<PAGE>
decide to abandon or terminate any such previously initiated
action, it shall provide prompt written notice of such decision
to Pacific, and Pacific shall have the right to institute or to
continue, to the extent legally permissible, any such legal
action at its own expense, and Pacific shall retain all proceeds,
recoveries or settlements from any such legal action.
UniServices shall cooperate with Pacific in connection with any
such matter to the extent reasonably necessary, including being
named as a plaintiff, and Pacific shall reimburse UniServices for
its out-of-pocket expenses in connection therewith. In either
event, Pacific shall retain all proceeds, recoveries or
settlements from any such action, but shall not enter into any
settlement, consent judgement, or other voluntary final
disposition of any such proceeding, and which may include cross
licenses or other licenses, without the written consent of
UniServices, which consent may not be unreasonably withheld or
delayed.
d. For any alleged infringement or other trade secret violation of
the technologies licensed hereunder, and which has occurred both
within and outside the Entertainment and/or the Additional Field,
or any alleged infringement or other trade secret violation, and
regardless of whether within or outside such Fields, of the
Jointly Owned Inventions and/or Jointly Owned Intellectual
Property Rights developed or held hereunder, UniServices and
Pacific shall both have the right and obligation to reasonably
enforce the licensed technology. In such event, the parties shall
agree on the methods to be employed by them to accomplish such
enforcement objective, and on an appropriate and equitable
allocation of the
20
<PAGE>
expenses and of any proceeds, recoveries or settlements of any such
enforcement action.
e. In the absence of a subsequent authorized and signed written
agreement between the parties hereto and relating to the subject
matter of Jointly Owned Inventions and/or Jointly Owned Intellectual
Property Rights held or developed pursuant to the terms and conditions
of this Agreement, the parties hereto agree to divide all benefits and
burdens of ownership with respect to all Jointly Owned Inventions
and/or Jointly Owned Intellectual Property Rights, based on a 50%
allocation of the benefits and burdens thereof to each of UniServices
and Pacific, and solely as Joint Owners who are independent
contractors, and are not partners, but subject to the terms and
conditions of this Agreement, including the right to initiate
mediation and/or subsequent arbitration proceedings hereunder in the
event of their failure to agree on any other ownership allocation or
other such matter requested by either such party.
f. With respect to any Jointly Owned Inventions and/or Jointly Owned
Intellectual Property Rights which are then maintained in confidence
as a trade secret, if either owner, or its successors or assigns in
interest, decides to patent and thereby materially disclose such
technology to the public, or to otherwise publish and materially make
public such confidential or trade secret information, including by way
of any copyright registration or copyright filing which requires a
material public disclosure of previously confidential trade secret
information, each party agrees to provide a veto power to the other
joint owner with respect to the
21
<PAGE>
implementation of its decision to file such patent application, or
such copyright registration, or to otherwise materially make public
such confidential or trade secret information. Each party agrees to
strictly follow and comply with the written directions of the other
party hereto in such regards, and to take no such action to publicly
disclose any such trade secrets so that they are no longer maintained
as a trade secret, and each party hereby consents to a restraining
order or to an injunction, which may be sought by the other party in
order to prevent such public disclosure, and each party agrees that
damages would not constitute an adequate remedy at law due to the
irreparable harm which may result from any such wrongful public
disclosure.
4.7 Additional Licenses. Pacific acknowledges and agrees that Enhancements
-------------------
in CMISS made by UniServices may be licensed or otherwise used by UniServices
for applications outside the Entertainment Field and outside the Additional
Field. UniServices further acknowledges and agrees that the Command Files
existing as of June 1, 1998 and any trade secrets or related technologies or
confidential information pertaining thereto (excluding the implementation of the
SVD Algorithm into CMISS, all of which are solely owned by UniServices) are
owned by Pacific, and Pacific, as assignee thereof, to the best of UniServices'
belief and knowledge, but without having conducted an independent investigation,
and concerning which investigation Pacific agrees that UniServices was not under
a duty to conduct such an investigation prior to entering into this Agreement,
now owns the United States patent applications previously filed for such
technologies, and UniServices now has no known claim or adverse interest with
respect to such Intellectual Property Rights, including any copyright rights
22
<PAGE>
or registrations, patent applications, amendments thereto, continuous thereof,
and extensions, Enhancements, and Derivative Works deriving therefrom. If for
any reason any Enhancement or Derivative Work of the Command Files or any
material portion of them are subsequently found to materially infringe on or to
otherwise violate UniServices' Intellectual Property Rights in dCMISS, CMISS,
CMISS/animation, or to materially infringe on or to otherwise violate any other
subsequently developed enhanced or derivative version of CMISS, or to be in
material breach of this Section 4.7, or to be in material breach of any other
material provision of this Agreement, then the parties hereto agree to execute
an amendment to this Agreement and/or to provide for a royalty free and
compensation free cross license between Pacific and UniServices, or their
respective Affiliates, on commercially reasonable terms with respect to such
technology and Intellectual Property Rights, and which cross license may include
trade secret and confidentiality covenants and other reasonable provisions, and
which cross license and this provision to enter into an amendment hereto and/or
such cross license shall in particular be subject to the provisions of Section
9.1 hereof.
With respect to this Section 4.7 and its interpretation, the parties hereto
further agree that CMISS is a low level Code, and that it has been developed by
UniServices and it is owned solely by UniServices, and that to the extent CMISS
is developed or created as a Command File using CMISS as a language, if such
Command File is created or developed solely by Pacific, then such Command File
shall be owned by Pacific, and if it is created or developed jointly by
UniServices and Pacific, it shall be owned jointly by UniServices and Pacific,
and if it is created or developed solely by UniServices, it shall be owned
solely by UniServices, subject to the terms and conditions of this Agreement.
23
<PAGE>
4.8 Pacific's Responsibility for its Products and Services. This Agreement
------------------------------------------------------
is a Technologies License, Development, Consulting and Collaboration Agreement,
and which includes the obligation of UniServices to provide via license to
Pacific certain Intellectual Property Rights or know how or other confidential
information or trade secrets which UniServices may now own or may hereafter have
legal access to for the benefit of Pacific, in accordance with the objectives of
this Agreement. To the extent permitted in this Agreement, it shall be the
responsibility of Pacific to incorporate such information into its own services
and products in whatever manner Pacific may select, and UniServices shall have
no obligation to Pacific or to its customers with regard to the design,
performance, implementation, safety, manufacture, license, use or sale of such
Intellectual Property Rights or know how or other confidential information as
has then been included by Pacific in its services and products beyond the
specific representations, warranties, covenants, agreements and other provisions
provided herein.
SECTION 5 - DELIVERABLES, ESCROW OF SOURCE CODES
------------------------------------------------
5.1 Delivery. Upon execution of this Agreement, UniServices will deliver
--------
(i) the then most current version of CMISS/animation in executable object code
form to Pacific, with any currently existing documentation describing how to use
CMISS/animation, and (ii) the most current version of CMISS/animation in Source
Code form to the escrow agent pursuant to the Preferred Escrow Agreement, which
is attached hereto as Exhibit C, along with any currently existing documentation
describing how to compile CMISS/animation. UniServices agrees to update the
CMISS/animation Source Code quarterly by providing new Source Code updates and
24
<PAGE>
versions and other information to the escrow agent in verifiable form, with
appropriate documentation regarding how to compile CMISS/animation, and as more
particularly described in Exhibit C hereto. The escrow agent's fees for its
services shall be paid by Pacific.
5.2 Escrow of Source Code. In order to protect Pacific and Pacific's
---------------------
partial investment in CMISS/animation, UniServices agrees to place the Source
Code in escrow for the benefit of Pacific. To accomplish this escrow
arrangement, UniServices and Pacific agree to execute and be bound by, effective
as of June 1, 1998, the Preferred Escrow Agreement attached hereto and expressly
incorporated herein by reference as Exhibit C, between Data Securities
International, Inc. ("DSI"), UniServices, and Pacific.
5.3 Source Code. For purposes of UniServices' escrow obligations, the term
-----------
"Source Code" shall mean a copy of the Source Code corresponding to
CMISS/animation, as identified in Exhibit C, but excluding any third party
products. The Source Code shall include all versions and updates to the Source
Code, plus any pertinent commentary or explanation that may be necessary to
render the Source Code understandable and useable by a trained computer-
programmer of reasonable expertise in the relevant field. The Source Code shall
include system documentation, statements of principles of operation, and
schematics, all as necessary or useful for the effective understanding and use
of the Source Code. Insofar as UniServices has employed, in the development,
maintenance, or implementation of the Source Code, any device, programming, or
documentation not commercially available to Pacific on reasonable terms through
readily known third party sources other than UniServices, the Source Code shall
include all such devices, programming, or documentation, including any programs,
and further including compilers, workbenches, tools, and higher-level (or
"proprietary") languages used by
25
<PAGE>
UniServices for the development, maintenance, and implementation of the Source
Code, to the extent such information may be included under any such third party
agreements.
5.4 Deposit. UniServices agrees to deposit verified Source Code (the
-------
"deposit materials" for purposes of the Preferred Escrow Agreement) which will
compile with DSI in accordance with the Preferred Escrow Agreement. UniServices
and Pacific agree to complete, sign and deliver to DSI the Exhibits to the
Preferred Escrow Agreement at the time this Agreement is signed by the parties
hereto.
5.5 Default in Development Services. In the event that UniServices: (1)
-------------------------------
ceases doing business, (2) substantially and materially fails to perform the
Development Services described in Section 4 hereof, or (3) substantially and
materially fails to perform its obligations under Section 5 hereof, and such
failure continues for 30 days after written notice by Pacific, and Pacific is
not in default of its own material obligations under this Agreement, then
subject to the dispute resolution procedure by officers of Pacific and
UniServices in order to be able to rectify and/or cure the default and to
continue the Development Services hereunder, and which officers' effort may be
followed 30 days thereafter by mediation pursuant to this Agreement, and failing
the successful resolution of the matter through mediation, may then be further
followed by arbitration pursuant to this Agreement in order to resolve such
default and possible remedy or cure. In the event Pacific claims a default
hereunder with respect to UniServices Development Services, which default is not
cured within 30 days, then Pacific may also suspend the payment of future
Development Fees accruing hereunder after such claimed default without the
necessity of resorting to the termination provisions provided under this
Agreement. In the event of the failure of mediation or arbitration to resolve
the default and possible cure or other
26
<PAGE>
remedy, and which mediation or arbitration may include the resolution of the
disposition of the ownership and the obligation to pay any such suspended
Development Fees, then Pacific, upon further written notice to UniServices, may
terminate some or all of the provisions of Section 4 of this Agreement,
including its obligation to pay any further Development Fees to UniServices
hereunder, and Pacific, subject to the mediation and arbitration remedies
provided herein, shall be entitled to receive from the Escrow Agent the Source
Code and related materials in accordance with the terms of this Agreement and
the Preferred Escrow Agreement. In the event UniServices ceases doing business,
then without delay Pacific shall be entitled to receive from the Escrow Agent
the Source Code and related materials in accordance with the terms of this
Agreement and the Preferred Escrow Agreement. The termination in whole or in
part of Section 4 hereof shall not adversely affect the remaining provisions of
this Agreement, except as otherwise specifically provided herein.
SECTION 6 - EXTENSION
---------------------
6.1 Extension of Development Services. Pacific shall have the option of
---------------------------------
extending the Initial Term of this Agreement for the Research Group's provision
of Development Services pursuant to Section 4 for one or more additional one-
year terms. Pacific may exercise its option by giving written notice to
UniServices at least 30 days before the expiration of the Initial Term or of any
extension term, provided that Pacific is not in default of its obligations under
this Agreement beyond any applicable notice and grace or cure periods. The
Development Services to be provided by UniServices shall be provided during each
extension term on the same terms and conditions as during the Initial Term,
except that the Development Fee shall be $200,000
27
<PAGE>
(and such amount shall be increased by an inflation factor for each future year
based on the then future level of the U.S. Department of Commerce Consumer Price
Index, with the Index Amount as of October 31, 2002 to be equal to 100% of such
$200,000 amount, but in no event may increase in the amount of such fee be more
than 12% per annum for the period from October 31, 2002 through to the date of
measurement) per year for each one-year extension term, and subject to any other
changes in this Agreement relating to Development Services which may be agreed
to in writing by the parties hereto.
6.2 Extension of Exclusivity. The exclusivity of the license granted in
------------------------
Section 2.1 hereof for the Additional Field shall be extended for so long as the
Development Services are extended pursuant to Section 6.1 hereof.
6.3 Perpetual Extension of Exclusivity. If UniServices defaults on its
----------------------------------
material obligations hereunder such that Pacific becomes entitled to receive the
Source Code and related materials from the Escrow Agent pursuant to this
Agreement and the Preferred Escrow Agreement, then the license granted in
Section 2 hereof shall automatically become exclusive in perpetuity for the
entire Additional Field and it shall remain exclusive in perpetuity for the
Entertainment Field.
SECTION 7 - TERMINATION
-----------------------
7.1 Basic Fee Payment Default. If Pacific fails to pay any installment of
-------------------------
the Basic Fee when due, and such failure continues for 30 days after written
notice by UniServices, then UniServices may terminate: (1) this Agreement,
and/or (2) the license granted in Section 2
28
<PAGE>
hereof. In addition, UniServices may pursue any legal remedies available to it
pursuant to this Agreement in order to recover all amounts due and legally owing
to it hereunder from Pacific.
7.2 Development Fee Payment Default. If Pacific fails to pay any
-------------------------------
installment of the Development Fee when due, and such failure continues for 30
days after written notice by UniServices, then UniServices may terminate the
provisions of Section 4 of this Agreement and the license granted in Section 2
shall thereupon become non-exclusive for applications in the Additional Field.
In addition, UniServices may pursue any legal remedies available to it pursuant
to this Agreement in order to recover all amounts due and legally owing to it
hereunder by Pacific.
7.3 Intellectual Property Rights. If the license granted hereunder is
----------------------------
terminated pursuant to Section 7.1 above, then all rights licensed to Pacific
pursuant to this Agreement in CMISS/animation (other than Jointly Owned
Inventions and/or Jointly Owned Intellectual Property Rights developed
hereunder), shall revert to and shall thereafter be owned solely by UniServices,
free and clear of such license provisions. All Jointly Owned Inventions and/or
Jointly Owned Intellectual Property Rights shall continue to be Jointly Owned by
Pacific and UniServices subject to the terms and conditions hereof, and
regardless of whether this Agreement, any licenses, or the provisions for the
Development Services or Consulting Services to be performed hereunder have been
terminated.
7.4 Pacific's Separate Technologies. Any technology separately developed
-------------------------------
by Pacific or any of its Affiliates and not developed pursuant to this
Agreement, or any technology which is developed or is separately owned by
Pacific in conjunction with other third parties, shall be
29
<PAGE>
owned solely by Pacific, or by Pacific and such third parties, and shall not be
owned by UniServices.
7.5 UniServices Separate Technologies. Any technology separately
---------------------------------
developed by UniServices or any of its Affiliates and not developed pursuant to
this Agreement, or any technology which is developed or is separately owned by
UniServices in conjunction with other third parties, shall be owned solely by
UniServices, or by UniServices and such third parties, and shall not be owned by
Pacific.
SECTION 8 - WARRANTIES AND GENERAL PROVISIONS
---------------------------------------------
8.1 UniServices Warranties. UniServices represents and warrants that:
----------------------
a) UniServices has exclusive, perpetual universe wide rights to the
copyright, trade secret and all other Intellectual Property
Rights in CMISS and in CMISS/animation, free and clear of all
liens, claims and encumbrances of every kind and description
whatsoever (except for those relating to dCMISS and which are
included in the UCSD Agreement);
b) UniServices has the legal right and authority to enter into this
Agreement and to carry out its obligations, agreements and
covenants hereunder, which obligations, agreements and covenants
are valid, binding and enforceable against UniServices in
accordance with their respective terms;
c) UniServices is not aware of any patent infringed by
CMISS/animation; and
d) the version of dCMISS previously delivered to UCSD by UniServices
does not materially infringe or otherwise violate the terms and
conditions of this
30
<PAGE>
Agreement since it does not work on Animation Applications in the
form delivered to UCSD.
UniServices makes these warranties in lieu of all other warranties, express
or implied. UniServices has no control over the conditions under which Pacific
and/or its sub-licensees will use CMISS/animation, and it therefore cannot and
does not warrant the results to be obtained by such use. UNISERVICES EXPRESSLY
DISCLAIMS THE WARRANTIES OF MERCHANTABILITY, AND FITNESS FOR A PARTICULAR
PURPOSE OF CMISS/ANIMATION, INCLUDING ALL ENCHANCEMENTS, EXTENSIONS AND/OR
DERIVATIVE WORKS.
8.2 Liability. UniServices' liability arising hereunder from breach of
---------
contract, breach of warranty, indemnification, negligence, strict liability in
tort, or any other legal or equitable theory shall not exceed: (1) six million
U.S. dollars, inclusive of interest awarded, or (2) the total amount previously
paid by Pacific pursuant to this Agreement (i.e., the total license fee and the
total development fees paid through to the date of default), whichever amount is
greater. UniServices agrees to provide reasonably satisfactory financial
statements describing its financial condition to Pacific before Pacific signs
this Agreement, and such financial statements are attached hereto as Exhibit D.
NEITHER PARTY TO THIS AGREEMENT WILL BE LIABLE TO THE OTHER FOR ANY SPECIAL,
INCIDENTAL, OR CONSEQUENTIAL DAMAGES OF ANY TYPE EVEN IF IT HAS BEEN APPRISED OF
THE POSSIBILITY OF SUCH DAMAGES.
8.3 Indemnity. UniServices shall reasonably defend and shall indemnify and
---------
hold harmless Pacific against any charge of patent or copyright infringement or
unauthorized or
31
<PAGE>
improper breach of confidentiality of trade secret obligations or similar
violations of law by UniServices in connection with the CMISS/animation
technology to be provided to Pacific pursuant to to this Agreement. If in the
opinion of Pacific, UniServices has not met such obligation, or is unable to
meet such obligation, and Pacific provides 30 days prior written notice to
UniServices in such regard, then UniServices hereby grants to Pacific all
exclusive or non-exclusive license, rights, and interests minimally required
under Applicable Law in order for Pacific to be able to legally defend and
protect its legal and economic interests hereunder, and this Agreement shall in
such event be either an exclusive or a non-exclusive license from UniServices in
favor of Pacific in order to permit Pacific to take all necessary legal actions
for such purpose. Pacific may not settle, enter a consent judgment or make any
other voluntary final disposition of any such suit, and including cross licenses
or other licenses, without the consent of UniServices, which consent may not be
unreasonably withheld or delayed. Except as otherwise provided herein, any
settlement, award or judgment granted in favor of Pacific or UniServices shall
be applied first to the recovery of legal and expert fees and other related
costs incurred by the successful party or parties for such purpose, with
interest included thereon at the prime rate, with any available balance of funds
to be divided between the parties as they may subsequently agree, based on their
then reasonably applied discretion and their Intellectual Property Rights and
other interest therein, and based on an equitable resolution of such matter
which considers the facts and circumstances which then exist.
8.4 Services of Professor Hunter. In the event Professor Peter Hunter,
----------------------------
other than due to his death or disability, is unavailable through UniServices to
provide development services pursuant to this Agreement, then Pacific may pay
Professor Peter Hunter directly to provide
32
<PAGE>
such services to Pacific if he is available to the Pacific, and it may offset
its payments for such purpose against the Development Fee to the extent of its
actual payments to Professor Hunter, not to exceed $150,000 per year in any year
during the Initial term, and not to exceed $200,000, as indexed for inflation as
provided herein, in any subsequent extended term year.
8.5 No Reverse Engineering. Pacific agrees that it (including any
----------------------
permitted sublicensees or assignees) will not attempt to disassemble or reverse
engineer CMISS and/or CMISS/animation, including any of their enhancements,
extensions and/or Derivative Works.
SECTION 9 - ADDITIONAL PROVISIONS
---------------------------------
9.1 Resolution of Disputes.
----------------------
a UniServices and Pacific intend to avoid litigation relating to or
arising out of this Agreement. In the event of any dispute or
perceived problem, each party pledges itself to give prompt
notice to the other party and to first seek an amicable
resolution of such dispute without regard to litigation. As part
of this effort at amicable resolution, the parties agree to
communicate and to meet and discuss any problems, and to search
in good faith for mutually acceptable business solutions to any
perceived problem. Each party shall be given thirty (30) days
from the date of any such notice to correct its performance under
this Agreement, or otherwise cure any breach or alleged breach of
contract, or otherwise arrive at any acceptable resolution of the
matter with the other party.
33
<PAGE>
b. All disputes arising out of or relating to this Agreement (including
any questions of fraud or fraud in the inducement or questions
concerning the validity or enforceability of this Agreement or any of
the rights herein conferred) shall, unless earlier resolved by
discussions according to Paragraph a) hereof, or unless waived by the
aggrieved party, be resolved by voluntary mediation within a 30 day
period. In the event of the failure of the parties to reach agreement
in mediation, then the parties shall employ binding arbitration
pursuant to the commercial arbitration rules of the American
Arbitration Association ("AAA"), such arbitration to be held in Los
Angeles, California, and before a single arbitrator chosen jointly by
the parties. The arbitration shall be governed by the United States
Arbitration Act, 9 U.S.C. (S)(S) 1-16, to the exclusion of any
provision hereof which is inconsistent therewith or which would
produce a different result, and judgement upon the award rendered by
the arbitrator may be entered by any court having jurisdiction. The
power to grant an injunction shall be available to the arbitrator
where such remedy is provided pursuant to this Agreement, or is
otherwise necessary hereunder in order to accomplish the objectives of
this Agreement. Arbitration commenced and conducted pursuant to this
Agreement shall be completed within 60 days. Any decision by the
arbitrator may consist of only the adoption of either party's position
in the matter, as adopted by such party in writing and as submitted to
the arbitrator and the other party at or within ten (10) days
34
<PAGE>
before the commencement of the formal arbitration proceeding, and
the arbitrator may not adopt any other position in its binding
decision, such arbitration being sometimes referred to as
"baseball arbitration," in that compromises in any formal
arbitration decision, in the absence of an agreement reached
voluntarily by the parties themselves, are to be discouraged. AAA
shall employ expedited procedures, regardless of the amount in
controversy, for purposes of any request for immediate injunctive
relief hereunder. For purposes of any immediate injunctive relief
sought hereunder, AAA shall select a three judge panel of retired
judges for this purpose only. In the event either party seeks
immediate injunctive relief hereunder, and to that extent only,
the provisions of this Agreement with respect to possible
agreement between the parties themselves and with respect to
mediation shall not apply, and either party may employ immediate
arbitration procedures hereunder for such limited purpose only.
c. This Section 9.1 shall survive any termination of this Agreement
and/or any termination of the licenses granted hereunder and/or
any termination of any provisions contained in this Agreement.
9.2 Force Majeure. If circumstances beyond the control of either party
-------------
(such as, for example, acts of God and government decrees or restrictions) shall
temporarily make it impossible for that party to perform its obligations under
this Agreement, then the principles of force majeure shall apply and the right
to terminate this Agreement shall be temporarily
35
<PAGE>
suspended during the force majeure period, but only up to a maximum suspension
of one year for any such single event of force majeure, which events may occur
cumulatively more that once hereunder.
9.3 Agreement Disapproved or Unenforceable. If at any time during the life
--------------------------------------
of this Agreement, any governmental or regulatory agency, arbitrator or court
shall disapprove of this Agreement or any provision of this Agreement, or shall
find any part of this Agreement to be unenforceable, then the remaining
provisions of this Agreement shall remain in full force and effect, and Pacific
and UniServices shall cooperate in good faith to revise the disapproved or
unenforceable portions of this Agreement in a mutually satisfactory and
equitable manner and in a manner acceptable to said governmental agency or
arbitrator, or consistent with such judicial decree.
9.4 Proprietary and Confidential Information.
----------------------------------------
a. Each party hereto may disclose to the other certain proprietary
and confidential or trade secret information including (but not
limited to) inventions, trade secrets, technical or scientific
information, market research data, market plans, concepts, test
results, and customer and sales information. All such information
shall be deemed confidential, proprietary, and valuable trade
secret information which is the exclusive property of the party
from whom the information was derived. Each party shall use such
confidential information exclusively in accomplishing the
purposes of this Agreement, and shall not disclose such
information to others, except with the prior written consent of
such party. Each of the
36
<PAGE>
parties shall disclose such confidential information only to
such of its employees that shall require the information in order
to carry out the purposes of this Agreement.
b. The restrictions and obligations applicable to the parties
relating to proprietary confidential information and trade
secrets shall not apply to any information of either party which:
a) Is known to the other party prior to receipt thereof under
this Agreement, as evidenced by written records; b) Is disclosed
to the other party in good faith by a third party who is in
lawful possession thereof and who has the right to make such
disclosure; c) Is or shall have become part of the public domain,
by publication or otherwise, through no fault of the party having
the obligation of confidentiality under this Agreement; or d) Is
required by law or applicable court or administrative order to be
disclosed. Except as otherwise provided herein, the disclosure of
any such confidential information does not give any express or
implied right or license to either party, whether under any
patents or copyrights of either party or otherwise, nor does it
give any express or implied right or license to such information
for any purposes other than relating to the purposes of this
Agreement.
9.5 Patent Perfection, and Copyright Registration. UniServices shall be
---------------------------------------------
solely responsible for preparing, filing, prosecuting and maintaining all
licensed patent applications, all licensed patented technologies, and all
licensed, registered or otherwise governmentally
37
<PAGE>
certified or validated copyright rights hereunder which are owned solely by
UniServices, at its sole expense, and it may use patent or copyright counsel of
its own choice in so doing, and UniServices shall undertake and perform all such
actions to the best of its ability to do so and in its sole discretion. The
parties acknowledge and agree that CMISS and CMISS/animation have not previously
been filed for patent or copyright protection by UniServices, and as such
constitute UniServices' trade secrets. UniServices further acknowledges and
agrees that pending patent applications and copyright rights relating to Command
Files, as of June 1, 1998, are owned solely by Pacific, and further patent
and/or copyright applications, continuations in part, reissues, and
continuations may be filed by Pacific with respect to such patent and/or
copyright rights, and all Derivative Works or Enhancements thereof. With
respect to Jointly Owned Inventions and/or Jointly Owned Intellectual Property
Rights which are maintained in confidence as trade secrets, UniServices and
Pacific shall each have the right to object to and to prevent the other party
from making, preparing, prosecuting or maintaining any patent application or
copyright registration or making any other publication or public disclosure with
respect to such Jointly Owned Inventions and/or Jointly Owned Intellectual
Property Rights, and as further provided pursuant to this Agreement. If patent
applications or copyright registrations are subsequently agreed to be filed or
are consented to by the parties hereto for any Jointly Owned Inventions and/or
Jointly Owned Intellectual Property Rights developed hereunder, the costs and
expense thereof shall be paid for by both parties equally, or as they may
otherwise subsequently agree.
9.6 Independent Contractors. It is intended and agreed by the parties
-----------------------
hereto that they are independent contractors, and Pacific is a licensee of
UniServices hereunder. Pacific shall
38
<PAGE>
not in any way act or hold itself out to the public as an agent of UniServices,
and Pacific shall have no power to incur any obligations of any kind on behalf
of UniServices. Similarly, UniServices agrees that it is an independent
contractor to Pacific, and that it will provide Development and Consulting
Services to Pacific as an independent contractor, and UniServices shall not in
any way act or hold itself out as an agent of Pacific, and UniServices shall
have no power to incur any obligations of any kind on behalf of Pacific. The
parties do not intend to form a partnership or joint venture, and no such
partnership or joint venture is formed by this Agreement and/or by any Plan
adopted hereunder.
9.7 Time is of the Essence. Time is of the essence for the performance of
----------------------
all obligations set forth in this Agreement. However, grace periods provided
herein for various purposes shall be construed with the objective and for the
purpose of allowing the parties to remain in compliance with and to cure or
remedy any alleged default hereunder, and to permit each of them to
satisfactorily perform the terms and conditions of this Agreement and their
obligations hereunder.
9.8 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties in separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute one and the same Agreement. In the
event the parties execute this Agreement in counterparts by facsimile
signature, each such party agrees to promptly forward to the other party the
signed original hard copy of this Agreement by overnight delivery service which
requires not more than four business days to accomplish such delivery.
39
<PAGE>
9.9 Notice of License and use of UniServices Name. Pacific agrees that
---------------------------------------------
its products and services licensed or sold hereunder shall be appropriately
identified with all appropriate patent numbers or copyright registration
identification applicable to CMISS and/or CMISS/animation, and in a manner to
give proper legal notice thereof under any Applicable Law. However, no such
notice shall include reference to UniServices without its prior written consent,
which consent shall not be unreasonably withheld or delayed. Pacific shall not
market any services or products using the marks of or any endorsement of
UniServices unless separately authorized in writing by UniServices to do so.
9.10 Non-Solicitation. During the Initial Term, any extension term (as
----------------
described in Section 6), and for twelve months thereafter, neither party may
solicit any employee of the other who is involved in providing Development
Services or in licensing CMISS and/or CMISS/animation and their enhancements or
extended versions or derivative works, or in providing Consulting Services
therefor, without the prior written consent of the other party hereto, which
consent may be withheld or delayed in such other party's sole discretion.
9.11 Survival. The covenants, conditions, obligations, agreements,
--------
indemnities, representations, warranties, confidentiality and other provisions
hereof which by their terms contemplate the continuing performance of a party
hereto after the termination of this Agreement, and/or after the termination of
any license granted hereunder, and/or after the termination of any services to
be provided hereunder, shall survive the termination of this Agreement and/or
the termination of the license granted hereunder, and/or the termination of this
Agreement or of the license granted hereunder or of the services to be performed
hereunder, and shall not operate so as to relieve any party of legal
responsibility or liability for
40
<PAGE>
its breach hereof, whether in damages or otherwise, and whether occurring
before or after any such termination has occurred.
9.12 The Plan. The Plan, as amended from time to time in accordance with
--------
this Agreement, shall for purposes of this Agreement be treated as if originally
incorporated into this Agreement by reference on the original effective date of
this Agreement.
9.13 Government Requirements and Approvals and Certain Laws. The parties
------------------------------------------------------
hereby agree that they will not ship or divert for us in any country any of the
Licensed Software, Source Code or other documentation or technical data with
respect thereto, and including the executable object code, in contravention of
the laws and regulations of the United States or any such countries or knowingly
allow such shipment or diversion. Each party shall use its reasonable efforts to
obtain all required governmental approvals necessary in connection with this
Agreement and the performance of their obligations hereunder. Without limiting
the generality of the foregoing, both Pacific and UniServices acknowledge that
their respective exportation of the licensed technologies and Jointly Owned
Inventions and/or Jointly Owned Intellectual Property Rights and related
technical documentation may be subject to compliance with the United States
Export Administration Act of 1979, as amended (collectively, the "Act"), and
both Pacific and UniServices warrant and represent to each other that each will
comply in all respects with the Act. In the event either party or both parties
publish any Source Code, or in the event the Source Code is not deemed to be
published for purposes of any applicable copyright law registration or copyright
protection available to either party hereto, and whether arising under common
law, by statute, by convention or otherwise, then the parties agree that the
provisions of the Berne Convention shall apply with respect to the Source Code
and the
41
<PAGE>
executable object code held or developed hereunder, and regardless of whether it
has been published or is considered unpublished for purposes of this Agreement
and their making of any required filings, registrations, or governmental
certifications, or for purposes of obtaining the benefit of any applicable
copyright law with respect thereto. Pacific and UniServices each agree to
indemnify the other party hereto against any claim, losses, liability or damage
suffered or incurred by the other party and arising out of or relating to any
violation by such party of any of the provisions or covenants contained in this
Section.
9.14 Conflict with Applicable Law. In the event that any provision, term,
----------------------------
condition, or object of this Agreement may be in likely conflict with any
Applicable Law, and the legal counsel of either party shall advise that in its
considered opinion such conflict, or a reasonably likely possibility of such
conflict exists, then either party may propose to the other party appropriate
modifications of this Agreement to avoid such conflict. In such event the
parties hereto shall use their reasonable efforts to satisfactorily and
reasonably resolve such matter, subject to the provisions of Section 9.1 hereof.
9.15 Effectiveness Subject to Prior Approval or Registration. If the legal
-------------------------------------------------------
effectiveness of this Agreement is subject to the condition that it be approved
and/or registered by or with any governmental authority or agency, each party
shall act diligently and use its reasonable efforts to obtain such approval and
registration at its own expense in such country, this provision being a joint
covenant of the parties hereto. Either party shall present satisfactory evidence
to the other party that any such required approval and registration has been
obtained.
42
<PAGE>
SECTION 10 - MISCELLANEOUS PROVISIONS
-------------------------------------
10.1 Waiver. A waiver by either party of any term or condition of this
------
Agreement shall not be construed on the same or any other occasion to be a
waiver of any other term or condition of this Agreement.
10.2 Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of Delaware, and the Federal and other
laws of the United States of America, and without regard to the United Nations
1980 Convention on the international sale of goods, but with regard to the Berne
Convention concerning copyright claims, and except that the laws of the State of
Delaware shall not include its conflicts or choice of applicable laws
provisions. Applicable Law means any law, regulation, decree, order or statue of
the State of Delaware and United States of America Federal Law, and any treaty
or convention and regulations or orders issued thereunder and applicable to the
ownership or licensing and other commercial disposition of computer software and
related technologies and products and services, and found applicable to this
Agreement.
10.3 Entire Agreement. This Agreement constitutes the entire Agreement
----------------
between UniServices and Pacific pertaining to the subject matter hereof, and
supersedes all prior negotiations, discussions, and any agreements which may
have previously existed between the parties hereto or other parties, whether
written or oral, and which relates to the subject matter hereof.
10.4 Amendment. This Agreement may be amended or modified only by a signed
---------
written agreement executed by both UniServices and Pacific.
43
<PAGE>
10.5 Non-assignment. Neither party may assign this Agreement without the
--------------
signed written consent of the other party hereto, except that this provision
shall not prevent Pacific or UniServices from sublicensing, selling or otherwise
commercially exploiting in accordance with the terms and conditions of this
Agreement the licensed or Jointly Owned Inventions and/or Jointly Owned
Intellectual Property Rights and technologies hereunder, or prevent either party
from performing its obligations or exercising its rights hereunder.
10.6 Agreement Binding. Each party acknowledges that it has read this
-----------------
Agreement, understands its terms, and agrees to be bound by its terms and
conditions.
10.7 Consent to Jurisdiction. In the event either party hereto brings a
-----------------------
claim, suit or other proceeding against the other party hereto for the purpose
of obtaining equitable relief or otherwise, or for the purpose of enforcing any
mediation agreement or arbitration agreement or arbitration award, both parties
consent to the exclusive personal jurisdiction of, and venue in, the State
courts within Los Angeles County, California, or in the event of Federal
jurisdiction, the Federal Courts of California, except as to any controversy or
claim required to resolved pursuant to Section 9.1 hereof, and with respect to
which said Section 9.1 the parties hereto also grant their consent.
10.8 Waiver of Trail By Jury. The parties hereto waive their right to
-----------------------
trail by jury in the event of any litigation between the parties hereto and
relating to this Agreement or their performance hereunder.
10.9 Headings. Section and subsection headings are included herein for
--------
convenience only, and such headings shall not be used in the interpretation of
this Agreement, or in the interpretation of any ambiguities which may be
contained herein.
44
<PAGE>
10.10 Rules of Construction. Rules of interpretation of ambiguities
---------------------
against the draftman, and other fictional legal theories or rules of contract
construction shall not be applied to this Agreement, notwithstanding anything
contained herein (other than Section 9.7 hereof) or in any Applicable Law.
10.11 Notices. All notices to be given or otherwise made to any party
-------
to this Agreement shall be deemed to be sufficient if contained in a written
instrument, delivered by hand in person, or by express overnight courier
service, or by electronic facsimile transmission (with a conforming copy sent by
United States or New Zealand mail, registered or certified mail, return receipt
requested), or by registered or certified mail, return receipt requested,
postage prepaid, addressed to such party at the address set forth herein or at
such other address as may hereafter be designated in writing by the addressee to
the addressor and listing all parties. All such notices shall, when mailed or
telecopied, be effective when received or when attempted delivery is refused.
10.12 Remedies. The remedies provided herein are cumulative, may be
--------
exercised successively or concurrently, and are exclusive of any other remedies
provided by law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and effective as of the date set forth above.
SIGNED for and on behalf of SIGNED for and on behalf of
AUCKLAND UNISERVICES, LTD.: PACIFIC TITLE/MIRAGE, INC.:
/s/ John A. Kernohan /s/ Michael S. Rosenblatt
- --------------------------- ----------------------------
John A. Kernohan Michael S. Rosenblatt
Chief Executive Officer Co-President
Date: June 12, 1998 Date: 6/12/98
--------------------- ----------------------
45
<PAGE>
[LETTERHEAD OF THE UNIVERSITY OF AUCKLAND]
[LOGO]
19 May 1998
Pacific Title/Mirage
5055 Wilshire Blvd
Suite 3000
Los Angeles
CA 90036
U.S.A.
Attention: Robert Verratti
Dear Mr Verratti
Re: Technologies License, Development, Consulting and Collaboration Agreement
This letter is to confirm that it is the policy of The University of Auckland
that all research and development contracts using staff and other resources at
The University of Auckland shall be undertaken through Auckland UniServices
Limited (UniServices). UniServices is authorised to make such arrangements on
terms which suit both the University and UniServices.
This policy has been in effect since December 1990 and it is contemplated that
this arrangement will continue for at least the next five years.
I confirm that I am aware of the contractual arrangements currently being
negotiated between Pacific Title/Mirage and UniServices.
Your sincerely
/s/ W.B. Nicoll
W.B. NICOLL
REGISTRAR
<PAGE>
================================================================================
Draft
19 December 1996
THE UNIVERSITY OF AUCKLAND
(UOA)
AUCKLAND UNISERVICES LIMITED
(UniServices)
DEED OF ASSIGNMENT OF INTELLECTUAL PROPERTY
BROOKFIELDS
LAWYERS
AUCKLAND & MANUKAU
================================================================================
<PAGE>
DEED OF ASSIGNMENT OF INTELLECTUAL PROPERTY
DEED dated the 28th day of FEBRUARY 1997
PARTIES
1. THE UNIVERSITY OF AUCKLAND ("UOA")
2. AUCKLAND UNISERVICES LIMITED ("UniServices")
INTRODUCTION
A. UniServices is a company wholly owned by UOA
B. UniServices was incorporated for the purpose, amongst other things, of
identifying and developing intellectual property created by UOA staff and
therefore the property of UOA, for commercial gain.
C. The parties have agreed that to enable Uniservices to carry out this
function all such intellectual property shall become the property of
UniServices.
THIS DEED RECORDS:
1. DEFINITIONS AND INTERPRETATION
1.1 In this deed unless the context otherwise requires:
"Intellectual Property" means all intellectual property which at the date
of this deed or in the future and whether existing at the date of this deed
or created in the future, becomes the property of UOA and includes all
copyright patents, plant varieties and designs and all confidential
information and know how but does not include the Excluded Intellectual
Property.
"Excluded Intellectual Property" means:
(a) all the trademarks and rights to any names and all goodwill and
copyright associated with the same;
(b) all rights to any journal articles, books and any other artistic
literature including novels and poems;
(c) all rights to any works of art or music; and
(d) all rights to any instructive material (other than computer software).
<PAGE>
-2-
"Commercial Intellectual Property" means Intellectual Property identified
by UniServices for commercial exploitation or with a potential for
commercial exploitation as provided in clause 3.1.
1.2 In this deed:
(a) Where the context permits, the singular includes the plural and vice
versa.
(b) References to any "party" mean a party to this deed and include the
successors, executors, administrators and permitted assignees (as the
case may be) of that party.
(c) Anything which may be done at any time may also be done from time to
time (unless stated otherwise).
2. ASSIGNMENT
2.1 In consideration of the covenants contained in this deed UOA assigns all
the Intellectual Property to UniServices absolutely and where that
Intellectual Property or UOA's right to the same come into existence after
the date of this deed this clause shall operate to vest that Intellectual
Property in UniServices immediately that Intellectual Property comes into
existence or becomes the property of UOA.
3. COMMERCIAL DEVELOPMENT AND PROTECTION BY UNISERVICES
3.1 UniServices shall constantly review the Intellectual Property with a view
to identifying any parts of the Intellectual Property suitable for
commercial exploitation or which if further developed may become suitable
for commercial exploitation.
3.2 Upon identifying any Commercial Intellectual Property, UniServices shall
take all reasonable steps to commercially exploit that Commercial
Intellectual Property or to develop it further with a view to its
commercial exploitation.
3.3 If UniServices wishes to develop any Commercial Intellectual Property
further, UniServices shall inform suitably qualified staff of UOA and then
enter into negotiations with those staff on any terms on which UniServices
may be prepared to further develop that Commercial Intellectual Property
using the services of UOA or that staff of UOA acting as independent
contractors. Such negotiations shall be on the understanding that:
(a) All negotiations will on an arms length basis.
(b) UniServices will be free to negotiate and to make any agreement with
any third party at its discretion.
<PAGE>
-3-
UniServices shall ensure that any arrangement negotiated with or involving
UOA staff complies in all things with UOA's then current staffing policies
on staff involved in projects of this nature.
3.4 UniServices shall take all reasonable steps to protect any Commercial
Intellectual Property including, where appropriate, filing patent
applications in New Zealand and elsewhere. In making any decision in this
regard Uniservices may take into account the cost of such protection
against the value and likelihood of any commercial gain.
4. PROTECTION BY UOA
4.1 UOA shall procure that its staff take all steps to inform UniServices of
the development of any Intellectual Property which may reasonably be
considered Commercial Intellectual Property and shall not disclose the same
to any person other than UniServices, until UniServices has confirmed to
that staff member whether UniServices considers such Intellectual Property
to be Commercial Intellectual Property or not.
4.2 UOA shall also procure that UOA's staff Maintain as confidential at all
times, and not at any time, directly or indirectly:
(a) Disclose or permit to be disclosed to any person; or
(b) Use for themselves; or
(c) Use to the detriment of UniServices,
any Commercial Intellectual Property except
(i) As required by law; or
(ii) Where it is already or has become public knowledge; or
(iii) As authorised in writing by UniServices.
4.3 UniServices agrees that it will not unreasonably withhold its consent to
the publication of any Commercial Intellectual Property as part of an
academic paper to be published by a member of UOA staff provided:
(a) Such publication does not result in UniServices being in breach of any
obligation to any third party;
(b) The academic paper is submitted to UniServices for its approval
before it is released to any third party.
(c) UniServices may delay any publication or disclosure to allow
protection of any Commercial Intellectual Property.
<PAGE>
-4-
(d) UniServices may require any Commercial Intellectual Property which
Uniservices considers, at its discretion, to be commercially sensitive
to be deleted.
4.4 UOA shall procure that any member of UOA staff involved in the development
of any Commercial Intellectual Property are available for and assist
UniServices in any steps UniServices wishes to take to protect that
Commercial Intellectual Property including lending their name to any patent
application or otherwise.
5. LIABILITY
5.1 Except as provided in this deed, UOA shall not be liable to UniServices for
any loss or damage whatsoever or howsoever caused arising directly or
indirectly in connection with any Intellectual Property, its use or
otherwise, except that which it is unlawful to exclude.
5.2 To the extent permitted by law all statutory or other implied warranties
are hereby excluded.
6. GENERAL
6.1 No waiver of any breach, or failure to enforce any provision, of this deed
at any time by either party shall in any way limit or waive the right of
that party to subsequently require strict compliance with this deed.
6.2 This deed is governed by the laws of New Zealand and the parties submit to
the exclusive jurisdiction of the New Zealand courts in respect of all
matters relating to this deed.
6.3 If any provision of this deed is or becomes invalid or unenforceable, that
provision shall be deemed deleted from this deed and such invalidity or
unenforceability shall not affect the other provisions of this deed, all of
which shall remain in full force and effect to the extent permitted by law,
subject to any modifications made necessary by the deletion of the invalid
or unenforceable provisions.
6.4 Each party shall do all things and execute all documents reasonably
required in order to give effect to the provisions and intent of this deed.
6.5 The parties agree that at the time it is assigned by this deed the value of
the Intellectual Property is zero. However, if GST is or becomes payable in
respect of the assignment of any Intellectual Property the amount of that
GST shall be paid by UniServices to UOA upon demand by UOA.
<PAGE>
-5-
EXECUTION
THE SEAL of )
THE UNIVERSITY OF )
AUCKLAND )
was hereunto affixed )
in the presence of: )
/s/ [ILLEGIBLE] Member of Council
- -------------------------------------
/s/ [ILLEGIBLE] Member of Council
- -------------------------------------
/s/ [ILLEGIBLE] Registrar
- -------------------------------------
SIGNED by )
AUCKLAND UNISERVICES )
LIMITED )
by: )
/s/ [ILLEGIBLE]
- -------------------------------------
(Director)
/s/ [ILLEGIBLE]
- -------------------------------------
(Director)
<PAGE>
SOFTWARE AGREEMENT
SOFTWARE AGREEMENT ("Agreement") dated the 2nd day of March, 1998 ("Effective
Date")
PARTIES
1. AUCKLAND UNISERVICES LIMITED (Uniservices")
2. THE REGENTS OF THE UNIVERSITY OF CALIFORNIA ("The Regents") on behalf of
the San Diego campus ("UCSD")
INTRODUCTION
A. In the late 1980's the computer programme known as "CMISS" was developed by
staff at the University of Auckland. Professor Andrew McCulloch
("McCulloch"), currently an employee of UCSD, was a staff member involved
in the development of the programme.
B. All of the University of Auckland's rights in CMISS have been transferred
to Uniservices.
C. McCulloch has, using elements of CMISS, developed a programme known as
dCMISS (SDC98008).
D. The parties hereto wish to enter into an agreement regarding the licensing
of CMISS to The Regents by Uniservices.
Therefore, the parties agree as follows:
AGREEMENT
1. DEFINITION AND INTERPRETATION
Definition
1.1 In this agreement, unless the context otherwise requires:
"Drug Discovery" means any discovery for therapeutics realised through,
with, or aided by the use of dCMISS in: (i) drug identification,
validation, testing and assessment of drug targets; (ii) assay development
using drug targets, including cell construction and adaptation to assay
format by way of high throughput formats; (iii) identification screening of
potential drug lead compounds, including natural products, synthetic
<PAGE>
compounds and combinatorial libraries of compounds; (iv) identification of
lead components and medicinal chemistry candidates; (v) development of
surrogate assays which may, in addition to other uses, be necessary to
follow in-vivo trials, pre-clinical animal studies, including
determinations of dosage, specificity assimilation, distribution among
tissues, metabolism and excretion of the compound; (vi) design, assessment
and testing of delivery modes, routes and formulations; and (vii) clinical
testing and/or marketing of drug candidates.
1.2 In this Agreement:
a) Where the context permits the singular includes the plural and vice
versa.
b) References to any "party" means a party to this Agreement and include
the successors, executors, administrators and permitted assignees, as
the case may be, of that party.
c) Where the context permits, references to a "person" include an
individual, firm, company, corporation or unincorporated body of
persons, any public, territorial or regional authority, any
government, and any agency of any government or of any such authority.
d) References to "dCMISS" in the text refer to elements of CMISS source
code contained in the dCMISS source code.
2. ACKNOWLEDGEMENTS
2.1 The Regents acknowledge that dCMISS contains elements of CMISS developed by
the University of Auckland.
2.2 The Regents acknowledge that the elements of CMISS contained in dCMISS are
owned by the University of Auckland.
2.3 Uniservices has indicated that Uniservices has acquired all rights to CMISS
from the University of Auckland.
3. USE OF dCMISS
3.1 Subject to clause 3.2, Uniservices licenses to The Regents the right to use
the elements of CMISS contained in dCMISS.
3.2 The Regents shall not license, or deliver for the use of others, the
elements of CMISS contained in dCMISS for any commercial use in the Drug
Discovery area.
<PAGE>
3.3 From the effective date of this Agreement, The Regents agree not to use the
term "CMISS" in any name of or reference to dCMISS.
4. CONFIDENTIALITY AND SUPPLY OF dCMISS SOURCE CODE
4.1 As of the Effective Date of this Agreement, The Regents shall exercise all
reasonable efforts to maintain confidential at all times, and shall not at
any time, directly or indirectly, disclose or permit to be disclosed any
elements of the CMISS source code contained in the dCMISS source code to
any person, including employees of UCSD, except as provided in clause 4.2
of this Agreement or as authorized in writing by UniServices.
4.2 The Regents may disclose any of the elements of CMISS source code which are
part of the dCMISS source code to any person provided that contained
therein is an appropriate warning as to limitation on further disclosure
and use for commercial purposes. Such warning shall include the following:
a) The receiving party agrees to use the source code for academic purposes
only; and
b) The receiving party will not have any commercial undertaking involving
the use of the dCMISS source code; and
c) The receiving party covenants not to disclose that source code to any
further person; and
d) The receiving party acknowledges that part of the dCMISS source code,
developed at the University of Auckland, is not owned by The Regents
but by a third person.
5. TERMS AND TERMINATION
5.1 This agreement will take effect on the Effective Date and shall remain in
effect until or unless terminated in accordance with clause 5.2 or clause
5.3.
5.2 In addition to any other right of termination or remedy conferred on the
parties under this Agreement or by law, UniServices may, at its absolute
discretion, either withdraw in whole or in part any consent to and/or
license of the use of the elements of CMISS contained within dCMISS as set
out in clause 3 of this Agreement or terminate this Agreement at any time
and with immediate effect by written notice given to The Regents if:
a) The Regents has failed to comply with an earlier written notice given
by
<PAGE>
UniServices specifying material breach of this Agreement by The
Regents and, in the case of a breach which is capable of remedy,
requiring that The Regents remedy the breach within 7 days after
receipt of that earlier notice.
b) The Regents has committed any material breach of this Agreement, which
breach is not reasonably capable of being remedied by The Regents
within 7 days.
5.3 Upon termination of this Agreement for whatever reasons:
a) Such termination shall be without prejudice to the rights and remedies
of either party in respect of any breach of this Agreement by the
other party, where such breach occurred prior to the termination of
this Agreement.
b) The provision of clause 4.1, together with those other provisions of
this Agreement which are incidental to and required in order to give
effect to that clause, shall remain in full force and effect for five
(5) years after termination of this Agreement.
6. DISPUTES
6.1 The parties shall meet and discuss in good faith any dispute between them
arising out of this Agreement.
6.2 If the discussions referred to in clause 6.1 fail to resolve the relevant
dispute, either party may, by written notice to the other party, require
that the dispute be submitted for mediation by a single mediator nominated
by the President for the time being of the Auckland District Law Society.
In the event of any such submission to mediation:
a) The mediator shall be deemed to be not acting as an expert or as an
arbitrator.
b) The mediator shall determine the procedure and timetable for the
mediation. Participation by telephone shall be acceptable.
c) The cost of the mediation shall be shared equally between the parties.
6.3 Neither party may issue any legal proceedings, other than for urgent
interlocutory relief, in respect of any such dispute, unless that party has
first taken all reasonable steps to comply with clauses 6.1 and 6.2.
7 NON WAIVER
7.1 No waiver of any breach, or failure to enforce any provision, of this
Agreement at any time by any party shall in any way limit or waive the
right of that party to subsequently
<PAGE>
enforce and compel strict compliance with this Agreement.
8. NON ASSIGNMENT
8.1 The Regents shall not transfer or assign any of their liabilities or rights
under this Agreement to any other person without the prior written consent
of Uniservices, which consent may be withheld at Uniservices' absolute
discretion.
EXECUTION
SIGNED on behalf of AUCKLAND UNISERVICES LIMITED by:
/s/ John A. Kernoban
- ------------------------------------------------
John Kernoban, Chief Executive Officer
Date: March 16, 1998
-------------------------------------------
SIGNED on behalf of THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
/s/ Alan Paau
- ------------------------------------------------
Alan Paau, Director, Technology Transfer Office
Date: 3/2/98
-------------------------------------------
<PAGE>
EXHIBIT C
PREFERRED ESCROW AGREEMENT
Account Number ___________________
This Agreement is effective ______________, 19_____ among Data Securities
International, Inc. ("DSI"), Auckland UniServices Limited ("Depositor") and
Pacific Title/Mirage, Inc. ("Preferred Beneficiary"), who collectively may be
referred to in this Agreement as "the parties."
A. Depositor and Preferred Beneficiary have entered or will enter into a
license agreement, development agreement, collaborative agreement, and/or other
agreement regarding certain proprietary technology of Depositor (referred to in
this Agreement as "the license agreement").
B. Depositor desires to avoid disclosure of its proprietary technology
except under certain limited circumstances.
C. The availability of the proprietary technology of Depositor is
critical to Preferred Beneficiary in the conduct of its business and, therefore,
Preferred Beneficiary needs access to the proprietary technology under certain
limited circumstances.
D. Depositor and Preferred Beneficiary desire to establish an escrow with
DSI to provide for the retention, administration and controlled access of the
proprietary technology materials of Depositor.
E. The parties desire this Agreement to be supplementary to the license
agreement pursuant to 11 United States [Bankruptcy] Code, Section 365(n).
ARTICLE 1 -- DEPOSITS
1.1 Obligation to Make Deposit. Upon the signing of this Agreement by the
--------------------------
parties, Depositor shall deliver to DSI the proprietary information and other
materials ("deposit materials") required to be deposited by the license
agreement or, if the license agreement does not identify the materials to be
deposited with DSI, then such materials will be identified on an Exhibit A. If
Exhibit A is applicable, it is to be prepared and signed by Depositor and
Preferred Beneficiary. DSI shall have no obligation with respect to the
preparation, signing or delivery of Exhibit A.
1.2 Identification of Tangible Media. Prior to the delivery of the deposit
--------------------------------
materials to DSI, Depositor shall conspicuously label for identification each
document, magnetic tape, disk, or other tangible media upon which the deposit
materials are written or stored. Additionally, Depositor shall complete Exhibit
B to this Agreement by listing each such tangible media by the item label
description, the type of media and the quantity. The Exhibit B must be signed by
Depositor and delivered to DSI with the deposit materials. Unless and until
Depositor makes the initial deposit with DSI, DSI shall have no obligation with
respect to this Agreement, except the obligation to notify the parties regarding
the status of the deposit account as required in Section 2.2 below.
<PAGE>
1.3 Deposit Inspection. When DSI receives the deposit materials and the
------------------
Exhibit B, DSI will conduct a deposit inspection by visually matching the
labelling of the tangible media containing the deposit materials to the item
descriptions and quantity listed on the Exhibit B. In addition to the deposit
inspection, Preferred Beneficiary may elect to cause a verification of the
deposit materials in accordance with Section 1.6 below.
1.4 Acceptance of Deposit. At completion of the deposit inspection, if
--------------------
DSI determines that the labelling of the tangible media matches the item
descriptions and quantity on Exhibit B, DSI will date and sign the Exhibit B and
mail a copy of Exhibit B to Depositor and Preferred Beneficiary. If DSI
determines that the labelling does not match the item descriptions or quantity
on the Exhibit B, DSI will (a) note the discrepancies in writing on the Exhibit
B; (b) date and sign the Exhibit B with the exceptions noted; and (c) provide a
copy of the Exhibit B to Depositor and Preferred Beneficiary. DSI's acceptance
of the deposit occurs upon the signing of the Exhibit B by DSI. Delivery of the
signed Exhibit B to Preferred Beneficiary is Preferred Beneficiary's notice that
the deposit materials have been received and accepted by DSI.
1.5 Depositor's Representations. Depositor represents as follows:
---------------------------
a. Depositor lawfully possess all of the deposit materials deposited with
DSI;
b. With respect to all of the deposit materials, Depositor has the right
and authority to grant to DSI and Preferred Beneficiary the rights as
provided in this Agreement;
c. The deposit materials are not subject to any lien or other
encumbrance;
d. The deposit materials consist of the proprietary information and other
materials identified either in the license agreement or Exhibit A, as
the case may be; and
e. The deposit materials are readable and useable in their current form
or, if the deposit materials are encrypted, the decryption tools and
decryption keys have also been deposited, and include all required
versions thereof needed to make the deposit materials useful to the
Beneficiary.
1.6 Verification. Preferred Beneficiary shall have the right, at
------------
Preferred Beneficiary's expense, to cause a verification of any deposit
materials. A verification determines, in different levels of detail, the
accuracy, completeness, sufficiency and quality of the deposit materials. If a
verification is elected after the deposit materials have been delivered to DSI,
then only DSI, or at DSI's election an independent person or company selected
and supervised by DSI, may perform the verification.
1.7 Deposit Updates. Except as otherwise provided by the license
---------------
agreement, Depositor shall update the deposit materials within 50 days of each
release of a new version of the product which is subject to the license
agreement. Such updates will be added to the existing deposit. All deposit
updates shall be listed on a new Exhibit B and the new Exhibit B shall be signed
by Depositor. Each Exhibit B will be held and maintained separately within the
escrow account. An independent record will be created which will document the
activity for each Exhibit B. The processing of all deposit updates shall be in
accordance with Sections 1.2
<PAGE>
through 1.6 above. All references in this Agreement to the deposit materials
shall include the initial deposit materials and any updates for all needed
versions thereof.
1.8 Removal of Deposit Materials. The deposit materials may be removed
----------------------------
and/or exchanged only on written instructions signed by Depositor and Preferred
Beneficiary, or as otherwise provided in this Agreement.
ARTICLE 2 -- CONFIDENTIALITY AND RECORD KEEPING
2.1 Confidentiality. DSI shall maintain the deposit materials in a secure,
---------------
environmentally safe, locked facility which is accessible only to authorized
representatives of DSI. DSI shall have the obligation to reasonably protect the
confidentiality of the deposit materials. Except as provided in this Agreement,
DSI shall not disclose, transfer, make available, or use the deposit materials.
DSI shall not disclose the content of this Agreement to any third party. If DSI
receives a subpoena or other order of a court or other judicial tribunal
pertaining to the disclosure or release of the deposit materials, DSI will
immediately notify the parties to this Agreement. It shall be the responsibility
of Depositor and/or Preferred Beneficiary to challenge any such order; provided,
however, that DSI does not waive its rights to present its position with respect
to any such order. DSI will not be required to disobey any court or other
judicial tribunal order. (See Section 7.5 below for notices of requested
orders).
2.2 Status Reports. DSI will issue to Depositor and Preferred
--------------
Beneficiary a report profiling the account history at least semi-annually.
DSI may provide copies of the account history pertaining to this Agreement upon
the request of any party to this Agreement.
2.3 Audit Rights. During the term of this Agreement, Depositor and
------------
Preferred Beneficiary shall each have the right to inspect the written records
of DSI pertaining to this Agreement. Any inspection shall be held during normal
business hours and following reasonable prior notice.
ARTICLE 3 -- GRANT OF RIGHTS TO DSI
3.1 Title to Media. Depositor hereby transfers to DSI the title to the
--------------
media upon which the proprietary information and materials are written or
stored. However, this transfer does not include the ownership of the
proprietary information and materials contained on the media such as any
copyright, trade secret, patent or other intellectual property rights, except as
otherwise provided on the license agreement.
3.2 Right to Make Copies. DSI shall have the right to make copies of the
--------------------
deposit materials as reasonably necessary to perform this Agreement. DSI shall
copy all copyright, nondisclosure, and other proprietary notices and titles
contained on the deposit materials onto any copies made by DSI. With all deposit
materials submitted to DSI, Depositor shall provide any and all instructions as
may be necessary to duplicate the deposit materials including but not limited to
the hardware and/or software needed.
3.3 Right to Transfer Upon Release. Depositor hereby grants to DSI the
------------------------------
right to transfer the deposit materials to Preferred Beneficiary upon any
release of the deposit materials for use by Preferred Beneficiary in accordance
with Section 4.5. Except upon such a release or as otherwise provided in this
Agreement. DSI shall not transfer the deposit materials.
<PAGE>
ARTICLE 4 -- RELEASE OF DEPOSIT
4.1 Release Conditions. As used in this Agreement, "Release Conditions"
------------------
shall mean the following:
a. Depositor's failure to substantially and materially carry out the
obligations, agreements, covenants or representations imposed on
it pursuant to the license agreement; or
b. Depositor's failure to continue to do business in the ordinary
course.
4.2 Filing for Release. When Preferred Beneficiary believes in good faith
------------------
that a Release Condition has occurred, Preferred Beneficiary may provide to DSI
written notice of the occurrence of the Release Condition and a request for the
release of the deposit materials. Upon receipt of such notice, DSI shall
provide a copy of the notice to Depositor, by hand or by facsimile (with
confirmation copy by certified mail, return receipt requested, or by commercial
express mail).
4.3 Contrary Instructions. From the date DSI delivers the notice
---------------------
requesting release of the deposit materials, Depositors shall have twenty
business days to deliver to DSI Contrary Instructions. "Contrary Instructions"
shall mean the written representation by Depositor that a Release Condition has
not occurred or has been cured. Upon receipt of Contrary Instructions, DSI
shall send a copy to Preferred Beneficiary by hand or by facsimile (with
confirmation copy by certified mail, return receipt requested, or by commercial
express mail). Additionally, DSI shall notify both Depositor and Preferred
Beneficiary that there is a dispute to be resolved pursuant to the Dispute
Resolution section (Section 7.3) of this Agreement. Subject to Section 5.2, DSI
will continue to store the deposit materials without release pending (a) joint
instructions from Depositor and Preferred Beneficiary; (b) resolution pursuant
to the Dispute Resolution provisions; or (c) order of a court.
4.4 Release of Deposit. If DSI does not receive Contrary Instructions
------------------
from the Depositor, DSI is authorized to release the deposit materials to the
Preferred Beneficiary or, if more than one beneficiary is registered to the
deposit, to release a copy of the deposit materials to the Preferred
Beneficiary. However, DSI is entitled to receive any fees due DSI before making
the release. This Agreement will terminate upon the release of the deposit
materials held by DSI.
4.5 Right to Use Following Release. Unless otherwise provided in the
------------------------------
license agreement, upon release of the deposit materials in accordance with this
Article 4, Preferred Beneficiary shall have the right to use the deposit
materials for the sole purpose of continuing the benefits afforded to Preferred
Beneficiary by the license agreement. Except as otherwise provided in the
license agreement, Preferred Beneficiary shall be obligated to maintain the
confidentiality of the released deposit materials.
ARTICLE 5 -- TERM AND TERMINATION
5.1 Term of Agreement. The initial term of this Agreement is for a period
-----------------
of one year. Thereafter, this Agreement shall automatically renew from
year-to-year unless (a) Depositor and Preferred Beneficiary jointly instruct
DSI in writing that the Agreement is
-4-
<PAGE>
terminated; or (b) the Agreement is terminated by DSI for nonpayment in
accordance with Section 5.2. If the deposit materials are subject to another
escrow agreement with DSI, DSI reserves the right, after the initial one year
term, to adjust the anniversary date of this Agreement to match the then
prevailing anniversary date of such other escrow arrangements.
5.2 Termination for Nonpayment. In the event of the nonpayment of fees
--------------------------
owed to DSI, DSI shall provide written notice of delinquency to all parties to
this Agreement. Any party to this Agreement shall have the right to make the
payment to DSI to cure the default. If the past due payment is not received in
full by DSI within one month of the date of such notice, then DSI shall have the
right to terminate this Agreement at any time thereafter by sending written
notice of termination to all parties. DSI shall have no obligation to take any
action under this Agreement so long as any payment due to DSI remains unpaid.
5.3 Disposition of Deposit Materials Upon Termination. Upon termination
-------------------------------------------------
of this Agreement by joint instruction of Depositor and Preferred Beneficiary,
DSI shall destroy, return, or otherwise deliver the deposit materials in
accordance with Depositor's instructions. Upon termination for nonpayment, DSI
may, at its sole discretion, destroy the deposit materials or return them to
Depositor. DSI shall have no obligation to return or destroy materials if the
deposit materials are subject to another escrow agreement with DSI.
5.4 Survival of Terms Following Termination. Upon termination of this
---------------------------------------
Agreement, the following provisions of this Agreement shall survive:
a. Depositor's Representations (Section 1.5);
b. The obligations of confidentiality with respect to the deposit
materials;
c. The rights granted in the sections entitled Right to Transfer
Upon Release (Section 3.3) and Right to Use Following Release
(Section 4.5), if a release of the deposit materials has occurred
prior to termination;
d. The obligation to pay DSI any fees and expenses due;
e. The provisions of Article 7; and
f. Any provisions of this Agreement which specifically state they
survive the termination or expiration of this Agreement.
ARTICLE 6 -- DSI'S FEES
6.1 Fee Schedule. DSI is entitled to be paid its standard fees and
------------
expenses applicable to the services provided. DSI shall notify the party
responsible for payment of DSI's fees at least 90 days prior to any increase in
fees. For any service not listed on DSI's standard fee schedule, DSI will
provide a quote prior to rendering the service, if requested.
6.2 Payment Terms. DSI shall not be required to perform any service
-------------
unless the payment for such service and any outstanding balances owed to DSI are
paid in full. All other fees are due upon receipt of invoice. If invoiced fees
are not paid, DSI may terminate this Agreement in accordance with Section 5.2.
Late fees on past due amounts shall accrue at the
-5-
<PAGE>
rate of one and one-half percent per month (18% per annum) from the date of the
invoice.
ARTICLE 7 -- LIABILITY AND DISPUTES
7.1 Right to Rely on Instructions. DSI may act in reliance upon any
-----------------------------
instruction, instrument, or signature reasonably believed by DSI to be genuine.
DSI may assume that any employee of a party to this Agreement who gives any
written notice, request, or instruction has the authority to do so. DSI shall
not be responsible for failure to act as a result of causes beyond the
reasonable control of DSI.
7.2 Indemnification. DSI shall be responsible to perform its obligations
---------------
under this Agreement and to act in a reasonable and prudent manner with regard
to this escrow arrangement. Provided DSI has acted in the manner stated in the
preceding sentence, Depositor and Preferred Beneficiary each agree to indemnify,
defend and hold harmless DSI from any and all claims, actions, damages,
arbitration fees and expenses, costs, attorney's fees and other liabilities
incurred by DSI relating in any way to this escrow arrangement.
7.3 Dispute Resolution. Except as otherwise provided by the license
------------------
agreement, any dispute relating to or arising from this Agreement shall be
resolved by arbitration under the Commercial Rules of the American Arbitration
Association. Unless otherwise agreed by Depositor and Preferred Beneficiary,
arbitration will take place in Los Angeles, California, U.S.A. Any court having
jurisdiction over the matter may enter judgment on the award of the
arbitrator(s). Service of a petition to confirm the arbitration award may be
made by First Class mail or by commercial express mail, to the attorney for the
party or, if unrepresented, to the party at the last known business address.
7.4 Controlling Law. This Agreement is to be governed and construed in
---------------
accordance with the Applicable Law provisions of the license agreement.
7.5 Notice of Requested Order. If any party intends to obtain an order
-------------------------
from the arbitrator or any court of competent jurisdiction which may direct DSI
to take, or refrain from taking any action, that party shall:
a. Give DSI at least two business days' prior notice of the hearing;
b. Include in any such order that, as a precondition to DSI's
obligation, DSI be paid in full for any past due fees and be paid
for the reasonable value of the services to be rendered pursuant
to such order; and
c. Ensure that DSI not be required to deliver the original (as
opposed to a copy) of the deposit materials if DSI may need to
retain the original in its possession to fulfill any of its other
duties.
ARTICLE 8 -- GENERAL PROVISIONS
8.1 Entire Agreement. This Agreement, which includes the Exhibits
----------------
described herein, embodies the entire understanding among the parties with
respect to its subject matter and supersedes all previous communications,
representations or understandings, either oral or
-6-
<PAGE>
written. No amendment or modification of this Agreement shall be valid or
binding unless signed by all the parties hereto, except that Exhibit A need not
be signed by DSI, Exhibit B need not be signed by Preferred Beneficiary, and
Exhibit C need not be signed.
8.2 Notices. All notices, invoices, payments, deposits and other documents
-------
and communications shall be given to the parties at the addresses specified in
the attached Exhibit C. It shall be the responsibility of the parties to notify
each other as provided in this Section in the event of a change of address. The
parties shall have the right to rely on the last known address of the other
parties. Unless otherwise provided in this Agreement, all documents and
communications may be delivered by First Class mail.
8.3 Severability. In the event any provision of this Agreement is found to
------------
be invalid, voidable or unenforceable, the parties agree that unless it
materially affects the entire intent and purpose of this Agreement, such
invalidity, voidability or unenforceability shall affect neither the validity of
this Agreement nor the remaining provisions herein, and the provision in
question shall be deemed to be replaced with a valid and enforceable provision
most closely reflecting the intent and purpose of the original provision.
8.4 Successors. This Agreement shall be binding upon and shall inure to
----------
the benefit of the successors and assigns of the parties. However, DSI shall
have no obligation in performing this Agreement to recognize any successor or
assign of Depositor or Preferred Beneficiary unless DSI receives clear,
authoritative and conclusive written evidence of the change of parties.
Auckland UniServices Limited Pacific Title/Mirage, Inc.
________________________________ _______________________________
Depositor Preferred Beneficiary
By: /s/ John A. Kernohan By: /s/ Dr. Ivan Gulas
----------------------------- ----------------------------
Name: JOHN A. KERNOHAN Name: Dr. Ivan Gulas
--------------------------- --------------------------
Title: CHIEF EXECUTIVE OFFICER Title: Co-President
-------------------------- -------------------------
Date: JUNE 12, 1998 Date: 5/24/98
--------------------------- --------------------------
Data Securities International, Inc.
By: John V. Borovka
-------------------------------
Name: John V. Borovka
-----------------------------
Title: VP SALES & MARKETING
----------------------------
Date: 6-12-98
-----------------------------
-7-
<PAGE>
EXHIBIT A
MATERIALS TO BE DEPOSITED
Account Number __________
Depositor represents to Preferred Beneficiary that deposit materials delivered
to DSI shall consist of the following:
Auckland UniServices Limited Pacific Title/Mirage, Inc.
________________________________ _______________________________
Depositor Preferred Beneficiary
By: /s/ John A. Kernohan By: /s/ Dr. Ivan Gulas
----------------------------- ----------------------------
Name: JOHN A. KERNOHAN Name: Dr. Ivan Gulas
--------------------------- --------------------------
Title: CHIEF EXECUTIVE OFFICER Title: Co-President
-------------------------- -------------------------
Date: JUNE 12, 1998 Date: 5/24/1998
--------------------------- --------------------------
-8-
<PAGE>
EXHIBIT B
DESCRIPTION OF DEPOSIT MATERIALS
Depositor Company Name _________________________________________________________
Account Number _________________________________________________________________
PRODUCT DESCRIPTION:
Product Name _______________________________ Version ______________________
Operating System _______________________________________________________________
________________________________________________________________________________
Hardware Platform ______________________________________________________________
________________________________________________________________________________
DEPOSIT COPYING INFORMATION:
Hardware required:______________________________________________________________
________________________________________________________________________________
Software required:______________________________________________________________
________________________________________________________________________________
DEPOSIT MATERIAL DESCRIPTION:
Qty Media Type & Size Label Description of Each Separate Item
(excluding documentation)
___ Disk 3.5" or ___
___ DAT tape __mm
___ CD-ROM
___ Data cartridge tape ___
___ TK 70 or ___ tape
___ Magnetic tape ___
___ Documentation
___ Other ____________________________
I certify for Depositor that the above DSI has inspected and accepted the
described deposit materials have been above materials (any exceptions are
transmitted to DSI: noted above):
Auckland UniServices Limited Data Securities International, Inc.
Signature__________________________ Signature__________________________
Print Name_________________________ Print Name_________________________
Date_______________________________ Date Accepted:_____________________
Exhibit B#_________________________
Send materials to: DSI, 9555 Chesapeake Dr. #200, San Diego, CA 92123
<PAGE>
Escrow Annual Fees
Account Additional
First Renewal Beneficiary
Protection System Year Years or Depositor
- ----------------- ---- ----- ------------
Preferred $2,300 $1,300 $ n/a
Master Preferred-Depositor 3,300 1,300 650
Master Preferred-Beneficiary 3,300 1,300 1,300
Comprehensive Preferred 3,100 2,100 1,450
FlexSAFE 1,500 1,200 200
SAFE 1,500 1,200 50
Technology Protection (POST) 650 650 n/a
1. Included Services
Administrative services and protection vary depending on the system
selected. Please consult with your DSI representative to ensure that you
are utilizing the agreement which best suits your needs.
2. Custom Agreements
A $500 customization fee will be added to the first year when contract
changes increase DSI's risk or modify our release, termination or update
processes.
3. Preferred Discounts
Preferred fees will be discounted $650/year when the deposit materials are
held in an existing DSI escrow account.
4. Additional Protection Systems
Preferred or Comprehensive Preferred $1,000
Master Preferred 2,000
SAFE or FlexSAFE 300
SERVICE OPTIONS
Unlimited deposit updates/replacements + one additional
storage unit $300/yr.
Individual deposit updates/replacements $200/ea.
DepositTrack updates $300/ea.
Remote vaulting $500/yr.
Release filing fee *no fee
Additional storage units $100/ea.
Technical verification (estimates based on $150/hr.)
Verification Level I $300-600
Verification Level II (includes Level I) $600-1,200
Verification Level III (includes Levels I and II) $2,400-4,600
* direct expenses in excess of $300 will be chargeable.
<PAGE>
AUCKLAND UNISERVICES LIMITED
STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 1997
<TABLE>
<CAPTION>
Consolidated Consolidated Parent Parent Parent
1997 Actual 1996 Actual 1997 Actual 1997 Budget 1996 Actual
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS
- --------------
Cash in Hand and at Bank (Note 11) 4,857,931 5,797,021 4,853,283 5,833,000 5,797,021
Bank Deposits (Note 11) 9,168,827 5,937,362 9,168,827 4,814,206 5,937,361
Accounts Receivable 2,583,569 2,520,444 2,583,569 3,227,833 2,520,444
Provisions for Doubtful Debts (45,000) (45,000) (45,000) (45,000) (45,000)
Work in Progress 3,718,537 1,321,573 3,718,537 1,119,775 1,321,573
Sundry Debtors 82,322 160,727 32,662 25,749 160,727
------------------------------------------------------------------------
TOTAL CURRENT ASSETS 20,366,186 15,692,127 20,311,878 14,975,563 15,692,126
- --------------------
NON-CURRENT ASSETS
- ------------------
Fixed Assets (Note 3) 478,956 587,440 478,956 422,023 587,440
- ------------
Investments (Note 6)
- -----------
Advance to Associate Company 39,703 107,932 39,703 67,872 107,932
Investment in Associate Companies 14,472 14,896 14,472 45,683 14,896
Loan to Subsidiary Company (Note 4) 0 0 880,145 0 0
------------------------------------------------------------------------
54,175 122,828 934,320 113,555 122,828
Intangible Assets
- -----------------
Development Costs (Note 7) 635,984 171,778 75,057 206,563 171,778
------------------------------------------------------------------------
635,984 171,778 75,057 206,563 171,778
------------------------------------------------------------------------
TOTAL NON-CURRENT ASSETS 1,169,115 882,046 1,488,333 742,141 882,046
- ------------------------
------------------------------------------------------------------------
TOTAL ASSETS 21,535,301 16,574,173 21,800,211 15,717,704 16,574,173
- ------------ ------------------------------------------------------------------------
CURRENT LIABILITIES
- -------------------
Bank Overdraft (Note 11) 169,880 13,452 169,880 12,206 13,452
Trade Creditors 712,625 658,784 676,625 154,898 658,784
Advance Billings 16,626,909 12,931,602 16,626,909 12,306,305 12,931,602
Consultant Creditors 1,202,946 779,350 1,202,946 837,570 779,350
Sundry Creditors 348,878 284,419 348,878 323,742 264,351
Employee Entitlements 183,895 144,208 183,895 64,909 144,208
NeuronZ Current Account (Note 4) 0 226,998 0 0 226,998
Pacific Enzymes Current Account 28,488 0 28,488 0 0
The University of Auckland Current Account
(Note 4) 13,657 133,585 13,657 77,269 133,585
-----------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 19,287,278 15,172,398 19,251,278 13,776,699 15,152,330
SHAREHOLDERS' FUNDS
Authorised, Issued and Paid Up Capital
200,100 Ordinary $1 Shares
Fully paid 200,100 200,100 200,100 200,100 200,100
Revenue Reserves
- ----------------
Retained Earnings 2,047,923 1,201,675 2,348,833 1,740,905 1,221,743
-----------------------------------------------------------------------
Shareholder's Funds 2,248,023 1,401,775 2,548,933 1,941,005 1,421,843
- ------------------- -----------------------------------------------------------------------
TOTAL SHAREHOLDER'S FUNDS
- -------------------------
ADVANCES AND LIABILITIES 21,535,301 16,574,173 21,800,211 15,217,704 16,574,173
- ------------------------ -----------------------------------------------------------------------
</TABLE>
The notes on pages 9 to 15 form an integral part of these accounts.
On behalf of the Board
/s/ [ILLEGIBLE]
--------------------------- Director
/s/ [ILLEGIBLE]
--------------------------- Director
April 1998
<PAGE>
AUCKLAND UNISERVICES LIMITED
STATEMENT OF FINANCIAL PERFORMANCE
FOR THE YEAR ENDED 31 DECEMBER 1997
<TABLE>
<CAPTION>
Consolidated Consolidated Parent Parent Parent
1997 Actual 1996 Actual 1997 Actual 1997 Budget 1996 Actual
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
Income
Sales 19,174,407 17,978,480 19,744,204 18,103,380 17,978,480
Royalties 80,713 103,000 80,713 0 103,000
---------------------------------------------------------------------------
Total Revenue (Note 5) 19,255,120 18,081,480 19,824,917 18,103,380 18,081,480
Interest 635,227 664,835 635,215 463,000 664,835
Bad Debts Recovered 113 113
Other Income (1,538) 5,263 (1,538) 0 5,263
---------------------------------------------------------------------------
Total Operating Income 19,888,922 18,751,578 20,458,707 18,566,380 18,751,578
---------------------------------------------------------------------------
Net Surplus Before Tax 846,248 839,510 1,127,090 414,555 859,578
- ----------------------
After Charging
- --------------
Audit Fees 16,000 9,500 12,500 12,000 9,500
Depreciation 203,175 165,893 203,175 305,443 165,893
Amortisation of Development Costs 84,566 146,329 84,566 0 146,329
Amortisation of Set Up Costs 70,091 0 0 0 0
Patent Costs Written Off 0 0 0 0 0
Bad Debts 43,272 5,647 43,272 20,000 5,647
Doubtful Debts 0 0 0 0 0
Equipment Donation to University of Auckland 1,442,748 780,665 1,442,748 828,532 780,665
Directors Fees 0 0 0 0 0
Foreign Exchange Fluctuations 143,484 1,131 134,615 0 1,131
Interest Expense 180,952 202,502 180,952 0 202,502
Operating Lease Costs 24,682 0 24,682 0 0
Rent - Buildings 152,274 0 152,274 70,000 4,547
Share of Associate Company (Deficit)/Surplus (423) (30,787) (423) 0 (30,787)
---------------------------------------------------------------------------
Net Surplus After Tax 846,248 839,510 1,127,090 414,555 859,578
- ---------------------
Retained Earnings 1 January 1997 1,201,675 362,165 1,221,743 1,326,348 362,165
---------------------------------------------------------------------------
Retained Earnings 31 December 1997 2,047,923 1,201,675 2,348,833 1,740,903 1,221,743
---------------------------------------------------------------------------
</TABLE>
The notes on Pages 9 to 15 form an integral part of these accounts.
<PAGE>
COMPREHENSIVE PREFERRED AMENDMENT
TO PREFERRED ESCROW AGREEMENT
Account Number ________________________
This document is intended to amend the Preferred Escrow Agreement (the
"Agreement") among the undersigned parties, as follows:
Section 1.6 is replaced with the following:
DSI shall perform a Level One verification of the deposit materials upon the
initial deposit and for each update. A verification determines, in different
levels of detail, the accuracy, completeness, sufficiency and quality of the
deposit materials. A Level One verification is defined as follows: DSI will
cause a technically qualified DSI employee to evaluate the deposit materials in
order to identify (a) the hardware and software configurations reasonably
necessary to maintain the deposit materials, (b) the hardware and software
configurations reasonably necessary to compile the deposit materials, and (c)
the compilation instructions. DSI will then prepare and deliver to Depositor and
Preferred Beneficiary a report describing the information so identified. It
shall be the responsibility of the Depositor, and not DSI, to assure that the
deposit materials contain the information required in the license agreement.
Preferred Beneficiary shall have the right, at Preferred Beneficiary's expense,
to cause higher levels of verification of any deposit materials. If a
verification is elected after the deposit materials have been delivered to DSI,
then only DSI, or at DSI's election an independent person or company selected
and supervised by DSI, may perform the verification.
Section 1.7 is modified to add the following:
DSI shall notify Depositor in writing semi-annually of Depositor's obligation
to make updated deposits. Within 30 days of receipt of each such notice,
Depositor shall certify in writing to DSI that (a) it has made the updated
deposits as required in the immediately preceding paragraph; or (b) there has
not been a release of a new version of the product since the last deposit. After
the 30 days, DSI shall notify Preferred Beneficiary that DSI has received a) an
updated deposit from Depositor, b) a statement from Depositor advising there has
not been a release of a new version of the product since the last deposit, or c)
no response from Depositor.
Except as specifically provided above, the Agreement shall remain in full force
and effect without modification.
AUCKLAND UNISERVICES LIMITED Pacific Title/Mirage, Inc.
- ------------------------------- ---------------------------------
Depositor Preferred Beneficiary
By: John A. Kernohan By: Michael Rosenblatt
---------------------------- ------------------------------
Name: JOHN A KERNOHAN Name: Michael Rosenblatt
-------------------------- ----------------------------
Title: CHIEF EXECUTIVE OFFICER Title: Co-President
------------------------- ---------------------------
Date: JUNE 12, 1998. Date: 6/12/98
-------------------------- ---------------------------
Data Securities International, Inc.
By: /s/ John V. Borovka
---------------------------------
Name: John V. Borovka
-------------------------------
Title: VP SALES MARKETING
------------------------------
Date: 6-12-98
------------------------------
<PAGE>
THIS LETTER IS TO BE TYPED ON THE LETTERHEAD OF UNISERVICES
- -----------------------------------------------------------
(Insert date here)
Mr. Michael S. Rosenblatt
Co-President
Pacific Title/Mirage, Inc.
(Insert remainder of address here)
Subject: UniServices - Pacific Title/Mirage Agreement
effective November 1, 1997
Dear Michael:
This letter is a side-letter to the Technologies License, Development,
Consulting and Collaboration Agreement ("Agreement") between Auckland
UniServices Limited ("UniServices") and Pacific Title/Mirage, Inc. ("Pacific")
effective November 1, 1997. This letter acknowledges the parties' side-agreement
that, as of the date of this letter, Pacific has paid certain moneys and has
agreed to soon pay other moneys pursuant to the Agreement.
More specifically, Pacific has already paid Development Fees (as defined in
Section 4.5 of the Agreement) for five months November 1, 1997 to March 1, 1998,
totaling $62,500, and has already paid certain expenses relating to Consulting
Services (as defined in Section 4.4 of the Agreement) up to April___, 1998,
totaling ____.
In addition, as soon as the Agreement has been executed by both parties,
Pacific has agreed to pay the installments of the Basic Fee (as defined in
Section 3.1 of the Agreement), the installments of the Development Fee (as
defined in Section 4.5 of the Agreement) and the expenses relating to
Consulting Services (as defined in Section 4.4 of the Agreement), all as
identified below. The following is an accounting of the moneys to be paid as
soon as the Agreement has been executed by both parties:
Installments of Basic Fee: $87,500 due upon signing the Agreement, $87,500
-------------------------
due January 31, 1998, and $87,500 due April 30, 1998, totaling $262,500.
--------
Installments of Development Fee: $12,500 due April 1, 1998, $12,500 due
-------------------------------
May 1, 1998, and $12,500 due June 1, 1998, totaling $37,500.
-------
Expenses relating to Consulting Services: $_________ for the time period
----------------------------------------
__________ (insert dates here).
Future payments of moneys in U.S. dollars will continue in accordance with
the terms of the Agreement.
<PAGE>
To confirm the accuracy of the information in this side-letter, please sign
two copies of this letter. Please retain one signed copy for your file, and
return the other signed copy to me for my file.
If you have any questions, please feel free to contact me.
Very truly yours,
/s/ John A. Kernohan
-----------------------------
John A. Kernohan, Ph.D.
Agreed and accepted by:
Pacific Title/Mirage, Inc.
/s/ Dr. Ivan Gulas
- -----------------------------
Printed name: DR. IVAN GULAS
Corporate title: Co-President Pacific Title/Mirage, Inc.
Date: 5/24/1998
------------------------
<PAGE>
[LETTERHEAD OF NIXON & VANDERHYE P.C.]
May 20, 1998
Mr. John Borovka
Data Securities International, Inc.
Subject: Confidentiality Agreement regarding the
UniServices - Pacific Title/Mirage Agreement of
November 1, 1997
Dear Mr. Borovka:
This letter memorializes your company's agreement to maintain the
confidentiality of the Technologies License, Development, Consulting and
Collaboration Agreement ("Agreement") between Auckland UniServices Limited
("UniServices") and Pacific Title/Mirage, Inc. ("Pacific") effective November 1,
1997, and to not disclose the Agreement or any of its terms to any outside
parties or individuals without the express written permission of both
UniServices and Pacific. As you know, the Agreement will be part of the
Preferred Escrow Agreement concerning these same parties and your company.
To confirm this confidentiality undertaking in writing, please sign three
copies of this letter. Please retain one signed copy for your file and return
the other two signed copies to me so that I can give a signed copy to
UniServices and a signed copy to Pacific.
If you have any questions, please feel free to contact me.
Very truly yours,
NIXON & VANDERHYE P.C.
/s/ Duane M. Byers
------------------
Duane M. Byers
Agreed and accepted by:
Data Securities International, Inc.
/s/ John V. Borovka
- ---------------------------------------
Printed name: JOHN V. BOROVKA
Corporate title: VP SALES & MARKETING
Date: 5-21-98
<PAGE>
EXHIBIT 10.15
ASSET PURCHASE AGREEMENT
------------------------
AGREEMENT made this 8th day of October, 1997 among Pacific Title and Art
---
Studio, a corporation organized under the laws of the State of California
("Seller"), Pacific Title and Mirage, Inc., a Delaware corporation ("PTM"),
Safeguard Scientifics, Inc., a corporation organized under the laws of the State
of Pennsylvania ("Safeguard"), and Mirage Technologies, Limited Partnership, a
Delaware limited partnership (PTM, "Mirage" and, together with Safeguard,
"Purchaser").
BACKGROUND
----------
A. Seller is engaged in the business of creating titles and effects using
both optical processes (the "Optical Business") and digital processes (the
"Digital Business"). (The Optical Business and the Digital Business are
conducted as a single business and are referred to individually and
collectively herein as the "Business".) Seller also is engaged in the film
archive business, which is not included in this purchase and sale.
B. Purchaser desires to purchase, and Seller desires to sell, certain
assets of Seller used in carrying out the Business. In connection with such
purchase and sale, Purchaser also will assume certain liabilities associated
with the Business.
C. Concurrently with the purchase thereof, Purchaser shall assign and
transfer (or shall cause Seller to assign and transfer) the Business and all
rights and liabilities under this Agreement to PTM.
NOW, THEREFORE, in consideration of the premises and of the mutual
promises, covenants, representations and warranties made in this Agreement,
Purchaser and Seller, intending to be legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
-----------
Section 1.1. Definitions. For convenience certain terms in this Agreement
----------- -----------
shall have the following meanings (such terms as well as any other terms defined
elsewhere in this Agreement shall be equally applicable to both the singular and
plural terms defined), respectively:
"Accounts Receivable" shall mean all of Seller's accounts receivable and
-------------------
notes receivable created or arising in respect of the sale of services, products
or other assets of the Business.
"Adjusted Cash" shall have the meaning set forth in Section 3.5 hereof.
-------------
1
<PAGE>
"Affiliate" shall mean, as to any specified person, (a) any other person
---------
controlling, controlled by or under common control with such specified person,
(b) any officer, director or partner of such specified person, (c) any other
person of which such specified person is an officer, employee, agent, director,
shareholder or partner or (d) any member of the Family Group of such specified
person or of any individual who is an Affiliate of such specified person by
reason of clause (a) or (b) of this definition. The term "control," with respect
to any person, means possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of such person, whether
through the ownership of voting securities or a partnership interest, by
contract or otherwise. "Family Group" means, as to any individual, such
individual's spouse, ancestors, lineal descendants and trusts for the benefit of
any of the foregoing, provided that all the income beneficiaries and
remainderman of any such trust are such individual's spouse, ancestors or lineal
descendants.
"Assumed Liabilities" shall mean the accrued liabilities and
-------------------
obligations of Seller to be assumed by Purchaser hereunder pursuant to Section
2.3.
"Bill of Sale and Assumption" shall mean the Bill of Sale and
---------------------------
Assumption of Liabilities referred to in Section 3.2(a) hereof evidencing and
effecting the assignment by Seller of the Purchased Assets to Purchaser and the
assumption by Purchaser of the Assumed Liabilities.
"Business" shall have the meaning assigned to such term in Recital A
--------
hereof.
"California Code" shall have the meaning assigned to such term in
---------------
Section 4.6(i) hereof.
"Cash" shall mean all of Seller's cash and cash equivalents as shown
----
on Seller's books and records.
"Casualty" shall have the meaning assigned to such term in Section
--------
6.5(a) hereof.
"CERCLA" shall have the meaning assigned to such term in Section 4.12
------
hereof.
"Condemnation" shall have the meaning assigned to such term in Section
------------
6.5(b) hereof.
"Closing" shall mean the consummation of the transactions contemplated
-------
to occur hereunder on the Closing Date pursuant to Article III hereof.
"Closing Date" shall have the meaning assigned to such term in Section
------------
3.1 hereof.
"Commitment" shall mean, collectively, the Chicago Title Preliminary
----------
Title Report for the Real Property, dated June 19, 1997, as supplemented June
26, 1997 and August 21, 1997 and as modified by the letter to Chicago Title
Company attached hereto as Schedule 1.1.
------------
2
<PAGE>
"Condition" shall mean the assets, liabilities, business, prospects,
---------
operations, results of operations or condition (financial or otherwise) of the
Business or the Purchased Assets, considered in the aggregate.
"Contract" shall have the meaning assigned to such term in Section
--------
4.16 hereof.
"Digital Business" shall have the meaning assigned to such term in
----------------
Recital A hereof.
"Dispute" shall have the meaning assigned to such term in Section 13.5
-------
hereof.
"Divisional Statements" shall have the meaning assigned to such term
---------------------
in Section 4.9 hereof.
"Equipment" shall mean all of Seller's furniture, fixtures, machinery,
---------
equipment, motor vehicles, office equipment, computers, tools and
replacement parts, wherever located, used by Seller in the operation of the
Business, all of the Equipment on the date hereof being listed on Schedule
--------
4.6(c) hereof.
- ------
"Employment Agreements" shall mean the respective Employment
--------------------
Agreements or Consulting Agreement contemplated by Section 2.5 hereof.
"Environmental Laws" shall have the meaning assigned to such term in
------------------
Section 4.12 hereof.
"Excluded Assets" shall mean the following assets which are expressly
---------------
excluded from the Purchased Assets: (A) the corporate seal, certificate of
incorporation, minute books, stock books, tax returns or other records having to
do with the corporate organization of Seller, (B) the rights which accrue or
will accrue to Seller under this Agreement, (C) the rights to any of Seller's
claims existing at the Closing for any federal, state or local income tax
refunds, (D) any life insurance policies maintained by Seller, other than life
insurance policies maintained by Seller on the lives of Peter Hubbard, Ken Smith
and Phillip Feiner, (E) any workers' compensation, general liability, property
and casualty and errors and omissions insurance policies, (F) any claims and
rights against third parties (including insurance carriers) to the extent they
do not relate to the Business, (G) claims for refunds of taxes and other
governmental charges to the extent such refunds relate to periods ending on or
prior to the Closing Date, (H) Cash in an amount equal to the principal balance
of and all unpaid interest on the Notes, (I) the beach house located at 21500
Pacific Coast Highway, Malibu, California 90265, together with all furniture and
furnishings thereof, (J) all glass art and memorabilia, except for certain items
to be designated by Seller and delivered to Purchaser within seven days
following the Closing, and (K) all assets used by Seller exclusively in the
business conducted by its archives division.
"Financial Statement Date" and "Financial Statements" shall have the
------------------------ --------------------
meanings assigned to such terms in Section 4.9(a) hereof.
3
<PAGE>
"Financing Source" shall mean such financial institution as may
----------------
provide Purchaser with funds to enable it to pay the Purchase Price.
"Hazardous Substances" means any toxic or hazardous gaseous, liquid,
--------------------
solid or other material or waste that pose a hazard to the environment or human
health or safety including (i) any "hazardous substances" as defined by the
federal Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. (S)(S) 9601 et seq., and by the Carpenter-Presley-Tanner Hazardous
-------
Substance Act, California Health and Safety Code (S)(S) 25340 et seq., (ii) any
-------
"extremely hazardous substance", "hazardous chemical" or "toxic chemical" as
those terms are defined by the federal Emergency Planning and Community
Right-to-Know Act, 42 U.S.C. (S)(S) 11001 et seq., and by California Health and
-------
Safety Code (S)(S) 25500 et seq,. (iii) any "hazardous waste" as defined under
-------
the federal Solid Waste Disposal Act, as amended by the Resource Conversation
and Recovery Act, 42 U.S.C. (S)(S) 6901 et seq., and under California Hazardous
-------
Waste Control Law, Health and Safety Code (S)(S) 25100 et seq., (iv) any
-------
"pollutant," as defined under the federal Water Pollution Control Act, 33
U.S.C. (S)(S) 1251 et seq., California Water Quality Act, California Water Code
-------
(S)(S) 13000 et seq., California Safe Drinking Water and Toxics Act, Health and
-------
Safety Code (S)(S) 24249.5 et seq., (v) any "hazardous substance emissions" or
-------
"air toxics emissions" as defined under the Clean Air Act, 42 U.S.C. (S)(S) 7401
et seq., and California Health and Safety Code (S)(S) 7401 et seq., and
- ------- -------
California Health and Safety Code (S)(S) 39608 et seq., (S)(S) 40150 et seq.,
------- -------
(S)(S) 40501 et seq., and all South Coast Air Quality Management Districts Rules
-------
and Regulations, and (vi) any regulated substance or waste under any laws or
court or administrative orders by any federal, state or local governmental
authorities concerning protection of the environment, all as of the date hereof.
"HSR Act" shall mean Hart-Scott-Rodino Antitrust Improvements Act of
-------
1976, as amended, and the rules and regulations promulgated thereunder.
"Intellectual Property and Information" shall mean all the following
-------------------------------------
used by Seller in the operation of the Business: patents, applications for
patents, trademarks, trademark registrations, applications for trademark
registrations, trade names, service marks, service mark registrations,
applications for service mark registrations, copyrights, copyright
registrations, applications for copyright registrations, computer programs,
trade secrets, product related artwork (except for glass memorabilia) and know-
how.
"Inventory" shall mean all of Seller's packaging, finished goods,
--------
spare parts, work in process, stockroom inventory and raw materials, wherever
located, used by Seller in the operation of the Business, or which are offered
for sale in the ordinary course of the Business.
"Knowledge" shall have the meaning assigned to such term in Section
---------
13.2 hereof.
"Landlord" shall mean 5055 Wilshire Limited Partnership.
--------
4
<PAGE>
"Lease" shall mean that certain 5055 Wilshire Office Lease between
-----
Landlord and Seller dated March 11, 1993, as amended by First Amendment to
Office Lease dated November 4, 1994, and by an unexecuted Second Amendment to
Office Lease dated as of November 4, 1994.
"Leased Real Property" shall mean the real property leased by Seller
--------------------
in a portion of the property known as 5055 Wilshire Boulevard, Los Angeles, CA
90036 and used in the operation of the Business.
"Leasehold Improvements and Fixtures" shall mean all of the
-----------------------------------
leasehold improvements, fixtures and appurtenances owned by Seller and attached
to the Leased Real Property.
"Legal Expenses" shall have the meaning assigned to such term in
--------------
Section 11.1(a) hereof.
"Liabilities" shall mean any and all obligations or liabilities of any
-----------
nature whatsoever, express or implied, matured or unmatured, disputed,
liquidated, unliquidated, absolute, fixed or contingent, known or unknown.
"Lien" shall mean any mortgage, lien, security interest, pledge,
----
encumbrance, restriction on transferability, default of title, charge or claim
of any nature whatsoever or any property or property interest, including without
limitation any easement or other exception to title.
"Notes" shall mean the notes payable to Gordon R. Hubbard, as Trustee
-----
of the Gordon Hubbard Revocable Trust, u/t/d dated March 22, 1994, and to Gordon
R. Hubbard, as Trustee of the Shirley A. Hubbard Trust, as set forth in the
Financial Statements, in the aggregate unpaid principal balance of $2,050,000.
"Optical Business" shall have the meaning assigned to such term in
----------------
Recital A hereof.
"Permitted Liens" shall mean those Liens for taxes not yet due and
---------------
payable and those Liens identified on Schedule 4.5 hereto that will remain as
------------
Liens against or affecting the Purchased Assets following the Closing.
"Prepaid Items" shall mean all of Seller's prepaid expenses expended
-------------
for the benefit of the Business, including but not limited to advances and
deposits, all of the Prepaid Items listed on the Preliminary Balance Sheet
subject to change therefrom in the ordinary course of business.
"Preliminary Balance Sheet" shall mean an unaudited balance sheet of
-------------------------
the Business for the eight-month period ended August 31, 1997 previously
delivered by Seller.
"Purchase Price" shall mean Fifteen Million Eight Hundred Thousand
--------------
Dollars ($15,800,000).
5
<PAGE>
"Purchased Assets" shall mean all the assets relating to the Business,
----------------
including without limitation the Accounts Receivable, Cash in excess of
principal and interest due on the Notes (adjusted as provided in Section 3.5
hereof), Equipment, Intellectual Property and Information, Inventory, Leasehold
Improvements and Fixtures, Prepaid Items, Real Property and Rights and Other
Property, all as existing on the Closing Date, but excluding the Excluded
Assets.
"Purchaser" shall mean jointly and severally (but subject to the
---------
provisions of Section 2.8 hereof), PTM, Safeguard and Mirage.
"Real Property" shall mean the real property owned by Seller and used
-------------
in the operation of the Business, located at 6350 Santa Monica Boulevard in Los
Angeles, California, and generally described on Schedule 4.6(e) hereto, together
---------------
with all buildings, structures and improvements of every nature located thereon
and all appurtenances, rights, and hereditaments pertaining thereto.
"RCRA" shall have the meaning set forth in Section 4.12 hereof.
----
"Rights and Other Property" shall mean all of Seller's assets arising
-------------------------
from or used in connection with the Business, other than the Excluded Assets,
not included in the Accounts Receivable, Cash, Equipment, Intellectual Property
and Information, Inventory, Leasehold Improvements and Fixtures, Prepaid Items
and Real Property which are used in the Business, including, without
limitation, all of the following which relate to the Business: Seller's rights
under the agreements identified in Section 2.3 hereof, executed originals of
such agreements (if available in the files of or otherwise reasonably available
to Seller), rights of offset, credits, claims against third parties for refunds
in respect of the Business or the Purchased Assets, causes of action, judgments,
proceeds of insurance in respect of damage to or destruction of loss of assets
included within the Business or the Purchased Assets, going concern value,
goodwill, rights in the name "Pacific Title and Art Studio," "Pacific Title
and Arts" or any variation thereof (subject to Section 13.7 hereof), contract
rights, purchase orders, sales orders, warranties and licenses received from
manufacturers and sellers of Equipment and Inventory, vendor and customer
records, shipping records, franchises, licenses, permits, consents, approvals,
certificates of public convenience, waivers and authorizations for the operation
of the Business, (to the extent assignable), technical information, telephone
numbers, rights, files, books and records (whether in hard copy or magnetic
form), sales and product brochures and catalogs and other sales literature and
materials, in each case to the extent on hand or obtainable with reasonable
commercial effort.
"Seller" shall mean Seller and its Affiliates.
------
"Seller Documents" shall mean the Bill of Sale and Assumption, Grant
----------------
Deed, and other documents of Seller described in Section 3.2(a) hereof.
"Settlement Date" shall have the meaning set forth in Section 3.5(a)
---------------
hereof.
6
<PAGE>
"Solvent" shall mean, with respect to any entity, that as of the date of
-------
determination:
(a) the then fair salable value of the property of such entity is
(i) greater than the then total amount of liabilities (whether matured,
unmatured, disputed, liquidated, unliquidated, absolute, fixed or contingent) of
such entity ("Obligations") and (ii) greater than the amount that will be
required to pay such entity's probable liability on such Obligations as they
become absolute and matured;
(b) such entity's capital is not unreasonably small to carry on such
entity's business as theretofore operated and all businesses in which such
entity is about to engage;
(c) such entity (i) is then able to pay its liabilities, existing and
capable of being enforced, in the ordinary course of business; (ii) will be able
to continue to pay such entity's Obligations as they mature in the ordinary
course of business; and (iii) does not intend or reasonably believes that it
will incur Obligations beyond its ability to pay as such Obligations mature; and
(d) the value of such entity's total assets is in excess of such
entity's total liabilities with both assets and liabilities being stated and
classified in accordance with generally accepted accounting principles.
"Survey" shall mean the land title survey of the Real Property,
------
prepared by one or more duly licensed land surveyors at the expense of Purchaser
acceptable to the applicable Title Company and Purchaser.
"Title Company" shall mean Chicago Title Company.
-------------
"Title Company" shall mean Owner's ALTA Policy of Title Insurance -
-------------
1970 Form B issued by the Title Company, in an amount mutually agreed upon
(which amount shall be the portion of the Purchase Price allocated to the Real
Property pursuant to Section 2.4 hereof), and insuring Purchaser's title to the
Real Property, subject only to the Permitted Liens.
"Warranty Work" shall mean corrective work performed under a new or
-------------
existing purchase orders and requests for the issuance of credit memorandums.
ARTICLE II
SALE AND PURCHASE OF ASSETS: PURCHASE PRICE
-------------------------------------------
Section 2.1. Sale and Purchase of Purchased Assets. Subject to the terms
----------- -------------------------------------
and conditions contained in this Agreement, at the Closing on the Closing Date,
Seller shall sell, assign, transfer and deliver to Purchaser and Purchaser shall
purchase from Seller, free and clear of all Liens other than Permitted Liens,
all of the Purchased Assets.
7
<PAGE>
Section 2.2. Payment of Purchase Price. At the Closing, Purchaser shall pay
----------- -------------------------
to Seller, by wired funds to an account designated by Seller, an amount equal to
the Purchase Price, together with such other sums (if any) as may be required by
this Agreement. In addition, Purchaser will assume at the Closing and agree to
pay, discharge or perform, as appropriate, the Assumed Liabilities. Except as
specifically provided in Section 2.3 hereof, Purchaser shall not assume or be
responsible for any Liabilities of Seller.
Section 2.3. Assumption of Specified Liabilities: Excluded Liabilities.
----------- ---------------------------------------------------------
(a) At the Closing, and except as otherwise specifically provided in
this Section 2.3, Purchaser shall assume and agree to pay, discharge or perform,
as appropriate, and in accordance with their respective terms and conditions,
the following Liabilities of Seller, referred to collectively herein as the
"Assumed Liabilities":
(i) all Liabilities of Seller incurred in operating the
Business existing as of the Financial Statement Date, but only if and to
the extent that the same are accrued or reserved for on the balance sheet
included in the Divisional Statements or reflected in the notes to the
Financial Statements pertaining to the Business and have not been paid or
discharged prior to the Closing hereunder;
(ii) all Liabilities of Seller arising in the ordinary course of
its operation of the Business between the Financial Statement Date and the
Closing Date, including Warranty Work, to the extent that the same have not
been paid or discharged prior to the Closing hereunder, except such, if
any, as fall within any of the categories described in subparagraphs
(iii)(A) and (B) hereof;
(iii) all Liabilities of Seller in respect of the agreements,
contracts, commitments and leases which are identified in Section 4.16
hereof or are not required to be identified in accordance with the
provisions of such section, except that Purchaser shall not assume or agree
to pay, discharge or perform any:
(A) Liabilities of the aforesaid character existing as of
the Financial Statement Date and which under generally accepted
accounting principles are or should have been accrued or reserved for
on a balance sheet or reflected in the notes thereto as a liability or
obligation, if and to the extent that the same were not accrued or
reserved for on the balance sheet included in the Financial Statements
or reflected in the notes thereto; and
(B) Liabilities arising out of any breach or failure to
perform by Seller prior to Closing of any agreements, contracts and
leases identified in Section 4.16 hereof or not required to be
identified in accordance with the provisions of such section, except
for Warranty Work.
8
<PAGE>
(iv) all liabilities of Seller in connection with the Employment
Agreements described in Section 2.5 hereof and for all employee related
-----------
obligations described in Section 2.6;
(v) all liabilities of Seller for work in process; and
(vi) all sales tax liability, if any, associated with the
purchase and sale of the Purchased Assets.
(b) Purchaser's obligations in connection with its assumption of the
Assumed Liabilities are absolute and unconditional and shall be performed by
Purchaser without any right of set off for claims asserted by Purchaser against
Seller. Notwithstanding the foregoing, Purchaser is entitled to pursue
separately against Seller any and all rights Purchaser may have under or arising
from this Agreement for a breach by Seller of any representation, warranty,
covenant or agreement contained in this Agreement.
(c) Except to the extent provided in Section 2.3(a) hereof, Purchaser shall
not assume or incur any Liability under this Section 2.3 or otherwise for the
following, referred to collectively herein as the "Excluded Liabilities":
(i) in respect of Seller or any claim, regardless of when made or
asserted, (excluding Warranty Work) which arises out of or is based upon
negligence, strict liability or any express or implied representation,
warranty, agreement or guarantee made by Seller, or alleged to have been
made by Seller, or which is imposed or asserted to be imposed by operation
of law, in connection with any product designed, manufactured, sold, shipped
or installed by or on behalf of Seller or for any service performed by or on
behalf of Seller, including without limitation any claim relating to the
repair or replacement of any such product and any claim seeking recovery for
property damage, consequential damage, lost revenue or lost income or
personal injury;
(ii) in respect of any federal, state or local income or other tax
payable with respect to the business, assets, properties or operations of
Seller for any period prior to the Closing Date or incident to or arising as
a consequence of the negotiation or consummation by Seller of this Agreement
and the transactions contemplated hereby; provided that Purchaser shall be
obligated to pay any sales tax liability associated with the purchase and
sale of the Purchased Assets;
(iii) any liability relating to the transportation of Hazardous
Materials by Seller prior to the Closing (the parties acknowledge that for
purposes of this Section 2.3(c)(iii), Hazardous Substances shall include
substances which are deemed to be Hazardous Substances following the date
hereof);
(iv) any liability in connection with that certain litigation
captioned Nelson v. Pacific Title and Art Studio, U.S. District Court No.
--------------------------------------
95-6173DT, or Klein v. Pacific Title
----------------------
9
<PAGE>
and Art Studio, Los Angeles Superior Court No. EC019235, or arising from the
--------------
underlying subject matter of claims made in either such suit; and
(v) any liability in connection with the workers' compensation claim
filed by Jane Martinez or arising from the underlying subject matter of such
claim.
Section 2.4. Allocation of Purchase Price. Seller and Purchaser agree that
----------- ----------------------------
the Purchase Price shall be allocated among the Purchased Assets in a manner
agreed upon by the parties following the preparation of a balance sheet of the
Business as of the Closing Date. Seller and Purchaser agree that each will
report the federal income tax consequences of such purchase and sale
contemplated hereby in a manner consistent with such allocation and such
negotiations.
Section 2.5. Employment of Seller's Employees.
----------- --------------------------------
(a) Purchaser shall offer employment or consulting arrangements to
the executives of Seller set forth on Schedule 2.5 in accordance with the
------------
Employment Agreements. The Employment Agreements shall be in a form mutually
acceptable to Purchaser and such executives (to be evidenced by letters from
such executives and Purchaser). In addition, (i) Purchaser expressly shall
assume all obligations under the existing Employment Contracts set forth in
Schedule 2.5, and (ii) Purchaser shall offer substantially comparable
- ------------
employment to all other employees of Seller employed in connection with the
Business on the Closing Date. Purchaser shall recognize all vacation, sick or
personal leave accrued through the Closing Date by any employee of Seller
employed by Purchaser following Closing.
(b) Prior to the Closing, Purchaser shall perform any action and
execute any agreements or other documents necessary to become a signatory to
each and every union and local union agreement applicable to the Business to
which Seller is a party. At the request of Seller, and prior to the Closing
Date, Purchaser shall attend and participate in one or more meetings between
Seller and representatives of the applicable union and local unions that may be
called for the purpose of "Effects Bargaining," as prescribed by law. For
purposes of this Section 2.5(b), the term "Effects Bargaining" shall mean
negotiations with the relevant unions as required by the National Labor
Relations Act in order to bargain concerning the impact of the transactions
contemplated hereby, if any, on the terms and conditions of employment of union-
represented employees.
(c) Promptly upon execution of this Agreement Seller shall provide
notice to the applicable labor unions/collective bargaining units for its
employees of the pending sale of the Business. Purchaser shall use reasonable
efforts to continue (in separate subsidiaries) the application of any union
health and welfare and pension benefits presently being provided to nonunion
employees of Seller.
10
<PAGE>
Section 2.6. Severance and Other Payments to Employees of Seller.
----------- ---------------------------------------------------
(a) Purchaser shall reimburse Seller for all amounts paid to
employees of Seller who (i) perform functions related to the Business, (ii) who
are employed by Seller as of the Closing, and (iii) elect not to become
employees of Purchaser following the Closing (including all amounts required to
be paid for accrued vacation, sick leave and personal days); provided, however,
that Purchaser shall not be obligated to reimburse Seller for any wages paid to
any such employee for current payroll periods ending as of the Closing Date.
(b) Purchaser shall indemnify Seller for any amounts required to
be paid to employees of Seller as of the Closing who become employees of
Purchaser following the Closing on account of vacation, sick leave or personal
days accrued through the Closing.
(c) Purchaser shall indemnify Seller for any severance or other
benefits required to be paid to employees of Seller as of the Closing pursuant
to any collective bargaining agreement as a result of the transactions
contemplated by this Agreement.
(d) Promptly following the end of Purchaser's first fiscal year
(but not later than January 31, 1998) Purchaser shall pay to employees of Seller
who become employees of Purchaser bonus compensation in an aggregate amount at
least equal to the amount of bonus compensation accrued through the date of
Closing; provided that Purchaser shall not be obligated to pay any bonus
compensation to any person who is not employed by Purchaser as of the end of
Purchaser's fiscal year.
(e) The indemnification provisions of Section 11.1(c) through
(f) shall apply to indemnification provided by Sections 2.6(b) and (c) hereof.
Section 2.7. Purchaser Not Assuming Employee Benefit Plans. Purchaser shall
----------- ---------------------------------------------
not assume the assets, liabilities nor sponsorship of any of Seller's "employee
benefit plans," as such term is defined in Section 3(3) of ERISA. Without
limiting the foregoing, the following terms and conditions shall apply.
(a) Defined Benefit Pension Plan. Purchaser shall not assume the
-----------------------------
assets, liabilities or sponsorship of the Pacific Title and Art Studio Defined
Benefit Pension Plan, which pension plan previously has been terminated.
(b) 401(k) Profit Sharing Plan. Purchaser shall not assume the
-----------------------
assets, liabilities or sponsorship of the Pacific Title and Art Studio 401(k)
Profit Sharing Plan.
(c) Welfare Benefit Plans. Purchaser shall not assume the assets,
---------------------
liabilities nor sponsorship of any of the welfare benefit plans (within the
meaning of Section 3(l) of ERISA) maintained by Seller and listed on Schedule
2.7(c).
11
<PAGE>
(d) Cooperation. Seller and Purchaser shall provide each other
-----------
with all information as the other may reasonably request from time to time in
order to implement the foregoing provisions and as is necessary or appropriate
to administer their respective employee benefit plans.
Section 2.8. Joint and Several Liability. Prior to the Closing, each of
------------ ---------------------------
PTM, Safeguard and Mirage, which collectively constitute the Purchaser
hereunder, shall be jointly and severally liable for the performance of
Purchaser's obligations hereunder. Following the Closing Safeguard and Mirage
shall have no further obligations or liabilities under this Agreement;
provided that Safeguard and Mirage shall remain liable for any breaches of any
representations or warranties made by them prior to the Closing.
ARTICLE III
CLOSING
-------
Section 3.1. General. Unless otherwise agreed to by the parties hereto, but
----------- -------
subject to Section 12.1(g), the closing under this Agreement (the "Closing")
will be held at the offices of Christensen, Miller, Fink, Jacobs, Glaser, Weil &
Shapiro, LLP, 2121 Avenue of the Stars, 18th Floor, Los Angeles, CA 90067
commencing at 10:00 a.m. on the date which is three business days after
satisfaction of the conditions set forth in Articles VII and VIII hereof, or
such other date and time as shall be mutually agreed to in writing by Purchaser
and Seller (the "Closing Date"):
Section 3.2. Delivery. At the Closing and as a condition to Closing:
----------- --------
(a) Seller will deliver or cause to be delivered to Purchaser:
(i) Bill of Sale and Assumption, duly executed by Seller,
substantially in the form attached hereto as Exhibit A, and such other
---------
instruments of transfer, sale and assignment (including certificates of title in
respect of the motor vehicles included within the Purchased Assets) as shall be
reasonably necessary to vest in Purchaser good title to, or to assign and
transfer to Purchaser all of Seller's right, title and interest in, the
Purchased Assets; and
(ii) Grant Deed conveying the Real Property to a
subsidiary of PTM designated by Purchaser prior to the Closing, subject only to
the Permitted Liens, duly executed and acknowledged by Seller and in proper form
for recording;
(iii) a cashier's check in an amount equal to the Cash;
(iv) All other agreements, certificates, consents, approvals
and documentary evidence reasonably required to be delivered pursuant to
Seller's obligations hereunder.
12
<PAGE>
(b) Purchaser will deliver to Seller:
(i) payment of the Purchase Price;
(ii) Bill of Sale and Assumption evidencing and effecting the
assumption by Purchaser of the Assumed Liabilities; and
(iii) all other agreements, certificates, consents, approvals
and documentary evidence reasonably required to be delivered pursuant to the
Purchaser's obligations hereunder.
Section 3.3. Expenses. Except as provided by Schedule 3.3, each party
----------- -------- ------------
shall be responsible for the payment of costs it has incurred and will incur in
connection with the execution and delivery of this Agreement and consummation of
the transactions contemplated hereby; provided, however, that (a) Purchaser
shall pay (i) the filing-fee required from an "acquiring person" in connection
with filing of a notice (if any) under the HSR Act; (ii) the Survey costs; (iii)
the difference in cost of premium between obtaining an ALTA title insurance
policy rather than a CLTA title insurance policy and (iv) any sales taxes
associated with the transactions contemplated by this Agreement; and (b) Seller
shall pay (i) the costs of obtaining a CLTA title insurance policy and (ii) the
real estate transfer taxes in connection with sale of the Real Property.
Section 3.4. Subsequent Documentation. Seller shall at any time and from
----------- ------------------------
time to time upon the reasonable request of Purchaser execute, acknowledge and
deliver, or cause to be executed, acknowledged and delivered, all such further
assignments and instruments of sale and transfer as may be reasonably required
for the better assigning, transferring and confirming to Purchaser or its
successors and assigns, or for aiding and assisting Purchaser or its successors
and assigns in collecting and reducing to possession, any or all of the
Purchased Assets.
Section 3.5. Post Closing Adjustments to Cash.
----------- --------------------------------
(a) On the sixtieth (60th) day following the Closing (or such other date as
the parties shall agree)(the "Settlement Date")the following adjustments shall
be made to Cash:
(i) Purchaser shall receive a credit for an amount equal to the legal
and accounting fees incurred by Seller subsequent to June 4, 1997 which
related to the transactions contemplated by this Agreement and which were
paid prior to the Closing.
(ii) Seller shall receive a credit for an amount equal to the
difference between the cost of the premium of the Title Policy and the
premium of a CLTA title insurance policy.
(iii) Purchaser shall receive a credit for an amount equal to the real
estate transfer taxes paid by Seller in connection with the transfer of the
Real Property.
13
<PAGE>
(iv) Seller shall receive a credit for amounts paid by Seller
pursuant to Section 2.6(a) hereof.
(v) Purchaser shall receive a credit of an amount equal to premiums
of the insurance policies obtained by Seller pursuant to Section 6.10
hereof, and
(vi) Seller shall receive a credit for federal and state income taxes
attributable to income of the Seller through October, 1997 (such taxes shall
be calculated at the rate of 48.5% of Seller's income through October,
1997), less the amount of distributions shown on Schedule 4.15 as made for
-------------
the purposes of taxes.
(b) The parties intend that following the adjustments to Cash set forth in
Section 3.5(a) have been made ("Adjusted Cash") Seller shall receive 20% of the
Adjusted Cash and Purchaser shall receive 80% of the Adjusted Cash. If the Cash
delivered to Purchaser at the Closing shall be in excess of 80% of the Adjusted
Cash, Purchaser shall pay such excess to Seller on the Settlement Date. If the
Cash delivered to Purchaser at the Closing shall be less than 80% of the
Adjusted Cash then Seller shall pay to Purchaser an amount equal to the
difference between such amounts; provided that the amount required to be paid by
Seller shall be reduced by the amount by which, if any, that the principal and
interest owing on the Notes as of the Closing exceeded the amount of Cash on the
Closing Date.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES RESPECTING SELLER
------------------------------------------------
Seller represents and warrants to Purchaser as follows:
Section 4.1. Organization and Qualification. Seller is a corporation duly
----------- -------------------------------
organized, validly existing and in good standing under the laws of the State of
California and is duly qualified and in good standing as a foreign
corporation authorized to transact business and to own and lease property in
each jurisdiction in which the nature of the business conducted by it or the
character or location of the properties owned or leased by it requires such
qualification in order to avoid liability or disadvantage. All of such
jurisdictions are listed Schedule 4.1.
------------
Section 4.2. Due Authorization. The execution and delivery of this Agreement
------------ ------------------
by Seller and the sale of the Purchased Assets and performance of the
obligations of Seller contemplated hereby and by the Seller Documents have been
duly and validly authorized by all necessary corporate and shareholder action.
Seller has the right, power and authority to enter into and perform this
Agreement and the Seller Documents, and this Agreement constitutes, and the
Seller Documents will, upon their execution, constitute, the valid and binding
obligations of Seller, enforceable against Seller in accordance with their
terms, except as enforceability thereof may be limited by general equitable
principles and by laws affecting the rights of creditors generally.
14
<PAGE>
Section 4.3. Conflict with Other Instruments: Absence of Restrictions.
----------- --------------------------------------------------------
Except as described in Schedule 4.3, the execution, delivery and performance of
------------
this Agreement and the Seller Documents by Seller will not contravene any
provision of Seller's articles of incorporation or by-laws and will not result
in a breach of, or constitute a default under, any agreement or other document
to which Seller is a party or by which Seller is bound, or any decree, order or
rule of any domestic or foreign court or governmental agency or any provision of
applicable law which is binding on Seller or on any of the Purchased Assets, or
result in the creation or imposition of any Lien, on any of the Purchased Assets
or give to others any interest or rights therein or create in any third party
the right to modify, terminate or accelerate (or to make a claim for damages in
respect of) any material instrument or material contract to which Seller is a
party or by which Seller is bound. To the Knowledge of Seller, except as
described in Section 4.3, the execution, delivery and performance of this
Agreement and the Seller Documents by Seller will not adversely affect the
performance by third parties under any material supply contracts and
distribution agreements or other material contracts to which Seller is a party.
Section 4.4. Government and Third-Party Approvals. Except as listed on
----------- ------------------------------------
Schedule 4.4, no consent by, approval or authorization of or filing,
- ------------
registration or qualification with any federal, state or local authority, or any
foreign governmental authority, or any corporation, person or other entity
(including any party to any contract or agreement with Seller) is required (a)
for the execution, delivery or performance of this Agreement or the Seller
Documents by Seller, (b) in connection with Seller's consummation of the
transactions contemplated hereby and thereby or (c) in order to vest in
Purchaser good and marketable title in and to all of the Purchased Assets upon
the Closing.
Section 4.5. Title to Purchased Assets and Related Matters. Except as
----------- ---------------------------------------------
described in Schedule 4.5, Seller has good, valid and marketable title to all of
------------
its assets constituting the Purchased Assets, whether tangible or intangible,
and whether consisting of real or personal property (excluding for purposes of
this Section 4.5 leasehold interests as to assets that are leased by Seller and
license rights as to assets that are licensed to Seller), and all such Purchased
Assets are held free and clear of all mortgages, liens, pledges, claims,
charges, security interests or other encumbrances or limitations of any nature
whatsoever, except the Permitted Liens and Liens for current taxes and
assessments not in default. Except as described in Schedule 4.5, the instruments
------------
of transfer to be executed by Seller at the Closing will be effective to
transfer to Purchaser good, valid and marketable title to, and assign to
Purchaser all of Seller's right, title and interest in and to, such Purchased
Assets.
Section 4.6. Other Representations Regarding Purchased Assets.
----------- ------------------------------------------------
(a) Accounts Receivable. Except as set forth on Schedule 4.6(a),
------------------- ---------------
all of the Accounts Receivable as of the Preliminary Balance Sheet Date are
reflected on the Preliminary Balance Sheet. Except as set forth on Schedule
--------
4.6(a), the Accounts Receivable listed on the Preliminary Balance Sheet (i) have
- ------
arisen in the ordinary course of business of Seller; and (ii) represent bona
fide obligations due to Seller arising in the ordinary course of the Business.
The Preliminary Balance Sheet includes bad debt and warranty reserves which are
adequate in view
15
<PAGE>
of the Company's past practice and experience, without regard to the
transactions contemplated hereby.
(b) Equipment. The items of Equipment listed on Schedule 4.6(b) are,
--------- ---------------
and on the Closing Date will be, in good working order. The Equipment includes
all of the motor vehicles and other machinery and equipment currently used in
the operation of the Business.
(c) Work in Process. All work in process has been performed in a good
---------------
and workman like manner in accordance with the Seller's past practices.
(d) Leased Real Property: Leasehold Improvements.
--------------------------------------------
(i) The Leased Real Property is leased from Landlord pursuant to
the Lease, a true and correct copy of which has been delivered to
Purchaser. Seller has not subleased any portion of the Leased Real Property
or assigned or conveyed any interest therein or in the Lease to any third
party. The Lease is in full force and effect and constitutes the valid and
binding agreement of Seller and, to Seller's Knowledge, Landlord. Except as
disclosed in Schedule 4.6(d), neither Seller nor, to Seller's Knowledge,
---------------
Landlord is in default under the Lease and no event or condition has
occurred or exists which, with the passage of time, the giving of notice or
both, would cause either Seller or, to Seller's Knowledge, Landlord to be
in default thereunder.
(ii) The Leasehold Improvements are, and on the Closing Date will
be, in good working order. The Leasehold Improvements include all of the
leasehold improvements, fixtures and appurtenances currently used by Seller
in operating the Business.
(e) Real Property.
-------------
(i) Seller has previously delivered to Purchaser or permitted
Purchaser access to copies of (A) the real estate property tax assessments
and tax bills for all of the lots comprising the Real Property for the
three-year period ending December 31, 1996, (B) any architectural drawings,
plans, specifications, site plans and as-built surveys relating to any of
the Real Property on hand at Seller's premises and (C) any engineering plans
and reports, soil and substrata studies, utility schemes, landscape plans
and other studies covering, relating to, affecting or concerning the
physical condition and operation of any Real Property on hand at Seller's
premises.
(ii) Except as set forth on Schedule 4.6(e), there are no leases,
---------------
tenancies, licenses or other rights of occupancy or use for any portion of
the Real Property, and no person other than Seller occupies or uses any
portion of the Real Property.
16
<PAGE>
(iii) There are no pending or, to Seller's Knowledge, threatened,
condemnations, eminent domain or similar proceedings, or assessments or
betterments, which could adversely affect any part of the Real Property.
(iv) Except as set forth on Schedule 4.6(e) to Seller's
---------------
Knowledge, the buildings and improvements constituting a part of the Real
Property, and the operation or maintenance thereof as operated and
maintained, do not contravene any current zoning or building law or
ordinance or other administrative regulation or violate any restrictive
covenant or any provision of federal, state or local or foreign law. Except
as set forth on Schedule 4.6(e), to Seller's Knowledge, there is no
---------------
outstanding notice of violation, order or citation against Seller under any
law, ordinance, governmental rule or regulation relating to any of the Real
Property, and all of the plants, buildings and structures constituting a
part of the Real Property are in good operating condition and in a state of
good maintenance and repair sufficient for the operation of the Business in
the manner now operated.
(f) Intellectual Property and Information. Except as disclosed on
-------------------------------------
Schedule 4.6(f), the Intellectual Property and Information includes all of
- ---------------
Seller's intellectual property rights which are used in operating the Business.
Seller owns exclusively or has a valid right to use the Intellectual Property
and Information being used to conduct the Business and the conduct of its
Business does not and, to Seller's Knowledge, will not conflict with or infringe
upon the intellectual property rights of others. A complete list of licenses
other than standardized shrink wrap software licenses is attached hereto as
Schedule 4.6(f). Except as set forth on Schedule 4.6(f), no claim is pending
- --------------- ---------------
or, to the best of Seller's Knowledge, threatened against Seller and/or its
officers, employees and consultants to the effect that any such Intellectual
Property and Information owned or licensed by Seller, or which Seller otherwise
has the right to use, is invalid or unenforceable by Seller. Except pursuant to
the terms of any licenses specified on Schedule 4.6(f), Seller has no obligation
---------------
to compensate any person or entity for the use of any such Intellectual Property
and Information, and Seller has not granted any person or entity any license or
other right to use any of the Intellectual Property and Information of Seller,
whether requiring payment of royalties or not.
To Seller's actual knowledge (without independent inquiry), no employee of
Seller is subject to any contractual or legal restrictions which might interfere
with their use of their best efforts to promote the interests of Seller.
To Sellers' Knowledge, no employee or consultant of Seller has used any
trade-secrets or confidential information of any other person in the course of
their work for Seller. To Seller's Knowledge, Seller is the exclusive owner of
all right, title and interest in its Intellectual Property and Information as
purported to be owned by it. Neither Seller nor, to Seller's Knowledge, any of
its employees or consultants has received notice of and to Seller's Knowledge
there are no claims that Seller's Intellectual Property and Information or the
use or ownership thereof by Seller infringes, violates or conflicts with any
right of any third party.
17
<PAGE>
(g) Electronic Data Processing Equipment. The Purchased Assets include
------------------------------------
all of the electronic data processing equipment and software currently used by
Seller in operating the Business.
(h) Generally. The assets constituting the Purchased Assets constitute
---------
all of the assets of Seller used in carrying out the Business, and the assets
constituting the Purchased Assets constitute all of the assets set forth on the
Preliminary Balance Sheet, to the extent required to be disclosed thereon (other
than such assets as Seller shall have disposed of since December 31, 1996 in the
ordinary course of business consistent with past practices).
Section 4.7. Conduct of Business. Except as set forth in Schedule 4.7,
----------- ------------------- ------------
between December 31, 1996 and the date hereof, Seller has conducted the
Business only in the ordinary course and in a manner consistent with its past
practices, including, without limitation, its distributions to shareholders.
Section 4.8. Solvency. Seller is Solvent.
------------ --------
Section 4.9. Additional Information.
----------- ----------------------
(a) Financial Statements. Seller has heretofore provided
---------------------
Purchaser with (i) the financial statements of Seller (the "Financial
Statements") for its fiscal year ended December 31, 1996 (the "Financial
Statement Date"), consisting of a balance sheet, a statement of operations, a
statement of shareholder's equity and retained earnings and a statement of cash
flows, together with an unqualified opinion thereon of Deloitte & Touche, LLP,
and (ii) unaudited statements of profit and loss for the Optical Business and
the Digital Business together with a segregated balance sheet of the Business
(together, the "Divisional Statements") for the twelve-month period ending on
the Financial Statement Date. The Financial Statements were prepared in
accordance with generally accepted accounting principles and practices
consistently applied throughout the periods reported upon and fairly and
accurately present the financial condition and the results of the operations of
Seller as at the Financial Statement Date and for the periods presented therein.
The Divisional Statements fairly and accurately present the financial condition
and the results of operations of the Business as at the Financial Statement Date
and for the periods presented therein. The parties acknowledge and agree that
the Financial Statements include the Archive Business, the assets and operations
of which are not included in the Purchased Assets.
(b) Absence of Liabilities. Except as disclosed in Schedule
---------------------- --------
4.9(b), on the Financial Statement Date, Seller had no material Liabilities
- ------
relating to or respecting the Business or the Purchased Assets except as and to
the extent reflected in the Divisional Statements, the notes to the Financial
Statements or in this Agreement or in any Schedule hereto. Seller has no
material Liabilities relating to or respecting the Business or the Purchased
Assets and no basis for any such Liability exists other than (i) any Liability
reflected in the Divisional Statements, the notes to the Financial Statements,
the Preliminary Balance Sheet, in this Agreement or in any Schedule hereto or
(ii) any Liability arising since the Financial Statement Date in the ordinary
course of business of Seller and in compliance with the covenants and agreements
of Seller herein contained.
18
<PAGE>
(c) Intra-company Relationships. All services rendered or any Affiliate
---------------------------
of Seller to the Business have been recorded in the accounts of the Business at
their full value. All goods sold by Seller or any Affiliate of Seller to the
Business, and all goods sold by the Business to Seller or any Affiliate of
Seller, have been accounted for as if they were transferred in arm's length
transactions. There is no rental charged by Seller to the Business for any real
property. Seller and its Affiliates have provided no services to the Business
for value except as employees since the Financial Statement Date except as, and
to the extent, set forth on Schedule 4.9(c).
---------------
(d) Preliminary Balance Sheet. The Preliminary Balance Sheet fairly and
-------------------------
accurately presents the financial condition of the Business as at August 31,
1997. The Preliminary Balance Sheet was prepared in a manner consistent with the
manner by which the Divisional Statements were prepared.
Section 4.10. Permits and Approvals. Schedule 4.10 contains a true and
------------- --------------------- -------------
correct description of all material licenses, permits, approvals,
authorizations, consents and registrations ("Permits") pertaining to the
Business and the Purchased Assets issued in favor of Seller. Such Permits
include all Permits necessary or required to operate the Business in accordance
with the provisions of applicable law, except such Permits the absence of which
will not materially adversely affect the Business or the Condition. Except as
set forth in Schedule 4.10, all of such Permits are in full force and effect,
-------------
and the Business is currently being operated in compliance with the terms of
each of the Permits. Except as set forth in Schedule 4. 10, (a) all such Permits
--------------
are transferable to Purchaser and, upon consummation of the transactions
provided for herein, Purchaser will receive all right and benefit to such
Permits, and (b)Purchaser will not be required, prior to or following the
Closing, to file, apply for or obtain any other license, permit, approval,
authorization, consent or registration in order to own and operate the Purchased
Assets and the Business as currently owned and operated by Seller.
Section 4.11. Compliance with Law. Except as set forth in Schedule 4.11 and
------------ ------------------- -------------
except as to matters covered by Section 4.12, Seller has complied with each, and
is not in violation of any, material law, ordinance or governmental rule or
regulation to which the Business or the Purchased Assets are subject and has not
failed to obtain, or to adhere to the requirements of, any material license,
permit, approval, authorization, consent or registration necessary to the
ownership of the Purchased Assets or the operation of the Business.
Schedule 4.12. Compliance with Environmental Laws. Except as disclosed in
-------------- -----------------------------------
Schedule 4.12 with respect to the Business and the Purchased Assets, to Seller's
- -------------
Knowledge: (a) Seller has complied with each, and is not in violation of any,
federal, state or local law, statute, regulation, permit, provision or
ordinance, relating to the use, generation, handling, storage, transportation,
release, treatment or disposal of Hazardous Substances (the "Environmental
Laws"); (b) Seller has obtained and complied with all necessary permits and
other approvals, including interim status under the Resource Conservation and
Recovery Act, as amended ("RCRA"), necessary to store, treat, dispose of and
otherwise handle Hazardous Substances; (c) there are no locations at any
facilities owned, leased or operated by Seller where Hazardous Substances have
entered into the soil, surface water or groundwater; and (d) there are no
on-site or off-site locations to which Seller
19
<PAGE>
has transported Hazardous Substances or arranged for their transportation from
facilities owned, leased or operated by Seller, which site is the subject of any
federal, state or local enforcement action or other investigation under any
Environmental Law, which may lead to claims against Seller or Purchaser for
clean-up costs, remedial work, damages to natural resources or for personal
injury claims, including, but not limited to, claims under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"). Except as disclosed in Schedule 4.12, to Seller's Knowledge, no
-------------
polychlorinated biphenyls or substances containing polychlorinated biphenyls are
present on facilities owned, leased or operated by Seller in connection with the
Business or the Purchased Assets, and no asbestos is present on facilities
owned, leased or operated by Seller in connection with the Business or the
Purchased Assets. To Seller's Knowledge, no portion of the Purchased Assets
constitutes any of the following "environmentally sensitive areas": (1) a
wetland or other "water of the United States" for purposes of Section 404 of the
federal Clean Water Act, 33 U.S.C. (S)1344, or any similar area regulated under
any state law; (2) a l00-year floodplain; or (3) a portion of the coastal zone
for purposes of the federal Coastal Zone Management Act, 16 U.S.C. (S)(S)1451-
1464.
Section 4.13. Additional Environmental Disclosures. To Seller's Knowledge,
------------- ------------------------------------
Schedule 4.13 hereto contains lists or summary descriptions of the following
- -------------
insofar as they affect or relate to facilities owned, leased or operated by
Seller and pertain to the Business or the Purchased Assets:
(a) All notices given by Seller to any governmental body or
official about discoveries of problems associated with Hazardous Substances at
facilities owned, leased or operated by Seller, including copies of all spill
reports, all reports submitted by Seller pursuant to environmental permits,
information supplied in response to inquiries from federal, state or local
agencies, and any requests submitted to Seller by the United States Justice
Department, the United States Environmental Protection Agency or state agencies
pursuant to CERCLA or RCRA regarding the hazardous wastes or hazardous
substances Seller has generated in the past and where those wastes and
substances are disposed; and
(b) All underground storage tanks located on facilities owned,
leased or operated by Seller.
Section 4.14. Litigation. Except as set forth in Schedule 4.14, no
------------ ---------- -------------
litigation, arbitration, investigation or other proceeding of or before any
court, arbitrator or governmental or regulatory official, body or authority is
pending or, to Seller's Knowledge, threatened against Seller with respect to the
Business or any of the Purchased Assets or the transactions contemplated by this
Agreement or the Seller Documents, and Seller knows of no basis for any such
litigation, arbitration, investigation or proceeding. Seller is not a party to
or subject to the provisions of any judgment, order, writ, injunction, decree or
award of any court, arbitrator or governmental or regulatory official, body or
authority which affects the Business or the Purchased Assets or their operation.
20
<PAGE>
Section 4.15. Absence of Changes. Except as set forth in Schedule 4.15,
------------ ------------------ -------------
between the Financial Statement Date and the date hereof there has not been, and
between the date hereof and the Closing Date there will not be:
(a) Any material change in the Condition, except changes in the
ordinary course of business, which in the aggregate have not been or will not be
prior to the Closing materially adverse to the Business or the Purchased Assets;
(b) Any damage, destruction or loss relating to the Business or
the Purchased Assets, whether or not covered by insurance or any other event or
condition which has had a material adverse effect, in the aggregate, on the
assets included within the Purchased Assets or on the Condition;
(c) Any claims relating to the Business or the Purchased Assets
not covered by applicable policies of liability insurance within the maximum
insurable limits of such policies;
(d) Any cancellation of purchase orders relating to the Business
for customer work in excess of $50,000 for any single customer;
(e) Any deterioration in the financial or competitive
prospects of Seller;
(f) Any declaration, setting aside or payment of any dividend or
other distribution in respect of any of Seller's shares of stock, or any direct
or indirect redemption, purchase or other acquisition of any such shares; or
(g) Any increase in the compensation payable or to become payable
by Seller to any of its officers, employees or agents, or any known payment or
arrangement made to or with any thereof.
Section 4.16 Contracts, Leases, Etc. Except as set forth in Schedule 4.16,
------------ ----------------------- -------------
Seller is not, with respect to the Business or the Purchased Assets, a party to
any currently effective written or oral:
(a) agreement, contract or commitment with any present or former
shareholder, director, officer, employee or consultant or for the employment of
any person, including any consultant;
(b) agreement, contract, commitment or arrangement with any labor
union or other representative of employees;
(c) agreement, contract or commitment for the future purchase of,
or payment for, supplies or products which obligates Seller to purchase supplies
or products not limited as to quantity or at a specified price which has a
remaining term of more than six months and which is not cancelable on 30 days
notice or less without penalty; or for the performance of services by a
21
<PAGE>
third party which involves in any one case $10,000 and is not cancelable on 30
days notice or less without penalty;
(d) agreement, contract or commitment to sell or supply products
or to perform services which obligates Seller to sell products or perform
services on terms not limited as to quantity but limited as to price involves in
any one case payments of $l0,000 and is not cancelable on 30 days notice or
less without penalty;
(e) representative, distribution, purchase or sales agency
agreement, contract or commitment;
(f) lease under which Seller is either lessor or lessee which
obligates annual payments in excess of $5,000 individually or $25,000 in the
aggregate;
(g) note, debenture, mortgage, pledge, charge, security
agreement, bond, conditional sale agreement, equipment trust agreement, letter
of credit agreement, loan agreement or other contract or commitment for
borrowing or lending of money (including, without limitation, loans to or from
officers, directors or any member of their immediate families), agreement or
arrangements for a line of credit or guarantee, pledge or undertaking of the
indebtedness of any other person;
(h) agreement, contract or commitment for any charitable or
political contribution;
(i) agreement, contract or commitment for any capital expenditure
in excess of $10,000;
(j) agreement, contract or commitment limiting or restraining it
from engaging or competing with any person or entity in any business similar to
the Business;
(k) license, franchise, distributorship or other similar
agreement, including those which relate in whole or in part to any patent,
trademark, trade name, service mark or copyright or to any ideas, technical
assistance or other know-how of or used by it in the operation of the Business,
which contemplates payments by Seller in excess of $10,000 per agreement.
(l) profit sharing, stock purchase, stock option, pension,
retirement, long-term disability, hospitalization, insurance or similar material
plans providing employee benefits;
(m) other agreement, contract or commitment not made in the
ordinary course of business which contemplates payments by Seller in excess of
$10,000 in any 12-month period.
All of the foregoing agreements, contracts, commitments, leases and other
documents and undertakings are sometimes herein referred to as the "Contracts."
22
<PAGE>
Except as set forth in Schedule 4.16, to Seller's Knowledge, each of the
-------------
Contracts is valid and enforceable in accordance with its terms; the parties
thereto are in compliance with the provisions thereof; no party is in
default in the performance, observance or fulfillment of any material
obligation, covenant or condition contained therein; no event has occurred which
with or without the giving of notice or lapse of time, or both, would constitute
a material default thereunder; and Seller's rights under the Contracts listed on
Schedule 4.16 are transferable by Seller to Purchaser without restriction
- -------------
(except for those contracts as to which the approvals and consents listed on
Schedule 4.4 apply).
- ------------
Section 4.17. Relationship With Customers and Suppliers. Except as set
------------ -----------------------------------------
forth on Schedule 4.17, Seller has used its reasonable business efforts to
-------------
maintain, and currently maintains, good working relationships with all of its
customers and suppliers of the Business. Neither Seller, nor any representative,
agent or employee of Seller, has paid any bribe or kickback to any customer or
to any representative, agent or employee of any customer. None of the ten
customers of Seller who, in the aggregate, for the fiscal year ended December
31, 1996, were the largest dollar volume customers of products sold by Seller
with respect to the Business has given Seller notice terminating, canceling or
to Seller's Knowledge threatening to terminate or cancel any contract or
relationship with Seller. None of the ten suppliers of Seller who, in the
aggregate, for the fiscal year ended December 31, 1996, were the largest dollar
volume suppliers of supplies used by Seller with respect to the Business has
given Seller notice terminating, canceling or to Seller's Knowledge threatening
to terminate or cancel any contract or relationship with Seller.
Section 4.18. Taxes. Seller has accurately prepared and duly and timely
------------ -----
filed with the appropriate governmental agencies (federal, state, local and
foreign) all tax and other returns required to be filed by it. Seller has paid,
or has made sufficient provision for the payment of, all taxes shown by such
returns to be required (a) to be paid by it for all fiscal and other applicable
tax periods which have ended or (b) to be accrued for the portion of the current
fiscal or other current applicable tax period up to the day prior to the Closing
Date. No deficiencies for any taxes have been asserted in writing or assessed
against Seller which remain unpaid.
Section 4.19. Employees. Schedule 4.19 lists each of the employees of
------------ --------- -------------
Seller providing services to the Business (collectively, the "Employees") and
(a) the base salary or hourly rate, as currently in effect, for each of such
Employees, (b) the bonus arrangements, if any, currently in effect for each of
the Employees, (c) the commission arrangements, if any, currently in effect for
each of the Employees and (d) the date on which the most recent salary increase
went into effect for each of the Employees and the amount of each such increase.
Except as limited by individual written contracts with employees listed on
Schedule 2.5 or the Employment Agreements or, with respect to labor union
- ------------
affiliates, the terms of applicable collective bargaining agreements, all
Employees of Seller are "at will."
Section 4.20. Strikes, Picketing, etc; Overtime, Back Wage, Vacation,
---------------------------------------------------------------------
Discrimination, and Occupational Safety Claims. Except as set forth in Schedule
- ---------------------------------------------- --------
4.20, there has been no strike, slowdown, picketing, work stoppage or labor
- ----
dispute by any union or other group of employees of Seller in connection with
the Business for the past three years, and to Seller's Knowledge, no
23
<PAGE>
such action or dispute has been threatened during such period. No union has
asserted jurisdiction over the Digital Business or otherwise maintained that any
collective bargaining agreement binding Seller with respect to the Optical
Business binds Seller in its operation of or employment of persons in connection
with the Digital Business nor has any labor union indicated any intent to do so.
No union has invoked with respect to Seller the technological change provisions
set forth in its collective bargaining agreement with Seller or to Seller's
Knowledge indicated any intent to do so. Neither Seller nor any agent or
representative of Seller has (a) made any loan or given anything in value,
directly or indirectly, to any officer, official, agent or representative of any
labor union or group of employees (other than regular salaries and wages) or
(b) paid any illegal bribe or kickback to any union or to any representative,
agent or employee of any union. To Seller's Knowledge, except as set forth on
Schedule 4.20, no person or party has asserted or threatened to assert any claim
- -------------
against Seller pursuant to the grievance procedures established under any
agreement between Seller and any union. To Seller's Knowledge, except as set
forth in Schedule 4.20, there are no outstanding claims against Seller (whether
-------------
under federal, state or foreign law, under any employment agreement, union labor
contract or otherwise) asserted by any present or former employee of Seller on
account of or for (a) overtime pay, other than overtime pay for work done during
the current payroll period; (b) wages or salary for any period other than the
current payroll period; (c) any amount of vacation pay or pay in lieu of
vacation time, other than vacation time or pay in lieu thereof earned in or in
respect of the current fiscal year; or (d) any violation of any statute,
ordinance or regulation relating to minimum wages or maximum hours of work. To
Seller's Knowledge, except as set forth in Schedule 4.20, no person or party has
-------------
asserted or threatened to assert any claims against Seller under or arising out
of any statute, ordinance or regulation relating to discrimination or
occupational safety in employment or employment practices (including, without
limitation, the Occupational Safety and Health Act of 1970, as amended, the Fair
Labor Standards Act, as amended, Title VII of the Civil Rights Act of 1964, as
amended, or the Age Discrimination in Employment Act of 1967, as amended), in
connection with the Business.
Section 4.21. Pension and Other Employee Benefit Plans. There is set forth
------------ ----------------------------------------
or identified in Schedule 4.21 all of the plans, funds, policies, programs,
-------------
arrangements or understandings sponsored or maintained by Seller with respect to
the Business which provide any employee of Seller (or any dependent or
beneficiary of any such employee) with (a) retirement benefits; (b) severance or
separation from service benefits; (c) incentive, performance, stock, share
appreciation or bonus awards; (d) health care benefits; (e) disability income or
wage continuation benefits; (f) supplemental unemployment benefits; (g) life
insurance, death or survivor's benefits; (h) accrued sick pay or vacation pay;
or (i) any other type of material benefit offered under any arrangement subject
to characterization as an "employee benefit plan" within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and not excepted by Section 4 of ERISA (the foregoing being
collectively called "Employee Benefit Plans"). Except as set forth on Schedule
--------
4.21, none of such Employee Benefit
- ----
Plans is an "employee benefit pension plan" or a "pension plan" as defined in
Section 3(2) of ERISA. As to any Employee Benefit Plan identified in Schedule
--------
4.21, each of the following is true: (i) all amounts due from Seller as
- ----
contributions to the date hereof have been paid or accrued on their books;
(ii) Seller and any Affiliated Company (as hereinafter defined) have performed
or satisfied
24
<PAGE>
all material obligations required to be performed or satisfied by them under,
and are not in default under or in violation of, any Employee Benefit Plan and,
to Seller's Knowledge, no other party is in default thereunder or in violation
thereof; (iii) Seller and any Affiliated Company are in compliance in all
material respects with the requirements (including reporting and disclosure
requirements applicable to them) prescribed by all statutes, orders or
governmental rules or regulations applicable to the Employee Benefit Plans,
including, but not limited to, ERISA and the Internal Revenue Code of 1986, as
amended (the "Code"); (iv) neither Seller nor any Affiliated Company or any
other "disqualified person" or "party in interest" (as defined in Section 4975
of the Code and Section 3(14) of ERISA, respectively) has engaged in any non-
exempt "prohibited transaction," as such term is defined in Section 4975 of the
Code or Section 406 of ERISA, which could subject any Employee Benefit Plan (or
its related trust), Seller or any Affiliated Company, Purchaser, any
shareholder, officer, director, partner or employee of Seller, any Affiliated
Company or Purchaser, or any trustee, administrator or other fiduciary of any
Employee Benefit Plan to the tax or penalty imposed under Section 4975 of the
Code or Section 502(i) of ERISA or any other material liability including civil
liability under Title I of ERISA; and (v) there are no material actions, suits
or claims pending (other than routine claims for benefits) or, to Seller's
Knowledge, threatened, against any Employee Benefit Plan or against the assets
of any Employee Benefit Plan. For purposes of this Section 4.21, "Affiliated
Company" shall mean any member (whether or not incorporated) of a group which is
part of a controlled group of corporations or under common control (within the
meaning of the regulations promulgated under Section 414 of the Code) and of
which Seller is a member. Except as set forth on Schedule 4.21, Seller does not
-------------
maintain or participate in, and has never maintained or participated in, any
"multiemployer plans" as defined in Section 3(37) of ERISA.
Section 4.22. Contracts with Affiliates. Except as set forth in Schedule
------------ ------------------------- --------
4.22, there are no contracts, obligations or arrangements between Seller and any
- ----
director, officer, shareholder or employee of Seller or any Affiliate of any
such person applicable to the Business or the Purchased Assets.
Section 4.23. Statements and Other Documents Not Misleading. To Seller's
------------ ---------------------------------------------
Knowledge, neither this Agreement, including all Schedules, nor any other
financial statement, document or other instrument heretofore or hereafter
furnished by Seller to Purchaser in connection with the transactions
contemplated hereby contains or will contain any untrue statement of any
material fact or omits or will omit to state any material fact required to be
stated in order to make such statement, document or other instrument not
misleading. To Seller's Knowledge there is no fact which may materially
adversely affect the Condition which has not been set forth in this Agreement,
the Schedules or the other documents furnished to Purchaser on or prior to the
date hereof in connection with the transactions contemplated hereby.
Section 4.24. Investment Company. Seller is not an "investment company" or
------------ ------------------
a company "controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended.
25
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES RESPECTING PURCHASER
---------------------------------------------------
Purchaser represents and warrants to Seller as follows:
Section 5.1 Organization.
----------- ------------
(a) Safeguard is a corporation duly organized, validly existing and in good
standing under the laws of the State of Pennsylvania and is duly qualified and
in good standing as a foreign corporation authorized to transact business and to
own and lease property in each jurisdiction in which the nature of the business
conducted by it or the character or location of the properties owned or leased
by it requires such qualification in order to avoid liability or disadvantage.
All of such jurisdictions are listed on Schedule 5.1.
------------
(b) Mirage is a limited partnership duly formed, validly existing and in
good standing under the laws of the State of Delaware and is duly qualified and
in good standing as a foreign limited partnership authorized to transact
business and to own and lease property in each jurisdiction in which the nature
of the business conducted by it or the character or location of the properties
owned by it requires such qualification in order to avoid liabilities or
disadvantage. All of such jurisdictions are listed on Schedule 5.1.
------------
(c) PTM is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and is qualified and in good
standing as a foreign corporation authorized to transact business and to own and
lease property in each jurisdiction in which the nature of the business
conducted by it or the character or location of the properties owned or leased
by it requires such qualification in order to avoid liability or disadvantage.
All such jurisdiction are listed on Schedule 5.1.
------------
Section 5.2. Due Authorization. The execution and delivery of this
------------ -----------------
Agreement by each of PTM, Safeguard and Mirage and the purchase of the Purchased
Assets and performance of the respective obligations of PTM, Safeguard and
Mirage contemplated hereby and by the Bill of Sale and Assumption have been duly
and validly authorized by all necessary corporate and partnership action,
respectively, of PTM, Safeguard and Mirage. PTM, Safeguard and Mirage each have
the right, power and authority to enter into and perform this Agreement and the
Bill of Sale and Assumption, and this Agreement constitutes the valid and
binding obligations of PTM, Safeguard and Mirage, respectively, enforceable
against PTM, Safeguard and Mirage in accordance with their terms, except as
enforceability thereof may be limited by general equitable principles or by laws
affecting the rights of creditors generally. The Bill of Sale and Assumption
will, upon its execution by PTM, constitute the valid and binding obligation of
PTM, enforceable against PTM in accordance with its terms, except as
enforceability thereof may be limited by general equitable principles or by laws
affecting the rights of creditors generally.
Section 5.3. Conflict With Other Instruments. The execution, delivery and
----------- -------------------------------
performance of this Agreement by PTM, Safeguard and Mirage and the Bill of Sale
and Assumption by PTM
26
<PAGE>
will not contravene any provision of PTM's certificate of incorporation or
bylaws, Safeguard's articles of incorporation or by-laws or Mirage's certificate
of limited partnership or limited partnership agreement and will not result in a
breach of, or constitute a default under, any agreement or other document to
which any of PTM, Safeguard or Mirage is a party or by which any of them is
bound, or any decree, order or rule of any domestic or foreign court or
governmental agency or any provision of applicable law which is binding on PTM,
Safeguard or Mirage, as the case may be, or create in any third party the right
to modify, terminate or accelerate (or to make a claim for damages in respect
of) any material instrument or material contract to which PTM, Safeguard or
Mirage is a party or by which any of them is bound.
Section 5.4. Government and Third-Party Approvals. Except as set forth on
----------- -------------------------------------
Schedule 5.4, no consent by, approval or authorization of or filing,
- ------------
registration or qualification with any federal, state or local authority, or any
foreign governmental authority, or any corporation, person or other entity
(including any party to any contract or agreement with PTM, Safeguard or Mirage)
is required (a)for the execution, delivery or performance of this Agreement by
PTM, Safeguard and Mirage or the Bill of Sale and Assumption by PTM, (b)in
connection with the consummation of the transactions contemplated hereby and
thereby, by PTM, Safeguard and Mirage or (c) in order to vest in PTM good and
marketable title to all of the Purchased Assets upon Closing.
Section 5.5. Litigation. No litigation, arbitration investigation or
----------- ----------
other proceeding of or before any court arbitrator or governmental or
regulatory official, body or authority is pending or, to the Knowledge of PTM,
Safeguard or Mirage, threatened against PTM, Safeguard or Mirage with respect to
the Business or any of the Purchased Assets or the transactions contemplated by
this Agreement or the Bill of Sale and Assumption, and neither PTM, Safeguard or
Mirage have Knowledge of any basis for such litigation, arbitration,
investigation or proceeding.
Section 5.6. Solvency. Assuming that Seller's representations and
----------- --------
warranties in Sections 4.5, 4.6, 4.8, 4.9 and 4.15 are true, complete and
correct, as of the Closing Date, any assignee at the Closing of Purchaser's
rights will be Solvent. Safeguard is Solvent.
Section 5.7. Financing. Purchaser has, or has obtained commitments for,
----------- ---------
sufficient financing to pay the Purchase Price and perform its obligations
hereunder.
Section 5.8. HSR Act. The equity interest of the Purchaser is owned by
----------- -------
persons such that a notification and report form will not be required to be
filed under the HSR Act in order to consummate the transactions contemplated by
this Agreement.
27
<PAGE>
ARTICLE VI
CERTAIN COVENANTS AND OTHER MATTERS
-----------------------------------
Section 6.1 Corporate Examinations and Investigations
----------- -----------------------------------------
(a) Between the date hereof and the Closing Date, Seller agrees
to cooperate (and to cause its officers, employees, consultants, agents,
attorneys and accountants to cooperate) fully with Purchaser and the Financing
Source and with their respective counsel, accountants and representatives in the
conduct of their due diligence investigation of the Business from legal,
environmental, insurance, valuation and solvency perspectives and, in connection
with such due diligence investigation, to grant to Purchaser and the Financing
Source and such representatives access to the properties, records, and, with the
prior consent of Seller (which shall not be unreasonably withheld), employees,
customers, creditors, vendors and suppliers of the Business. Purchaser will use
its best efforts to complete its due diligence investigation as promptly as
reasonably practicable. Except as set forth in Section 6.1(b) hereof, no
investigation by Purchaser shall diminish any of the representations,
warranties, covenants or agreements of Seller under this Agreement or reduce
Purchaser's right to pursue such remedies at law or hereunder as it would
otherwise have in the absence of having conducted such investigation.
(b) Between the date hereof and the Closing Date, if Purchaser or
Seller discovers that any representation, warranty or covenant of Seller made
herein is not true, complete or correct, Purchaser or Seller (as the case may
be) will promptly notify the other party of such breach. Seller covenants and
agrees to use its best efforts to cure any such breach, but if Seller fails or
is unable to effect a cure thereof, the Purchaser shall either (i) waive such
breach and Close or (ii) terminate this Agreement without liability on the part
of either party to the other.
Section 6.2. Restriction on Certain Discussions and Actions. Seller
----------- ----------------------------------------------
agrees that until the Closing Date or until termination of this Agreement
pursuant to Article XII it will refrain, and will direct and cause its officers,
directors, Affiliates, employees, attorneys, accountants and other agents and
representatives to refrain, from taking any action, directly or indirectly, to
solicit, encourage, initiate or participate in any way in discussions or
negotiations with, or furnish any information with respect to the Business or
the Purchased Assets to, any person or other entity (other than Purchaser and
its representatives) in connection with any possible or proposed sale of capital
stock, sale of a substantial portion of the assets, merger or other business
combination involving the Business or the acquisition of a substantial equity
interest in the Business or the Purchased Assets or any similar transaction
involving the Business or the Purchased Assets; provided, however, nothing
contained herein shall preclude Seller from providing any notice or otherwise
obtaining any consent, approval or transfer of any Permit. Seller agrees that it
will not (without Purchaser's prior written consent) disclose this Agreement or
the matters referred to herein to any other prospective acquirer of the Business
until the Closing Date or until termination of this Agreement pursuant to
Article XII.
28
<PAGE>
Section 6.3. [Reserved]
Section 6.4. Title Policy. Within 20 days following the Closing Date,
----------- ------------
Seller shall cause the Title Company to issue the Title Policy.
Section 6.5. Casualty and Condemnation.
----------- -------------------------
(a) If any of the Purchased Assets, or any portion thereof or any
personal property located thereon, is lost, stolen or damaged or destroyed by
fire or any other casualty (a "Casualty"), Seller shall promptly give notice of
the same to Purchaser. Purchaser have the right to terminate this Agreement by
giving notice thereof to Seller within 15 days after receipt of Seller's notice
under this Section 6.5(a) of the occurrence of a Casualty. If Purchaser
terminates this Agreement pursuant to this Section 6.5(a), this Agreement shall
become null and void, and Seller and Purchaser shall thereupon have no further
liabilities or obligations under this Agreement. If Purchaser does not terminate
this Agreement pursuant to this Section 6.5(a), Purchaser be entitled to the
benefits of all insurance proceeds and claims relating to any such Casualty, and
Seller shall at or prior to Closing assign to Purchaser (without recourse or
warranty) all such insurance proceeds and claims. Seller shall inform Purchaser
of any negotiations with respect to insurance claims involving any Casualty,
will permit Purchaser to take part therein, and will not settle any such claims
without Purchaser's prior written consent. Purchaser shall not be entitled to a
diminution of the Purchase Price to the extent the insurance proceeds from such
Casualty are less than the fair market value of the Purchased Assets subject to
the Casualty.
(b) If any authority having the right of eminent domain shall
commence negotiations or shall commence legal action for the damaging, taking or
acquiring of any of the Purchased Assets, either temporarily or permanently, by
condemnation or by exercise of the right of eminent domain ("Condemnation"),
Seller shall promptly give notice of the same to Purchaser. Purchaser shall have
the right to terminate this Agreement by giving notice thereof to Seller within
15 days after receipt of Seller's notice under this Section 6.5(b). If Purchaser
terminates this Agreement pursuant to this Section, this Agreement shall become
null and void, and Seller and Purchaser shall thereupon have no further
liabilities or obligations under this Agreement. If Purchaser does not so
terminate this Agreement pursuant to this Section 6.5(b), Purchaser shall be
entitled to the benefits of all awards, claims, settlement proceeds and other
proceeds payable by reason of any such Condemnation, and Seller shall assign to
Purchaser (without recourse or warranty) all awards, claims, settlement
proceeds, or other proceeds payable by reason of any such Condemnation. In the
event of any negotiations with respect to any Purchased Asset with any authority
regarding settlement on account of damaging, taking or acquiring in lieu of
condemnation or eminent domain, Seller will inform Purchaser of all such
negotiations, will permit Purchaser to take part therein, and will not enter
into any settlements thereof without Purchaser's prior written consent.
Purchaser shall not be entitled to a diminution of the Purchase Price to the
extent the proceeds from such Condemnation are less than the fair market value
of the Purchased Assets subject to the Condemnation.
29
<PAGE>
Section 6.6. Conduct of Business Prior to the Closing. Between the date of
----------- ----------------------------------------
this Agreement and the Closing, with respect to the Business and except as
provided in Schedule 6.6:
------------
(a) Seller shall conduct its business, operations, activities and
practices (including, without limitation, its maintenance and management of
Cash) in the usual and ordinary course, consistent with its past practices;
(b) Seller shall not take or suffer or permit any action which
would render untrue any of the representations or warranties of Seller herein
contained, and Seller shall not omit to take any action the omission of which
would render untrue any such representation and warranty;
(c) Seller shall use reasonable efforts to preserve its business
organization intact, keep available to itself and to Purchaser the present
services of its employees (subject to paragraph (d) hereof); preserve for itself
and Purchaser the goodwill of Seller's suppliers and customers and others with
whom business relationships pertaining to the Business exist; maintain its
tangible property pertaining to the Business in the same condition as it now
exists, ordinary wear and tear excepted; maintain all insurance policies in
force at the date hereof in full force and effect; and maintain in full force
and effect all agreements, licenses, permits, authorizations and approvals
necessary for the operation of the Business;
(d) Seller shall not grant or otherwise make, or agree to grant
or otherwise agree to make, any increase in the compensation payable or to
become payable by it to any employees of the Business.
(e) Seller shall not sell or dispose of any of its assets used in
the operation of the Business (otherwise than in the ordinary course of business
consistent with past practice);
(f) Seller shall not make any capital expenditures in excess of
$50,000 in any single instance.
(g) Seller shall not make any distributions to its shareholders;
(h) Seller shall not enter into any agreement not in the ordinary
course of business; and
(i) Seller shall not cancel, waive or modify any claims or rights
owned by or running in favor of it outside the ordinary course of business,
which claims or rights will be transferred to Purchaser.
Section 6.7. Notice to Purchaser. Seller covenants and agrees to provide
----------- -------------------
Purchaser with immediate notice of any occurrence which could adversely affect
the Condition.
30
<PAGE>
Section 6.8. Consents; Further Assurances. Consistent with the terms and
----------- ----------------------------
conditions hereof, each party hereto will use its best efforts to execute and
deliver such other documents and take such other actions as reasonably requested
by the other party to fulfill the conditions precedent to the obligation of the
other party to consummate the purchase and sale of the Purchased Assets and
assumption of the Assumed Liabilities, or as the other party hereto may
reasonably request in order to carry out this Agreement and the transactions
contemplated hereby. Purchaser and Seller shall use their best efforts and will
cooperate with each other to the extent reasonably necessary to obtain all
Permits, consents, approvals and waivers, if any, from third parties required to
consummate the transactions contemplated hereby or which, if not obtained, would
materially adversely affect the Condition or the operation of the Purchased
Assets.
Section 6.9. Insurance. Prior to the Closing Seller shall obtain an
----------- ---------
insurance policy containing environmental risk coverage naming Purchaser as
beneficiary. Such policy shall provide at least $3 million of coverage, have a
term of at least five (5) years and otherwise be in a form reasonably
satisfactory to Purchaser. Purchaser acknowledges that the form of policy
previously delivered by Seller is satisfactory. Seller shall pay the cost of
such insurance policy. Seller may, at its option and at its expense, obtain its
own insurance policy.
ARTICLE VII
CONDITIONS TO THE OBLIGATION OF PURCHASER
-------------------------------------------
The obligation of Purchaser to proceed with the Closing under this
Agreement is subject to the satisfaction, on or prior to the Closing, of each of
the following conditions, each of which may be waived by Purchaser:
Section 7.1. Representations and Warranties True. The representations and
----------- ----------------------------------
warranties of Seller contained in this Agreement and the information contained
in the Schedules to this Agreement and any closing documents delivered by Seller
in connection with this Agreement shall have been true and correct in all
respects when made and shall be true and correct in all respects at the Closing
Date as though made at such time, and Seller shall have delivered to Purchaser a
certificate to that effect signed by its President.
Section 7.2. Performance of Obligations. The obligations of Seller to be
----------- --------------------------
performed by it on or before the Closing pursuant to the terms of this Agreement
shall have been duly performed and complied with in all respects and, at the
Closing, Seller shall have delivered to Purchaser a certificate to that effect
signed by its President.
Section 7.3. Consents and Permits. All Permits, consents, approvals and
----------- --------------------
waivers from third parties (including, without limitation, lenders) and
government agencies required to consummate the transactions contemplated hereby,
as specified on Schedules 4.4 and 4.10 hereof, shall have been obtained by or
-------------
transferred to Purchaser or its Affiliate.
31
<PAGE>
Section 7.4. No Material Change. There shall be no actual material adverse
----------- ------------------
change to the Condition, the Business or the Purchased Assets since subsequent
to the Preliminary Balance Sheet Date.
Section 7.5. Absence of Litigation. Except as set forth in Schedule 4.14,
----------- --------------------- -------------
there shall not be any litigation or proceeding, pending or threatened
(including, without limitation, any litigation or proceeding arising under
antitrust or securities laws), to restrain or invalidate the sale and purchase
of the Purchased Assets or the other transactions contemplated herein, and no
material action or proceeding shall be pending or, to the best of Seller's
knowledge, threatened against Seller or the Purchased Assets, at law or in
equity, before any federal or state court or governmental commission or in
arbitration or by or before any administrative agency, which action or
proceeding would adversely affect the Condition, nor shall any judgments,
consents, injunctions or any other judicial or administrative mandates be
outstanding against Seller which would adversely affect the Condition.
Section 7.6. Certified Resolutions. Purchaser shall have received a
----------- ---------------------
certified copy of the resolutions of the Board of Directors and of the
shareholders of Seller authorizing and approving the execution and delivery of
this Agreement and the Seller Documents and the consummation of the transactions
contemplated herein and therein.
Section 7.7. Certificate of Good Standing; Tax Lien Certificate. Purchaser
----------- --------------------------------------------------
shall have received a good standing certificate of Seller dated not more than
ten days prior to the Closing Date from the Secretary of State of the State of
California. Purchaser shall have received a tax clearance certificate dated not
more than 30 days prior to the Closing Date from the applicable officials of
the State of California evidencing that Seller has no outstanding liability for
delinquent taxes.
Section 7.8. Execution of Noncompetition Agreement
----------- -------------------------------------
(a) Seller shall have executed and delivered this Agreement and the
Seller Documents.
(b) Each of Seller's shareholders shall have executed and delivered an
Agreement and Covenant Not to Compete, substantially in the form attached hereto
as Exhibit B.
---------
Section 7.9. Absence of Liabilities. On the Closing Date, there shall be
----------- ----------------------
no Liabilities relating to or respecting the Business or the Purchased Assets,
except for Assumed Liabilities, except for such other liabilities as are
disclosed by this Agreement or any Schedule hereto and except for such
contractual obligations as may arise on and after the Closing Date under the
agreements listed on Schedule 4.16, as evidenced by a certificate to such effect
-------------
signed by the President of Seller and containing such supporting documentation
as Purchaser shall request.
Section 7.10. Completion of Environmental Remediation. Purchaser shall be
------------ ---------------------------------------
satisfied that all 1, 1, 1-trichloroethane owned by Seller is stored with
persons possessing all permits required for the storage of such 1, 1, 1-
trichloroethane.
32
<PAGE>
Section 7.11. Delivery of Specified Documents. Seller shall have delivered
------------ -------------------------------
to Purchaser all of the documents and instruments specified in Section 3.2
hereof on or prior to the Closing Date.
Section 7.12. Employment Agreements. Purchaser shall have entered into the
------------ ---------------------
Employment Agreements with each of the employees listed on Schedule 2.5 to
------------
receive new Employment Agreements.
Section 7.13. Landlord Consent. The Landlord shall have consented to the
----------- ----------------
assignment of the Lease and confirmed that Seller is not in default under the
Lease.
ARTICLE VIII
CONDITIONS TO THE OBLIGATION OF SELLER
--------------------------------------
The obligation of Seller to proceed with the Closing under this Agreement
is subject to the satisfaction, on or prior to the Closing, of each of the
following conditions, each of which may be waived by Seller:
Section 8.1. Representations and Warranties True. The representations and
----------- ----------------------------------
warranties of Purchaser contained in this Agreement and the information in the
Schedules to this Agreement and any closing documents delivered by Purchaser in
connection with this Agreement shall have been true and correct in all respects
when made and shall be true and correct in all respects at the Closing Date
as though made at such time and, at the Closing, Purchaser shall have delivered
to Seller a certificate to that effect signed by its President.
Section 8.2. Performance of Obligations. Each of the obligations of
----------- --------------------------
Purchaser to be performed by it on or before the Closing pursuant to the terms
of this Agreement shall have been duly performed and complied with in all
respects and, at the Closing, Purchaser shall have delivered to Seller a
certificate to that effect signed by its President or another authorized
officer.
Section 8.3. Certified Resolutions. Purchaser shall have received a
----------- ---------------------
certified copy of the resolutions of the Board of Directors of Seller
authorizing and approving the execution and delivery of this Agreement and the
Seller Documents and the consummation of the transactions contemplated herein
and therein.
Section 8.4. Absence of Litigation. There shall not be any litigation or
----------- ---------------------
proceeding, pending or threatened (including, without limitation, any litigation
of proceeding arising under antitrust or securities laws), to restrain or
invalidate the sale and purchase of the Purchased Assets or the other
transactions contemplated herein which would, in the judgment of Seller, made in
good faith, involve expense or lapse of time that would be materially adverse to
the interests of Seller.
33
<PAGE>
Section 8.5. Execution of Certain Agreements. Purchaser shall have
----------- -------------------------------
executed and delivered this Agreement and PTM shall have executed and delivered
the Bill of Sale and Assumption and the Employment Agreements.
Section 8.6. Landlord Consent. Landlord shall have consented to the
----------- ----------------
assignment of the Lease and confirmed that Seller is not in default under the
Lease.
Section 8.7. Employment Agreements. Purchaser shall have entered into the
----------- ---------------------
Employment Agreements with each of the employees listed on Schedule 2.5 to
------------
receive new Employment Agreements.
ARTICLE IX
POST-CLOSING COVENANTS OF SELLER
--------------------------------
Section 9.1. Books and Records of Seller. Following the Closing, Seller
----------- ---------------------------
agrees to permit Purchaser and its representatives to inspect the books and
records of Seller not included in the Purchased Assets insofar as they relate to
the Purchased Assets during regular hours and at no expense to Seller in order
for Purchaser and such representatives to obtain information relevant to the
Closing Date Balance Sheet and to Purchaser's tax returns, third party claims or
litigation involving Purchaser, or as otherwise reasonably required for the
conduct of Purchaser's business. Seller agrees to maintain such books and
records insofar as they relate to the Purchased Assets for a period of three
years after the Closing Date.
Section 9.2. Payment of Seller's Liabilities. Following the Closing,
----------- -------------------------------
Seller shall pay, perform and discharge as they become due, and in accordance
with their respective terms and conditions, all Liabilities other than any
Assumed Liabilities and other than any performance obligations of Seller under
the agreements listed on Schedule 2.3 hereof expressly assumed by Purchaser to
------------
the extent provided in Section 2.3 hereof.
Section 9.3. Covenant Not to Compete.
----------- -----------------------
(a) Seller will not, for a period of five years following the
Closing Date (the "Restricted Period"), compete, directly or indirectly, with
Purchaser in any business that creates titles, or optical, digital or other
effects, in the entertainment industry. The foregoing prohibition against
competition shall apply to any area within the Southern California region and,
in addition, to any area within a circle having a radius of one hundred
(100) miles surrounding San Francisco, California, or any location from which
Seller has, prior to the Restricted Period, maintained an office, manufacturing
or assembly plant, warehouse or otherwise engaged in business or any location at
which Seller has planned, prior to the Restricted Period, to open a
manufacturing or assembly plant, warehouse or other place of business, but only
if such office, manufacturing or assembly plant, warehouse or other place of
business was planned to be related to the business of creating titles and
effects in the entertainment industry.
34
<PAGE>
(b) Seller shall be deemed to be competing as described in
paragraph (a) hereof if Seller shall engage, directly or indirectly, in any of
the business covered thereby, whether for its own account or that of any other
person, firm, corporation, partnership or other business entity, and whether its
participation shall be as a stockholder, general or limited partner, or investor
possessing an ownership interest exceeding one percent (1%) in any such entity,
or as a principal agent, lender or in any other capacity.
(c) During the Restricted Period, Seller shall not, directly or
indirectly: (1) solicit, divert, take away or induce customers (wherever
located) of Purchaser to avail themselves of the services or products of others
which are competitive with any of Purchaser's services or products or (2)
solicit, employ or in any other fashion hire any employee of Purchaser unless
such person shall have been discharged by Purchaser, or otherwise induce any
employee of Purchaser to leave the employ of Purchaser.
Seller expressly acknowledges that damages alone will be an
inadequate remedy for any breach or violation of any of the provisions of this
Section 9.3, and that Purchaser, in addition to all other remedies available at
law or hereunder, shall be entitled, as a matter of right, to injunctive relief,
including specific performance, with respect to any such breach or violation, in
any court of competent jurisdiction. If any of the provisions of this Section
9.3 are held to be in any respect an unreasonable restriction upon Seller, then
they shall be deemed to extend only over the maximum period of time, geographic
area or range of activities as to which they may be enforceable. In the event
that Seller shall be in violation of the restrictive covenants in this Section
9.3, then the Restricted Period shall be extended for a period of time equal to
the period of time during which such breach shall occur; and, in the event that
Purchaser should be required to seek relief from such breach in any court, board
of arbitration or other tribunal, then the Restricted Period shall be extended
for the period of time required for the pendency of such proceedings, including
all appeals.
Section 9.4. Confidential Information. Unless otherwise agreed to in
----------- ------------------------
writing by Purchaser or as otherwise required by law, Seller agrees for itself,
its agents and employees to keep confidential and not to disclose, reveal or use
for a period of five (5) years from and after the Closing Date, any Confidential
Information, as such term is defined pursuant to that certain Nondisclosure
Agreement dated as of March 13, 1997 by and between Seller and Safeguard,
respecting Purchaser or the Business.
Section 9.5. Further Assurances. Seller shall cooperate with Purchaser
----------- -----------------
(and its designee) as may reasonably be required to assure the transfer of the
Purchased Assets to Purchaser (or its designee) including, without limitation,
assisting Purchaser (or its designee) to obtain such consents to assignment or
transfer not obtained prior to the Closing Date and waived by Purchaser in
connection with the Closing.
Section 9.6. Sales and Use Tax. During the 12-month period from and after
----------- -----------------
the Closing Date, Seller shall make no more than one sale of "tangible personal
property" within the meaning of the California Code.
35
<PAGE>
ARTICLE X
POST-CLOSING COVENANTS OF PURCHASER
-----------------------------------
Section 10.1. Books and Records of Purchaser. Following the
----------- ------------------------------
Closing, Purchaser agrees to permit Seller and its representatives to inspect
the books and records of Purchaser included in the Purchased Assets during
regular business hours and at no expense to Purchaser in order for Seller and
such representatives to obtain information relevant to the Closing Date Balance
Sheet and to Seller's tax returns, third party claims or litigation involving
Seller, or as otherwise reasonably required for the conduct of Seller's
business. Purchaser agrees to maintain such books and records insofar as they
relate to the Purchased Assets for a period of five years after the Closing
Date.
Section 10.2. Confidential Information. Unless otherwise agreed to in
------------ ------------------------
writing by Seller or as otherwise required by law, Purchaser agrees for itself,
its agents and employees to keep confidential and not to disclose, reveal or use
for a period of five (5) years from and after the Closing Date, any Confidential
Information, as such term is defined pursuant to that certain Nondisclosure
Agreement dated as of March 13, 1997 by and between Seller and Safeguard,
respecting Seller (except such Confidential Information pertaining to the
Business as may have been purchased by Purchaser pursuant to this Agreement and
that Purchaser elects to disclose).
Section 10.3. Payment of Assumed Liabilities. Following the Closing,
------------ ------------------------------
Purchaser shall pay, perform and discharge all Assumed Liabilities as they
become due and in accordance with their terms and conditions.
Section 10.4 Access to Accounting Systems and Human Resources. Following
------------ ------------------------------------------------
the Closing Purchaser shall make available to Seller, at mutually agreeable
times and for mutually agreeable compensation, Craig Dotson and other accounting
and human resources personnel.
Section 10.5. Lease. No later than January 11, 1998, Purchaser shall
------------ -----
either (i) have caused the Landlord to release Seller from all liability under
the Lease, or (ii) exercised the right to terminate the Lease as provided
therein and paid the termination fee set forth in the Lease. Within three
(3) business days of the date Purchaser demonstrates its compliance with either
clause (i) or (ii) Seller shall pay Purchaser $l00,000.
Section 10.6. Further Assurances. Purchaser shall cooperate with Seller
------------ ------------------
(and its designee) as may reasonably be required to assure the assumption by
Purchaser of the Assumed Liabilities as provided herein or in the Bill of Sale
and Assumption Agreement.
36
<PAGE>
ARTICLE XI
INDEMNIFICATION; EXPENSES
-------------------------
Section 11.1. General Indemnification.
------------ -----------------------
(a) Seller hereby agrees to (i) indemnify, defend and hold
harmless PTM, Safeguard and Mirage (and any assignee) and each of its directors,
officers, employees and agents from and against any and all losses, damages,
liabilities, costs and claims arising out of, based upon or resulting from (A)
any inaccuracy of any representation or warranty of Seller which is contained in
or made pursuant to this Agreement, (B) any breach by Seller of any of its
agreements or obligations contained in or made pursuant to this Agreement, and
(C) any liability of Seller that is not assumed by Purchaser as provided by this
Agreement; and (ii) reimburse PTM, Safeguard and Mirage (and any assignee) and
each of its directors, officers, employees, and agents for any and all fees,
costs and expenses of any kind related thereto (including, without limitation,
any and all Legal Expenses). As used in this Section 11.1, "Legal Expenses" of a
person shall mean any and all reasonable out-of-pocket fees, costs and expenses
of any kind incurred by such person and its counsel in investigating, preparing
for, defending against or providing evidence, producing documents or taking
other action with respect to any threatened or asserted claim.
(b) Purchaser hereby agrees to (i) indemnify, defend and hold
harmless Seller and each of its directors, officers, employees, affiliates,
agents and shareholders from and against any and all losses, damages,
liabilities, costs and claims arising out of, based upon or resulting from (A)
any inaccuracy of any representation or warranty of Purchaser which is contained
in or made pursuant to this Agreement, (B) any breach by Purchaser of any of its
agreements or obligations contained in or made pursuant to this Agreement, and
(C) any liability of Seller which Purchaser assumes as provided by this
Agreement; and (ii) reimburse Seller and each of its directors, officers,
employees, affiliates and agents for any and all fees, costs and expenses of
any kind related thereto (including, without limitation, any and all Legal
Expenses).
(c) Promptly after receipt by any person entitled to indemnification
under this Section 11.1 (an "indemnified party") of notice of the threat of the
commencement or the commencement of any action in respect of which the
indemnified party will seek indemnification hereunder, the indemnified party
shall so notify in writing the person(s) from whom indemnification hereunder is
sought (collectively, the "indemnifying party"), but any failure so to notify
the indemnifying party shall not relieve any such indemnifying party from any
liability that it may have to the indemnified party under this Section 11.1
except to the extent that the indemnifying party's ability to defend such claim
is materially prejudiced by the failure to give such notice. The indemnifying
party shall be entitled to participate in the defense of such action and to
assume control of such defense; provided, however, that:
-------- -------
(i) the indemnified party shall be entitled to participate
in (but not control) the defense of such claim and to employ counsel at its own
expense to assist in the handling of such claim;
37
<PAGE>
(ii) the indemnifying party shall obtain the prior written
approval of the indemnified party before entering into any settlement of such
claim or ceasing to defend against such claim, which approval shall not be
unreasonably withheld or delayed except that it shall not be unreasonable to
withhold or delay approval if, pursuant to or as a result of such settlement or
cessation, injunctive or other equitable relief would be imposed against the
indemnified party;
(iii) the indemnifying party shall not consent to the entry
of any judgement or enter into any settlement that does not include as an
unconditional term thereof the giving by the claimant or plaintiff to each
indemnified party of a release from liability in respect of such claim; and
(iv) the indemnifying party shall not consent to the entry
of any judgment or enter into any settlement of any claim to the extent the
claim seeks an order, injunction or other equitable relief against the
indemnified party without the written consent of the indemnified party which may
be withheld in the sole discretion of the indemnified party.
(d) At any time, the indemnified party may assume control of the
defense of any such action by written notice to the indemnifying party. After
such written notice by the indemnifying party to the indemnified party of its
election to assume control, the indemnifying party shall have no further
liability to the indemnified party pursuant to this Section 11.1.
(e) If the indemnifying party does not assume control of the
defense of such claims as provided in this Section 11.1, the indemnified party
shall have the right to defend such claim in any manner as it may deem
appropriate at the cost and expense of the indemnifying party, and the
indemnifying party will promptly reimburse the indemnified party thereof in
accordance with this Section 11.1. The reimbursement of fees, costs and expenses
required by this Section 11.1 shall be made by periodic payments during the
course of the investigation or defense, as and when bills are received or
expenses incurred.
(f) Subject to Section 11.1(g), any other provision hereof to the
contrary notwithstanding, the parties agree that the representations and
warranties of the parties contained in this Agreement and in any certificates
delivered pursuant to this Agreement shall survive for a period of twenty-four
months after the Closing Date, regardless of any investigation made by either
party prior to the date hereof or prior to the Closing Date but subject to the
applicable provisions of Section 6.1(b). Purchaser and Seller shall only be
entitled to indemnification under Section 11.1(a)(i)(A) or 11.1(b)(i)(A) if a
written notice describing the claim for which indemnification is sought is
signed by the President or any Vice President of Purchaser or Seller, as the
case may be, and is submitted to Seller or Purchaser, as the case may be, not
later than twenty-four months following the Closing Date. Any claim for
indemnification pursuant to, Section 11.1(a)(i)(A) or Section 11.1(b)(i)(A) not
made prior to the expiration of such twenty-four month period shall expire
automatically without notice or demand and shall be of no further force and
effect.
(g) Notwithstanding the foregoing, representations and
warranties, concerning:
38
<PAGE>
(i) tax matters shall survive until, and Purchaser or
Seller, as the case may be, shall be entitled to indemnification if written
notice is submitted prior to, expiration of the applicable statute of
limitations for such claim; and
(ii) representations and warranties concerning
environmental matters shall survive for a period of five years from the Closing
Date, and Purchaser shall be entitled to indemnification if written notice is
submitted prior to the end of such five-year period.
(h) Notwithstanding any provisions herein to the contrary:
(i) neither party shall be liable to the other party for
any misrepresentation, breach of any warranty or failure to fulfill any covenant
or agreement herein if such other party shall have had actual knowledge of the
facts upon which such misrepresentation, breach or failure is based at or prior
to the Closing Date;
(ii) the liability of either party computed otherwise in
accordance with this Article XI shall be limited to the after-tax consequence to
the indemnified party (or the affiliated group of which such indemnified party
is a member) of any such damage, loss, liability, deficiency cost or expense
suffered or incurred by such indemnified party;
(iii) neither party shall have any liability to the other
party for misrepresentation, breach of warranty or failure to fulfill any
covenant or agreement to be performed at or prior to the Closing Date except
pursuant to this Article XI; and
(iv) neither party shall have any liability to the extent
such liability is covered by insurance of the other party; and
(v) there shall be no liability of either party to the
other party unless claims in excess of $50,000 calculated separately for Seller
and Purchaser, in the aggregate, of either party against the other party shall
have arisen, in which event the liability shall exclude the first $50,000 in
claims.
ARTICLE XII
TERMINATION; SURVIVAL; EXPENSES
-------------------------------
Section 12.1. Termination. This Agreement may be terminated prior to the
----------- -----------
Closing as follows:
(a) at the election of Purchaser, if any one or more of the
conditions set forth in Article VII to its obligation to proceed with the
Closing has not been fulfilled on or prior to the Closing Date;
39
<PAGE>
(b) at the election of Seller, if any one or more of the
conditions set forth in Article VIII to its obligation to proceed with the
Closing has not been fulfilled on or prior to the Closing Date;
(c) at the election of Purchaser, (i) if Seller has breached, or
Purchaser reasonably believes that Seller has breached, any representation,
warranty, covenant or agreement contained in this Agreement, which breach cannot
be or is not cured by the Closing Date or (ii) as provided in Sections 6.1, 6.3,
6.4 or 6.5 hereof;
(d) at the election of Seller, (i) if Purchaser has breached, or
Seller reasonably believes that Purchaser has breached, any representation,
warranty, covenant or agreement contained in this Agreement, which breach cannot
be or is not cured by the Closing Date or (ii) as provided in Section 6.1, 6.3,
6.4 or 6.5 hereof;
(e) at the election of Purchaser or Seller, if any legal
proceeding is commenced or threatened by any governmental or regulatory body or
other person (other than Purchaser or Seller) directed against the consummation
of the Closing and either Purchaser or Seller, as the case may be, reasonably
and in good faith deems it impractical or inadvisable to proceed in view of such
legal proceeding or threat thereof, taking into account the potential expense
and delay likely to be involved;
(f) at any time on or prior to the Closing Date, by mutual
written consent of Purchaser and Seller; or
(g) at the election of Purchaser or Seller, if the Closing has
not occurred on or prior to October 31, 1997; provided that a party may not
terminate this Agreement if such party's failure to perform its obligations has
directly or indirectly caused the Closing not to have occurred.
Section 12.2. Survival.
------------ --------
(a) Except as set forth in this Section 12.2, if this Agreement
is validly terminated pursuant to Section 12.1 and the transactions contemplated
hereby are not consummated as described above, this Agreement shall become void
and be of no further force and effect and with respect to this Agreement no
party hereto shall have any liability to any other party hereto.
(b) Notwithstanding Section 12.2(a), if Purchaser terminates this
Agreement because any of the conditions contained in Sections 7.1 or 7.2 have
not been satisfied or if Seller terminates this Agreement because any of the
conditions contained in Sections 8.1 or 8.2 have not been satisfied then the
terminating party shall have the right to pursue all of its legal remedies for
breach of contract and damages; provided, that if the Agreement is terminated
--------
after compliance with the provisions of Section 6.1(b) hereof, no party shall be
liable to the other party upon such termination.
40
<PAGE>
(c) Notwithstanding Section 12.2(a), if this Agreement is validly
terminated pursuant to Section 12.1 and the transactions contemplated hereby are
not consummated as described above, the provisions of Section 6.2 relating to
the obligation of Purchaser to keep confidential and not to use certain
information obtained by it from Seller and to return documents and copies
thereof to Seller and the provisions of Section 12.3 relating to responsibility
for expenses shall survive.
Section 12.3. Expenses if No Closing. If the Closing does not occur and
------------ ----------------------
the transactions contemplated hereby are not consummated, then, subject to the
right of a non-defaulting party to recover damages, costs and expenses from a
defaulting party pursuant to Section 12.2 and except as provided in Section 3.3,
all costs and expenses incurred in connection with this Agreement shall be paid
by the person incurring such expenses; i.e., by Purchaser if incurred by
Purchaser and by Seller if incurred by Seller.
ARTICLE XIII
GENERAL
-------
Section 13.1. No Tax Representations. Seller and Purchaser agree that no
------------ ----------------------
representation or warranty has been made by them as to the tax consequences of
the transactions contemplated by this Agreement or the results of the allocation
of the amount of; or the consideration comprising, the Purchase Price, that each
is engaging separate counsel with respect to such tax consequences, and that
each is assuming its own respective tax liability, if any, arising out of this
Agreement or the consummation of the transactions contemplated hereunder.
Section 13.2. Regarding the Representations and Warranties.
------------ --------------------------------------------
(a) Independence. Each of the representations and warranties made
------------
by Seller in Article IV is independent of the other representations and
warranties made therein, and each of the representations and warranties made by
Purchaser in Article V is independent of the other representations and
warranties made therein.
(b) Knowledge Qualification. Whenever a representation or
-----------------------
warranty is made herein based on the knowledge of Seller or Purchaser (as the
case may be), such representation or warranty is made based on the actual
knowledge of Seller or Purchaser (as the case may be) including any officer,
director or responsible employee thereof, and on the knowledge which Seller or
Purchaser (as the case may be) would have had if it had conducted a diligent
inquiry into the subject matter of the representation or warranty.
Section 13.3. Binding Effect and Assignment. This Agreement shall be
------------ -----------------------------
binding upon and inure to the benefit of and be enforceable by each of the
parties and their respective successors and assigns. This Agreement may not be
assigned by either party without the prior written consent of the other party.
41
<PAGE>
Section 13.4. Waiver. Any term or provision of this Agreement may be
------------ ------
waived at any time by the party entitled to the benefit thereof by a written
instrument duly executed by such party.
Section 13.5. Dispute Resolution.
------------ ------------------
(a) Good-Faith Negotiations. If any dispute arises under this
-----------------------
Agreement, the Seller Documents or any other agreement executed in connection
herewith, or with respect to the breach, termination or validity hereof or
thereof, including the arbitrability of any such dispute (a "Dispute") that is
not settled promptly in the ordinary course of business, the parties shall seek
to resolve any such Dispute between them, first, by negotiating promptly with
each other in good faith in face-to-face negotiations. These face-to-face
negotiations shall be conducted by the respective designated senior management
representative of each party. If the parties are unable to resolve the Dispute
between them through these face-to-face negotiations, within 20 business days
(or such period as the parties shall otherwise agree) following the date of
notification (the "Notice Date") by one party to the other(s) of the existence
of such dispute, then any such disputes shall be resolved in the following
manner.
(b) Mediation. The parties shall endeavor to resolve any Dispute
---------
by mediation under the procedures established by the Judicial Arbitration and
Mediation Service ("JAMS").
(c) Resolution of Disputes.
----------------------
(i) Any Dispute which has not been resolved by mediation
as provided herein within 45 days of the Notice Date, shall be settled by
the appointment of an arbitrator, who shall be a retired judge of the Superior
Court of Los Angeles, or of the U. S. District Court, in accordance with the
procedures of the JAMS and otherwise strictly in accordance with the terms of
this Agreement and the substantive law of the State of California including law
in respect of any statute of limitations. The arbitration shall be conducted in
Los Angeles, California at a location designated by the arbitrator. The
arbitrator is not empowered to award damages in excess of compensating damages
and each party hereby irrevocably waives any right to recover such damages with
respect to any such dispute. The prevailing party shall be entitled to the costs
of arbitration, including attorney's fees. Judgment upon the arbitrators' award
may be entered and enforced in any court of competent jurisdiction.
(ii) Neither party shall be precluded hereby from securing
equitable remedies in courts of any jurisdiction, including, but not limited to,
temporary restraining orders and preliminary injunctions to protect its rights
and interests but shall not be sought as a means to avoid or stay arbitration of
a Dispute.
(iii) Each party is required to continue to perform its
obligations under this contract pending final resolution of any dispute arising
out of or relating to this contract, unless to do so would be impossible or
impracticable under the circumstances.
42
<PAGE>
Section 13.6 Notices. All notices, requests, demands, waivers, consents,
------------ -------
approvals, or other communications which are required or permitted hereunder
shall be in writing and shall be deemed given if delivered personally, sent by
reputable overnight courier service (such as Federal Express), sent by
telecopier with the original sent by first class U. S. mail, or sent by
registered or certified mail, return receipt requested, postage prepaid, to the
addresses set forth below:
If to Purchaser, to:
Safeguard Scientifics, Inc.
435 Devon Park Drive
Wayne, PA 19087
Attention: Steven J. Rosard
Vice President and Senior Corporate Counsel
Phone: (610) 293-0600
Fax: (610) 293-0601
And to:
Mirage Technologies, Limited Partnership
199 Wells Avenue, Suite 104
Newton, MA 02159
Attention: Ivan Gulas or Michael Rosenblatt
Phone: (617) 964-2900
Fax: (617) 964-9175
With a copy to:
Christensen, Miller, Fink, Jacobs, Glaser,
Weil & Shapiro, LLP
2121 Avenue of the Stars, 18th Floor
Los Angeles, CA 90067
Attention: Peter J. Weil, Esq.
Phone: (310) 553-3000
Fax: (310) 556-2920
And to:
Sherburne, Powers & Needham
One Beacon Street
Boston, MA 02108
Attention: Richard J. Hindlian, Esq.
Telephone: (617) 523-2700
Fax: (617) 523-6850
43
<PAGE>
If to Seller:
Pacific Title and Art Studio, Inc.
6350 Santa Monica Boulevard
Hollywood, CA
Attention: Peter Hubbard, President
Phone: (213) 464-0121
Fax: (213) 463-5835
With a copy to:
Loeb & Loeb, LLP
1000 Wilshire Boulevard, Suite 1800
Los Angeles, CA 90017
Attention: Harold Barza, Esq.
Phone: (213) 688-3400
Fax (213) 688-3460
or to such other address or telecopier number as the party entitled to receive
such notice may, from time to time, specify in writing to the other party.
Section 13.7. Use of Name. Seller shall change its corporate name, Pacific
------------ -----------
Title and Art Studio, Inc., promptly after the Closing Date to one that is
distinctly different in sound and appearance from its present name; provided,
--------
however, that Seller shall be entitled to conduct the business of the archive
- -------
division under the name "Pacific Title Archives," including, without limiting
the generality of the foregoing, use of such name on its letterhead,
advertising, and on all other materials related to the archive division. Neither
Seller nor any of its Affiliates will use the name Pacific Title and Art Studio,
Inc., except as expressly described in the above proviso.
Section 13.8. Commissions. Each party shall be responsible for paying a11
------------ -----------
commissions and finder's fees which are required to be paid by it as a result of
the transactions contemplated by this Agreement.
Section 13.9. Governing Law. This Agreement shall be governed as to its
------------ -------------
validity, interpretation and effect by the laws of the State of California,
without regard to conflicts of laws principles. Each party (i) irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of California located in the County of Los Angeles and the courts
of the United States of America located in Los Angeles County, California (the
"California Courts"), for any litigation arising out of or relating to matters
not subject to Section 13.5, (ii) waives any objection to the laying of venue of
any such litigation in the California Courts and (iii) agrees not to plead or
claim in any California Court that such litigation brought therein has been
brought in an inconvenient forum.
44
<PAGE>
Section 13.10. No Third Party Beneficiaries. Notwithstanding anything
------------- ----------------------------
to the contrary contained herein, no provision of this Agreement is intended to
benefit any person other than the signatories hereto and the two wholly-owned
Subsidiaries of PTM, nor shall any such provision be enforceable by any other
person.
Section 13.11 Severability. Any provision of this Agreement which is
------------- ------------
invalid or unenforceable in any jurisdiction shall be ineffective to the extent
of such invalidity or unenforceability without invalidating or rendering
unenforceable the remaining provisions hereof, and any such invalidity or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
Section 13.12 Schedules. All Schedules referred to in this Agreement are
------------- ---------
intended to be and are specifically incorporated by reference herein.
Section 13.13 Section Headings. All section headings herein have been
------------- ----------------
inserted for convenience of reference only and shall in no way modify or
restrict any of the terms or provisions hereof.
Section 13.14 Contents of Agreement. This Agreement sets forth the entire
------------- ---------------------
understanding of the parties hereto with respect to the transaction contemplated
hereby and shall not be amended or terminated except by a written instrument
duly executed by each of the parties hereto. Any and all prior agreements,
including without limitations, the letter of intent dated June 4, 1997 or
contemporaneous agreements or understandings between the parties regarding the
subject matter hereof are superseded in their entirety by this Agreement.
Section 13.15 Counterparts. This Agreement may be executed in two or more
------------- ------------
fully executed counterparts, each of which shall be deemed an original, but all
of such counterparts together shall constitute but one and the same instrument.
Section 13.16 Public Announcements. The parties agree that there will be
------------- --------------------
no press release or other public statement issued by any party relating to this
Agreement or the transactions contemplated hereby unless required by law. If
Purchaser determines that it is required by law to file this Agreement with the
SEC, it shall at a reasonable time before making any such filing, consult with
Seller regarding such filing and seek confidential treatment for such portion of
the Agreement as may be requested by Seller.
45
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
PACIFIC TITLE AND ART STUDIO
By: /s/ Peter L. Hubbard
----------------------
Name: Peter L. Hubbard
----------------------
Title: President
----------------------
PACIFIC TITLE AND MIRAGE, INC.
By: /s/ Ivan Gulas
----------------------
Name: Ivan Gulas
----------------------
Title: President
----------------------
SAFEGUARD SCIENTIFICS, INC.
By: /s/ Warren B. Musser
----------------------
Name: Warren B. Musser
----------------------
Title: Chairman
----------------------
MIRAGE TECHNOLOGIES,
LIMITED PARTNERSHIP
By: Mirage Technologies, Inc., General Partner
By: /s/ Ivan Gulas
----------------------
Name: Ivan Gulas
----------------------
Title: Co-Chairman
----------------------
46
<PAGE>
SCHEDULE 2.1
------------
EXCLUDED ASSETS
In addition to the items listed 3s within the definition for
"Excluded Assets" in Section 1.1 of the Agreement, the following shall be
excluded from the Purchased Assets:
a. Seller's line of credit with California United Bank;
b. Israeli government bonds valued at approximately $11,000 held
by Seller;
C. Seller's one-third share in season passes to all events held at
the Great Western Forum (April 1997-April 1998); and
d. Seller's duplicate set of Accountmate Software purchased prior
to the. Closing from Sourcemate Information Systems, Inc. for
use by the Archives Division.
<PAGE>
BILL OF SALE AND
ASSUMPTION OF LIABILITIES
Pursuant to and in accordance with the Asset Purchase Agreement dated
October , 1997 (the "Agreement") by and among PACIFIC TITLE AND ART STUDIO, a
--
California corporation, ("Assignor") SAFEGUARD SCIENTIFICS, INC., a Pennsylvania
corporation ("Safeguard"), and MIRAGE TECHNOLOGIES, L.P., a Delaware limited
partnership ("Mirage," and collectively with Safeguard, "Purchaser") and for
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Assignor hereby assigns, transfers, grants, sets over and delivers
unto PACIFIC TITLE AND MIRAGE, INC., a Delaware corporation ("Assignee"), all
of Assignor's right, title, interest, power and privilege in and to the
following property (the "Purchased Assets") pertaining to the Business (as
defined in the Agreement). Capitalized terms used and not otherwise defined
herein shall have the meanings assigned to such terms in the Agreement.
All the assets relating to the Business, including without limitation
the Accounts Receivable, Cash in excess of principal and interest due on the
Notes (subject to adjustment as provided in the Agreement), Equipment,
Intellectual Property and Information, Inventory, Leasehold Improvements and
Fixtures, Prepaid Items, Real Property and Rights and Other Property, all as
existing on the Closing Date, but excluding the Excluded Assets.
Notwithstanding the assignment and conveyance made in the foregoing
paragraph, in the event that the assignment attempted to be made thereunder
requires the approval of any person, governmental authority or entity to be
effective, as specified in the Agreement or in any Schedule thereto, then such
asset shall be temporarily excluded from the aforesaid conveyance and
assignment; provided, however, that in such event, Assignor shall, to the
greatest extent permitted under applicable law, hold such asset for the
exclusive use and benefit of Assignee until such consent has been obtained; and
provided, further, that without consideration Assignor shall execute such other
documents and shall take such other actions as shall be reasonably necessary to
transfer the benefits of such asset to Assignee. Upon obtaining consent or upon
written notice to Assignor from Assignee so electing (notwithstanding the
absence of such consent) no further conveyance or assignment shall be required,
but such right, title and interest shall automatically and with no further
action or consideration therefor become fully and completely vested in Assignee
by virtue of this Bill of Sale and Assumption of Liabilities.
Assignee hereby accepts the foregoing assignments and assumes and agrees to
be responsible for the Assumed Liabilities (as defined in the Agreement). It is
understood and agreed that Assignee shall not assume, pay or be responsible for
any other obligation, duty, debt or liability of Assignor, including without
limitation the Excluded Liabilities.
1.
EXHIBIT A
<PAGE>
The representations, warranties and covenants made in the Agreement (a) by
Assignor with respect to the Purchased Assets conveyed hereby and (b) by
Purchaser with respect to the Assumed Liabilities assumed hereby, are in each
case hereby reaffirmed and restated as if set forth in full herein.
Assignor hereby binds Assignor, its successors and assigns to warrant and
defend the title to the Purchased Assets unto Assignee, its successors and
assigns, against every person whomsoever lawfully claiming or to claim such
Purchased Assets or any part thereof in violation of any representation or
warranty of Seller under the Agreement.
Nothing in this Bill of Sale and Assumption of Liabilities shall be deemed
to supersede or modify any of the obligations, agreements, covenants,
representations or warranties of Assignor or Purchaser contained in the
Agreement. If any conflict exists between the terms of this Bill of Sale and
Assumption of Liabilities and the Agreement, the terms of the Agreement
shall control.
This Bill of Sale and Assumption of Liabilities shall bind and inure to the
benefit of the parties hereto and their respective successors, legal
representatives and assigns. This Bill of Sale and Assumption of Liabilities is
effective as of 12:0l a.m. on October , 1997.
--
IN WITNESS WHEREOF, Assignor and Assignee have caused this Bill of Sale and
Assumption of Liabilities to be executed by their duly authorized
representatives.
Assignor: PACIFIC TITLE AND ART STUDIO
By: -------------------------
Name: -------------------------
Title:-------------------------
Assignee: PACIFIC TITLE AND MIRAGE, INC.
By: -------------------------
Name: -------------------------
Title:-------------------------
2.
<PAGE>
NON-COMPETITION AGREEMENT
This NON-COMPETITION AGREEMENT is entered into as of October , 1997,
--
by and between the undersigned individual shareholder ("Shareholder") of PACIFIC
TITLE AND ART STUDIO, a California corporation ("Seller"), and PACIFIC TITLE AND
MIRAGE, INC., a Delaware corporation ("Owner"), and is made with reference to
the following facts:
RECITALS
A. Reference is made to that certain Asset Purchase Agreement dated
October , 1997 (the "Purchase Agreement") entered into among Seller, Owner,
--
Safeguard Scientifics, Inc., a Pennsylvania corporation ("Safeguard"), and
Mirage Technologies, L.P., a Delaware limited partnership ("Mirage," and
collectively with "Safeguard" and "Owner," "Purchaser"). Capitalized terms used
and not otherwise defined herein have the meanings assigned to such terms in the
Purchase Agreement.
B. Pursuant to the Purchase Agreement, Seller agreed to sell and
Purchaser agree to purchase the Purchased Assets of the Business.
C. Concurrently with Closing of the Purchase Agreement, Purchaser,
assigned and conveyed the Purchased Assets to Owner, its subsidiary.
D. Pursuant to Section 7.8 of the Purchase Agreement, it is a
condition to Purchaser's obligations under the Purchase Agreement that
Shareholder enter into an agreement not to compete with the owners of the
Business.
NOW, THEREFORE, in consideration of the covenants contained in the
Purchase Agreement and herein, and the benefits to be obtained by Shareholder
as a result of the Purchase Agreement, the parties hereto agree as follows:
AGREEMENT
1. Shareholder agrees, individually, on behalf of Shareholder's spouse
and as trustee for any trusts as to which Shareholder acts as trustee, that for
a period (the "Non-Compete Term")of [five years] from and after the date hereof,
Shareholder will not own, acquire, or have any other financial interest, direct
or indirect (including financial interests held by Shareholder's spouse or by
trusts for which Shareholder acts as trustee) in any business that creates
titles, or optical, digital or other effects, in the entertainment industry
within the Non-Compete Area (as hereinafter defined). For purposes hereof, the
"Non-Compete Area" shall mean
1.
EXHIBIT B
<PAGE>
any area within the Southern California region and, in addition, to any area
within a circle having a radius of one hundred (100) miles surrounding San
Francisco, California, or any location from which Seller has, prior to the
Restricted Period, maintained an office, manufacturing or assembly plant,
warehouse or otherwise engaged in business or any location at which Seller has
planned, prior to the Restricted Period, to open a manufacturing or assembly
plant, warehouse or other place of business, but only if such office,
manufacturing or assembly plant, warehouse or other place of business was
planned to be related to the business of creating titles and effects in the
entertainment industry.
2. Except as provided in Section 4 hereof, Shareholder shall be
deemed to be competing as described in Section 1 hereof if, during the Non-
Compete Term, Shareholder shall engage, directly or indirectly, in any of the
businesses covered thereby, whether for its own account or that of any other
person, firm, corporation, partnership or other business entity, and whether its
participation shall be as a stockholder, general or limited partner, or investor
possessing an ownership interest exceeding one percent (1%) in any such entity,
or as a principal, agent, lender or in any other capacity.
3. Except as provided in Section 4 hereof, during the Non-Compete
Term, Shareholder shall not, directly or indirectly: (a)solicit,
divert, take away or induce customers (wherever located) of Owner to avail
themselves of the services or products of others which are competitive with any
of Owner's services or products or (b) solicit, employ or in any other fashion
hire any employee of Owner unless such person shall have been discharged by
Owner, or otherwise induce any employee of Owner to leave the employ of Owner.
4. Notwithstanding Section 2 and 3 hereof, any activity expressly
permitted pursuant to the terms of any employment or consulting agreement
between Shareholder and the Company or Shareholder's spouse and the Company, as
the case may be, shall be permitted under this Agreement during the term and
otherwise as provided in such employment or consulting agreement.
5. Shareholder expressly acknowledges that damages alone will be an
inadequate remedy for any breach or violation of any of the provisions hereof,
and that Owner, in addition to all other remedies available at law or hereunder,
shall be entitled, as a matter of right, to injunctive relief, including
specific performance, with respect to any such breach or violation, in any
court of competent jurisdiction. This provisions shall not construed as a waiver
of any other rights or remedies which Owner may have for damages or otherwise.
6. If any of the provisions of this agreement are held to be in any
respect an unreasonable restriction upon Shareholder, then they shall be deemed
to extend only over the maximum period of time, geographic area or range of
activities as to which they may be enforceable. In the event that Shareholder
shall be in violation of the restrictive covenants in this
2.
<PAGE>
agreement, then the Non-Compete Term shall be extended for a period of time
equal to the period of time during which such breach shall occur; and, in the
event that Owner should be required to seek relief from such breach in any
court, board of arbitration or other tribunal, then the Non-Compete Term shall
be extended for the period of time required for the pendency of such
proceedings, including all appeals.
7. Governing Law. This Agreement should governed as to its validity,
-------------
interpretation and effect by the laws of the State of California, with regard to
conflicts of laws principles. Each party (i) irrevocably and unconditionally
consents to submit to the exclusive jurisdiction of the courts of the State of
California located in the County of Los Angeles and the courts of the United
States of America located in Los Angeles, California (the "California Courts"),
for any litigation arising out of or relating to matters not subject to Section
10, (ii) waives any objection to the laying of venue of any such litigation in
the California courts, and (iii) agrees not to plead or claim in any California
Court that such litigation brought therein has been brought in an inconvenient
forum.
8. Counterpart Execution. This Agreement may be executed in
--------------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one agreement.
9. Binding Agreement: Assignment. This Agreement shall be binding
-----------------------------
upon and inure to the benefit of the parties hereto and their respective
permitted successor and assigns. This Agreement may not be assigned by either
party without the prior written consent of the other party; provided, however,
that this Agreement may be assigned by Owner to any majority owned subsidiary,
including without limitation, assignment of all of the rights and duties
relating to the Optical Business to Optical Sub and assignment of all of the
rights and duties relating to the Digital Business to Digital Sub.
10. Dispute Resolution.
------------------
(a) Good Faith Negotiations. If any dispute arises under this
-----------------------
Agreement (a "Dispute") that is not settled promptly in the ordinary course of
business, the parties shall seek to resolve any such dispute between them,
first, by negotiating promptly with each other in good faith in face-to-face
negotiations. These face-to-face negotiations shall be conducted by the
respective designated senior management representative of each party. If the
parties are unable to resolve the Dispute between them through these face-to-
face negotiations, within 20 business days (or such period as the parties shall
otherwise agree) following the date of notification (the "Notice Date") by one
party to the other(s) of the existence of such dispute, then any such disputes
shall be resolved in the following manner.
3.
<PAGE>
(b) Mediation. The parties shall endeavor to resolve any
---------
dispute arising out of or relating to this Agreement by mediation under the
procedures established by the Judicial Arbitration and Mediation Service
("JAMS").
(c) Resolution of Disputes.
----------------------
(i) Any Dispute which has not been resolved by
mediation as provided herein within 45 days of the Notice Date, shall be
settled by the appointment of an arbitrator, who shall be a retired judge of the
Superior Court of Los Angeles or of the U.S. District Court, in accordance
with the procedures of the JAMS and otherwise strictly in accordance with the
terms of this Agreement and the substantive law of the State of California
including law in respect of any statute of limitations. The arbitration shall
be conducted in Los Angeles, California at a location designated by the
arbitrator. The arbitrator is not empowered to award damages in excess of
compensating damages and each party hereby irrevocably waives any right to
recover such damages with respect to any Dispute. The prevailing party shall be
entitled to the costs of arbitration, including attorney's fees. Judgment upon
the arbitrators' award may be entered and enforced in any court of competent
jurisdiction.
(ii) Neither party shall be precluded hereby from
securing equitable remedies in courts of any jurisdiction, including, but not
limited to, temporary restraining orders and preliminary injunctions to protect
its rights and interests but shall not be sought as a means to avoid or stay
arbitration of a Dispute.
(iii) Each party is required to continue to perform
its obligations under this contract pending final resolution of any Dispute,
unless to do so would be impossible or impracticable under the circumstances.
4.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Non-
Competition Agreement as of the date first above written.
-----------------------------------
(Signature of Shareholder)
-----------------------------------
(Type or Print Shareholder's Name)
PACIFIC TITLE AND MIRAGE, INC.
By:_______________________________
Name:_____________________________
Title:____________________________
AGREED AND ACCEPTED:
____________________________
[Spouse Signature]
____________________________
[Print Name]
5.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
LifeF/X, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
(signed) KPMG LLP
Los Angeles, California
May 17, 2000
<PAGE>
EXHIBIT 23.2
BRANDEN T. BURNINGHAM
ATTORNEY AT LAW
455 EAST FIFTH SOUTH . SUITE 205
SALT LAKE CITY, UTAH 84111
TELEPHONE: (801)363-7411
FACSIMILE: (801)355-7126
ADMITTED IN UTAH AND CALIFORNIA
May 17, 2000
Lifef/x, Inc.
153 Needham Street, Building N1
Newton, Massachusetts 02164
Re: Lifef/x, Inc., a Nevada corporation (the "Company")
Ladies and Gentlemen:
I hereby consent to the filing of my opinion letter, dated April 11, 2000,
as an exhibit to Amendment No. 1 to the Company's Form SB-2 Registration
Statement, to be filed on or about May 17, 2000.
Sincerely yours,
/s/ Branden T. Burningham
Branden T. Burningham
<PAGE>
EXHIBIT 23.3
[Letterhead of Loeb & Loeb LLP]
May 17, 2000
Lifef/x, Inc.
153 Needham Street, Building No. 1
Newton, Massachussetts 02464
Re: Lifef/x, Inc., a Nevada corporation (the "Company")
---------------------------------------------------
Ladies and Gentlemen:
We hereby consent to the reference to this firm in Amendment No. 1 to
the Company's Form SB-2 Registration Statement, to be filed on or about May 17,
2000.
Sincerely yours,
David C. Fischer
of Loeb & Loeb LLP
