<PAGE>
<TABLE>
<CAPTION>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
Amendment No. 1
to
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 14, 1999
__________________
LIFEF/X, INC.
(Exact Name of Registrant as Specified in its Charter)
<S> <C> <C>
Nevada 0-25171 84-1385529
(State or Other Jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation or Organization) Identification Number)
8 Cambridge Center
Cambridge, Massachusetts 02459
(617) 551-5849
(Address and Telephone Number of Principal Executive Offices)
</TABLE>
<PAGE>
Item 1. Changes in Control of Registrant
Subsequent Events
-----------------
The second closing of the private placement of units of LifeF/X, Inc.
("LifeF/X") disclosed by LifeF/X on December 15, 1999 occurred on February 2,
2000. As a result of the second closing, the $18 million maximum offering in
the placement has been fully subscribed.
On February 29, 2000, LifeF/X disclosed that Michael Rosenblatt, Serge
Lafontaine and Ian Hunter each received 1,777,102 shares of LifeF/X common
stock in Mirage Technologies, L.P.'s distribution of LifeF/X shares to its
partners on or about December 28, 1999. As a result of a typographical error,
the number of shares received by each of them was incorrect. Michael Rosenblatt,
Serge Lafontaine and Ian Hunter each received 1,774,102 shares in the
distribution.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
a. Financial Statements of Business Acquired.
b. Pro Forma Financial Statements.
The financial statements filed in the 8K-A are being refiled with this
amendment to correct typographical errors and to add textual changes to the
notes in order to reflect immaterial updates in subsequent event information. In
the opinion of management, none of the changes is material and all of the
changes, together in the aggregate, are not material.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the undersigned has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: March 2, 2000
Lifef/x, Inc.
By: /s/ Richard Guttendorf
----------------------------
Richard Guttendorf,
Chief Financial Officer
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report........................................................................... 2
Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999 (unaudited)...................... 3
Statements of Operations for the period from June 1, 1997 (inception) to
December 31, 1997, for the year ended December 31, 1998 and for the nine
months ended September 30, 1999 (unaudited)........................................................... 4
Statements of Shareholders' Equity (Deficit) for the period from June 1, 1997 (inception)
to December 31, 1997, for the year ended December 31, 1998 and for the nine
months ended September 30, 1999 (unaudited)........................................................... 5
Statements of Cash Flows for the period from June 1, 1997 (inception) to
December 31, 1997, for the year ended December 31, 1998 and for the nine
months ended September 30, 1999 (unaudited)........................................................... 6
Notes to Financial Statements........................................................................... 7
Unaudited Pro Forma Consolidated Financial Statements................................................... 26
</TABLE>
<PAGE>
Independent Auditors' Report
The Board of Directors
Pacific Title / Mirage, Inc.
We have audited the accompanying balance sheets of Pacific Title / Mirage, Inc.
as of December 31, 1997 and 1998 and the related statements of operations,
shareholders' equity (deficit) and cash flows for the period from June 1, 1997
(inception) through December 31, 1997 and for the year ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pacific Title / Mirage, Inc. as
of December 31, 1997 and 1998 and the results of its operations and its cash
flows for the period from June 1, 1997 (inception) through December 31, 1997 and
for the year ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Los Angeles, California
January 21, 1999, except for the
last paragraph of note 3, which
is as of December 15, 1999.
2
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31
-------------------------------- September 30,
1997 1998 1999
------------ ------------ --------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current Assets:
Net assets of discountinued operation-current
(notes 2, 3, 6 and 8) $ 223,360 --- ---
----------- ----------- -----------
Total current assets 223,360 --- ---
Net assets of discontinued operation-long-term (notes 2, 3, 6,
8 and 10) 7,462,200 8,143,697 1,659,900
----------- ----------- -----------
$ 7,685,560 8,143,697 1,659,900
=========== =========== ===========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Short-term notes payable to related party (note 8) $ --- 1,700,000 11,225,000
Accrued expenses 113,300 284,123 236,633
Net liabilities of discontinued operation-current (note 2) --- 2,586,648 8,546,227
----------- ----------- -----------
Total current liabilities 113,300 4,570,771 20,007,860
Long-term notes payable to related party (note 8) 600,000 2,100,000 2,100,000
----------- ----------- -----------
Total liabilities 713,300 6,670,771 22,107,860
----------- ----------- -----------
Commitments and contingencies (notes 6 and 11)
Subsequent events (note 12)
Shareholders' equity (deficit) (notes 4 and 5):
Preferred Stock, $.01 par value. Authorized 20,000,000 shares
(note 4):
Series A-issued and outstanding 8,000,000 shares --- --- ---
Series B-issued and outstanding 7,680,000 shares, stated at
liquidation preference 7,996,799 7,996,799 7,996,799
Common Stock, $.01 par value. Authorized 25,000,000 shares;
issued and outstanding 320,100 shares 3,201 3,201 3,201
Additional paid-in capital --- 6,000 1,468,383
Accumulated deficit (1,027,740) (6,533,074) (29,916,343)
----------- ----------- -----------
Net shareholders' equity (deficit) 6,972,260 1,472,926 (20,447,960)
----------- ----------- -----------
$ 7,685,560 8,143,697 1,659,900
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Statements of Operations
<TABLE>
<CAPTION>
Period from
June 1, 1997
(inception)
through Year ended Nine months ended
December 31, December 31, September 30
-------------- -------------- ----------------------------------
1997 1998 1998 1999
-------------- -------------- ----------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue $ -- -- -- --
----------- ----------- ----------- ------------
Operating costs and expenses:
Selling, general and administrative 18,705 181,942 136,517 147,061
Research and development 624,900 1,202,762 902,457 1,199,360
----------- ----------- ----------- ------------
Total operating costs and expense 643,605 1,384,704 1,038,974 1,346,421
----------- ----------- ----------- ------------
Loss from operations (643,605) (1,384,704) (1,038,974) (1,346,421)
Interest expense on borrowings 13,677 58,850 33,117 21,459
Interest expense-other (note 8) -- -- -- 1,462,383
----------- ----------- ----------- ------------
Loss from continuing operations
before income tax expense (657,282) (1,443,554) (1,072,091) (2,830,263)
Income tax expense 800 800 -- 800
----------- ----------- ----------- ------------
Loss from continuing operations (658,082) (1,444,354) (1,072,091) (2,831,063)
Discontinued operation (note 2):
Loss on discontinued operation (369,658) (4,060,980) (874,419) (3,002,332)
Loss on disposal, including $6,205,838 for
operating losses from measurement date
until September 30, 1999 and $11,344,036
losses for the remaining disposal period -- -- -- (17,549,874)
----------- ----------- ----------- ------------
Net loss $(1,027,740) (5,505,334) (1,946,510) (23,383,269)
=========== =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
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 8) -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -------------
Balance at December 31, 1998 8,000,000 -- 7,680,000 7,996,799
Issuance of Stock Warrants (note 8)
(unaudited) -- -- -- --
Net loss (unaudited) -- -- -- --
----------- ----------- ----------- -------------
Balance at September 30, 1999 (unaudited) 8,000,000 $ -- 7,680,000 $ 7,996,799
=========== =========== =========== =============
<CAPTION>
Net
Common Stock shareholders'
----------------------------- Additional Accumulated equity
Shares Amount paid-in capital deficit (deficit)
--------------- ------------- ---------------- --------------- -------------
<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 100 1 -- -- 8,000,000
Conversion of Series B Preferred Stock
to Common Stock 320,000 3,200 -- -- --
Net loss -- -- -- (1,027,740) (1,027,740)
---------- ----------- ------------ ------------ -----------
Balance at December 31, 1997 320,100 3,201 -- (1,027,740) 6,972,260
Issuance of Stock Warrants (note 8) -- -- 6,000 -- 6,000
Net loss -- -- -- (5,505,334) (5,505,334)
---------- ----------- ------------ ------------ -----------
Balance at December 31, 1998 320,100 3,201 6,000 (6,533,074) 1,472,926
Issuance of Stock Warrants (note 8)
(unaudited) -- -- 1,462,383 -- 1,462,383
Net loss (unaudited) -- -- -- (23,383,269) (23,383,269)
---------- ----------- ------------ ------------ -----------
Balance at September 30, 1999 (unaudited) 320,100 $ 3,201 1,468,383 (29,916,343) (20,447,960)
========== =========== ============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
June 1, 1997
(inception) Nine months ended
through Year ended September 30
December 31, December 31, ----------------------------
1997 1998 1998 1999
------------ ------------ ----------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,027,740) (5,505,334) (1,946,510) (23,383,269)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Loss on disposal -- -- -- 17,549,874
Noncash interest expense - issuance of stock warrants -- -- -- 1,462,383
Changes in operating assets and liabilities, net of effects
of acquisition of Pacific Title and Art Studio
Accrued expenses 113,300 170,823 51,263 (47,490)
Net cash (used in) provided by discontinued operation (176,858) 4,783,201 3,584,446 (3,227,172)
------------ ---------- ---------- -----------
Net cash (used in) provided by operating activities (1,091,298) (551,310) 1,689,199 (7,645,674)
------------ ---------- ---------- -----------
Cash flows from investing activities:
Acquisition of Pacific Title and Art Studio, net of cash
acquired (15,478,659) -- -- --
Purchases of property, plant and equipment (496,710) (2,623,631) (2,884,403) (705,080)
------------ ---------- ---------- -----------
Net cash used in investing activities (15,975,369) (2,623,631) (2,884,403) (705,080)
------------ ---------- ---------- -----------
Cash flows from financing activities:
Proceeds from note payable to related party 600,000 1,500,000 1,500,000 --
Borrowings of long-term debt from related party -- 1,700,000 500,000 9,525,000
Proceeds from sale of warrants exercisable into 600,000 shares
of Common Stock at $2.50 -- 6,000 6,000 --
Proceeds from issuance of Series B Preferred Stock and
Common Stock 8,000,000 -- -- --
Borrowings (repayments) of debt 8,766,667 50,000 (750,000) (1,266,000)
Net cash (used in) provided by financing activities -
discontinued operation (300,000) (81,059) (60,796) 91,754
------------ ---------- ---------- -----------
Net cash provided by financing activities 17,066,667 3,174,941 1,195,204 8,350,754
------------ ---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents -- -- -- --
Cash and cash equivalents at beginning of period -- -- -- --
------------ ---------- ---------- -----------
Cash and cash equivalents at end of period $ -- -- -- --
============ ========== ========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 60,277 700,056 514,249 500,574
Income taxes -- 800 800 800
============ ========== ========== ===========
Supplemental disclosure of noncash financing activities -
stock warrants $ -- -- -- 1,462,383
============ ========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
(1) Summary of Significant Accounting Policies
(a) Organization and Description of Business
Pacific Title / Mirage, Inc. (PTM or the Company) is engaged in the
following operations: (1) the development of LifeF/X technology (two
patents issued and one patent pending), 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 television and motion picture
industry. Prior to the incorporation of the Company on September 11,
1997, the Company's business was conducted as the Mirage Entertainment
Sciences Division (Division) of Mirage Technologies, L.P. (Mirage). The
Division was formed by Mirage on June 1, 1997 to pursue potential
commercial applications for certain of Mirage's technologies, including
LifeF/X. The financial statements of PTM are presented from June 1,
1997, the date of formation of the Division. The incorporation of the
Division had no impact on the financial position or results of operations
of PTM.
On September 30, 1997, 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 which consisted primarily of the fixed assets and
accumulated deficit of the Division.
On October 30, 1997, affiliates of Safeguard Scientifics, Inc.
(collectively, 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.
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 channel the
Company's efforts on LifeF/X development and, accordingly, initiated
steps to dispose of the non-LifeF/X operations in order to reduce cash
outflows and to raise cash to repay the Company's bank loans. The Company
is focusing on the development of the LifeF/X technology for potential
7
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
commercial uses with primary emphasis on internet applications.
Therefore, the non-LifeF/X operations have been reflected as a
discontinued operation in the accompanying financial statements for all
periods presented.
On December 14, 1999, the Company completed a transaction (the Merger)
with Fin Sports U.S.A., Inc. (FSI), whereby FSI 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 (unaudited). FSI was a public shell corporation with no
operations. In connection with the Merger, FSI changed its name to
LifeF/X, Inc. and PTM changed its name to LifeF/X Networks, Inc. For a
detailed discussion of this transaction, refer to note 12 - Subsequent
Events.
(b) Unaudited Interim Financial Statements
The interim financial statements as of September 30, 1999 and the nine
months ended September 30, 1998 and 1999 are unaudited. This information
reflects all adjustments, consisting of normal recurring adjustments
that, in the opinion of management, are necessary to present fairly the
financial position and results of operations of the Company for the
periods indicated. Results of operations for the nine months ended
September 30, 1999 are not necessarily indicative of the results of
operations for the full year.
(c) Revenue Recognition
Revenues related to the Company's discontinued non-LifeF/X operation 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 $957,861 and
$576,450 as of December 31, 1997 and 1998, 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 assets (liabilities) of discontinued
operation - current. Any anticipated losses on contracts are expensed
when identified.
Revenues for continuing operations are 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 revenues have
been recognized.
(d) 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.
8
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
(e) 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 statement 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, 1998, excess of
cost over net assets acquired was $5,502,185, net of accumulated
amortization of $700,000, which is included in net assets of discontinued
operation - long-term.
(f) 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.
(g) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 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.
(h) 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 production 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.
One customer represented approximately 36% of the Company's 1998 net
revenues from discontinued operation, and two customers represented
approximately 19% and 17% of the Company's accounts receivable as of
December 31, 1998, which is included in net assets of discontinued
operation - current.
9
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
(i) 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.
(j) Accounting for Stock Options
The Company accounts for stock option grants under Statement of Financial
Accounting Standards No. 123 (SFAS 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.
(k) 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
(unaudited) impairment charge was recorded by the Company and is included
in the loss on discontinued operation in the nine months ended September
30, 1999.
(l) Other Comprehensive Income
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 and its components in a full set
of financial statements. Comprehensive income consists of net income and
net unrealized gains (losses) on securities and is presented in the
statements of shareholders' equity and comprehensive income. 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 as
defined under SFAS No. 130. As such, net income (loss) equaled
comprehensive income for all periods.
10
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
(m) Recently Issued Accounting Standards
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
(note 2).
(2) Discontinued Operation
As discussed in note 1, the Company's Board of Directors decided to dispose
of the non-LifeF/X operations in March 1999 and has accounted for the non-
LifeF/X operations as a discontinued operation.
The condensed operating results of the discontinued operation are as
follows:
<TABLE>
<CAPTION>
Period from June
1, 1997 Nine months ended
(inception) Year ended September 30
through December 31, December 31, --------------------------
1997 1998 1998 1999
-----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 2,971,759 21,633,151 17,001,068 9,929,547
Loss from discontinued operation, including
$1,400,000 impairment charge in 1999 (369,658) (4,060,980) (874,419) (3,002,332)
Loss on disposal, including $6,205,838 for
operating losses from measurement date until
September 30, 1999 and $11,344,036 losses for
the remaining disposal period
-- -- -- (17,549,874)
-------------------- ------------ ----------- -------------
</TABLE>
11
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
The net assets of the discontinued operation are summarized as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------- September 30,
1997 1998 1999
-------------------- -------------------- --------------------
(Unaudited)
<S> <C> <C> <C>
Current assets $ 4,533,770 3,530,391 3,768,525
Current portion of long-term bank debt (note 3) (1,600,000) (1,600,000) (1,825,000)
Bank line of credit (note 3) (900,000) (2,550,000) (2,484,000)
Current liabilities - other (1,810,410) (1,967,039) (2,261,716)
Accrued liability for estimated operating losses
of discontinued operation for remaining
disposal period -- -- (5,744,036)
-------------------- -------------------- --------------------
Net assets (liabilities) of discontinued
operation - current $ 223,360 (2,586,648) (8,546,227)
==================== ==================== ====================
December 31
----------------------------------------------- September 30,
1997 1998 1999
-------------------- -------------------- --------------------
(Unaudited)
Property, plant and equipment, net $ 6,858,683 8,962,970 7,187,890
Excess of cost over net assets acquired, net 7,215,231 5,502,185 5,277,185
Other assets 174,000 115,325 42,400
Long-term bank debt, net of current portion
(note 3) (6,266,667) (4,666,667) (3,241,667)
Other long-term debt to related parties (note 8) -- (570,497) (870,315)
Long-term liabilities - other (519,047) (1,199,619) (1,135,593)
Accrued loss on disposal of discontinued
operation -- -- (5,600,000)
-------------------- -------------------- --------------------
Net assets of discontinued operation -
long-term $ 7,462,200 8,143,697 1,659,900
==================== ==================== ====================
</TABLE>
12
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
(3) Long-Term Bank Debt and Lines of Credit
The following is a summary of long-term bank debt:
<TABLE>
<CAPTION>
December 31
---------------------------------------------- September 30,
1997 1998 1999
-------------------- -------------------- --------------------
<S> <C> <C> <C>
(Unaudited)
Term loan with bank $ 7,866,667 6,266,667 5,066,667
Less current portion 1,600,000 1,600,000 1,825,000
-------------------- -------------------- --------------------
Long-term debt, net of current portion $ 6,266,667 4,666,667 3,241,667
==================== ==================== ====================
</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 8.25% (unaudited) at
September 30, 1999) plus .25%. Subsequent to September 30, 1999, the Company
agreed to increase the principal payments to $158,333 per month (unaudited)
from January 2000 through November 2002. The term loan is secured by the
property, plant and equipment (excluding equipment subject to capitalized
leases) of the Company.
Future maturities of principal payments under long-term debt, as modified,
are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999 $ 1,600,000
2000 1,900,000
2001 1,900,000
2002 866,667
2003 --
-----------
$ 6,266,667
============
</TABLE>
The Company has a $3,000,000 revolving credit facility with a bank that
expires on December 31, 1999. Subsequent to September 30, 1999, the
revolving credit facility has been extended until February 28, 2000
(unaudited). Borrowings under the credit facility bear interest, which is
payable monthly, at prime (7.75% at December 31, 1998 (unaudited) and 8.25%
at September 30, 1999) plus .25%. There was $900,000, $2,550,000 and
$2,484,000 (unaudited) outstanding on the credit facility at December 31,
1997, December 31, 1998 and September 30, 1999, respectively. The credit
facility is collateralized by accounts receivable and a
$1,000,000 guarantee by Safeguard.
13
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
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 12 -
Subsequent Events for 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 above), to extend the repayment of
the credit facility to February 29, 2000 and which contemplated an additional
extension to May 30, 2000 subject to the satisfaction of certain additional
conditions (unaudited).
(4) Shareholders' Equity
The Company has 20,000,000 shares of Preferred Stock authorized. The Company
has designated 8,000,000 shares each as Series A and B Preferred Stock.
Series A shares are subordinate to the Series B shares. Each share of Series
A and B Preferred Stock is convertible into one share of Common Stock at the
option of the holder or upon the vote of the holders of two-thirds of the
Series A and B Preferred Stock outstanding voting together as a class. The
Series A and B Preferred Stock is required to be converted upon the
occurrence of certain events. The holders of Series A and B Preferred Stock
are entitled to vote in all shareholder matters on an if-converted basis.
Pursuant to a stockholders' agreement, the Series A holders and the Series B
holders are entitled to vote as separate classes and each class may elect
three directors to the Board of Directors of the Company. The Series B
Preferred Stock holders are entitled to a liquidation preference before any
distributions to other stockholders equal to $1 per share. The Series A
Preferred Stock holders are entitled to a liquidation preference before any
distributions to Common Stock holders equal to $1 per share.
Refer to note 12 - Subsequent Events, for a discussion of the acquisition of
all of PTM's capital stock by FSI in conjunction with the merger in December
1999.
(5) Stock Option Plan
The Company's 1997 Equity Compensation Plan (the Plan) initially reserved up
to 2,500,000 shares of Common Stock for issuance under this plan. On July
29, 1998, the Board of Directors authorized the expansion of the Common Stock
reserved under the plan to 4,500,000 shares. The Plan provides for the grant
to Company employees of incentive stock options, and for the grant of
nonstatutory stock options, stock awards or restricted stock to Company
employees, directors and consultants. 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 five to ten years after
grant or upon earlier termination.
Restricted stock purchase options may be subject to vesting contingencies or
other specified conditions.
14
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
Stock option activity during the periods is indicated below. All option
grants 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
exercise price
Number of shares per share
-------------------- --------------------
<S> <C> <C>
Balance at December 31, 1997 -- $ --
Granted 1,385,000 1.00
-------------------- --------------------
Balance at December 31, 1998 1,385,000 1.00
Canceled (unaudited) (700,000) (1.00)
-------------------- --------------------
Balance at September 30, 1999 (unaudited) 685,000 $ 1.00
==================== ====================
Reserved for future issuance at September 30, 1999
(unaudited) 3,815,000
====================
</TABLE>
The total number of options exercisable were 160,000 and 291,250 (unaudited)
at December 31, 1998 and September 30, 1999, respectively.
Stock options outstanding are as follows:
<TABLE>
<CAPTION>
Options outstanding
------------------------------------------------------------------------------------------------
Weighted-average
remaining
Outstanding at contractual life
Range of Outstanding at September 30, Weighted-average at December 31,
exercise prices December 31, 1998 1999 (unaudited) exercise price 1998
-------------------- -------------------- -------------------- -------------------- -----------------
<S> <C> <C> <C> <C>
$ 1.00 1,385,000 685,000 $ 1.00 9 years
==================== ==================== ==================== ==================== =================
</TABLE>
15
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 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, net loss for the year ended December 31, 1998 would have changed to
the pro forma amounts indicated below:
<TABLE>
<S> <C>
Net loss:
As reported $ 5,505,334
Pro forma 5,893,335
====================
</TABLE>
The fair value of options granted during 1998 was determined using a Black-
Scholes 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 five years. At date of grant, the fair value of the stock options
was $0.28 per option.
See note 12 - Subsequent Events, for a discussion of the effect of the merger
on the 1997 Plan.
(6) Commitments
The Company has an exclusive, worldwide, license and support agreement for
the use of certain continuum modeling technologies. Under this agreement, the
Company has the right to utilize the continuum modeling technology in
commercial applications, excluding professional medical, engineering and
scientific applications. The agreement requires PTM to make license fee
payments of $87,500 per quarter from November 1997 through July 2000 (total
$1,000,000). In addition, the Company is required to pay a monthly fee of
$12,500 from November 1997 through October 2002 (total $750,000) for
development, maintenance, support and consulting services. The agreement runs
through October 1, 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 leased
facilities and leases certain machinery and equipment under operating leases
expiring at various dates through 2007. Rent expense on the operating leases
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.
16
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1998, including leases related to
its discontinued operation, are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
-------------------- --------------------
<S> <C> <C>
Year ending December 31:
1999 $ 272,160 2,875,631
2000 292,848 2,594,888
2001 93,248 1,343,654
2002 -- 513,870
2003 -- 496,290
Thereafter -- 1,920,000
-------------------- --------------------
Total minimum lease payments 658,256 $ 9,744,333
====================
Less amount representing interest 185,512
--------------------
Present value of minimum capital lease payments 472,744
Less current installments of obligations under capital leases,
included in net assets of discontinued operation - current 174,002
--------------------
Obligations under capital leases, excluding current
installments, included in net assets of discontinued
operation - long-term $ 298,742
====================
</TABLE>
Rent expense for the period ended December 31, 1997 (seven months) and 1998
was approximately $111,000 and $2,596,000, respectively, which is included in
loss from discontinued operation.
(7) Income Taxes
The provision for income taxes from continuing operations is comprised of the
following:
<TABLE>
<CAPTION>
Current Deferred Total
-------------------- -------------------- --------------------
<S> <C> <C> <C>
1997:
Federal $ -- -- --
State 800 -- 800
-------------------- -------------------- --------------------
$ 800 -- 800
==================== ==================== ====================
1998:
Federal $ -- -- --
State 800 -- 800
-------------------- -------------------- --------------------
$ 800 -- 800
==================== ==================== ====================
</TABLE>
17
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 34% to loss before income tax expense from
continuing operations as a result of the following:
<TABLE>
<CAPTION>
Period from June
1, 1997
(inception) to Year ended
December 31, 1997 December 31, 1998
-------------------- --------------------
<S> <C> <C>
Computed "expected" tax benefit $ (223,748) (490,808)
Increase (decrease) in taxes resulting from:
State taxes, net of Federal tax benefit (24,218) (53,123)
Research and experimentation credit (32,917) (38,466)
Valuation allowance 281,683 583,197
-------------------- --------------------
Income tax expense $ 800 800
==================== ====================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities related to
continuing operations at December 31, 1997 and 1998 are presented below:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1997 1998
-------------------- --------------------
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 248,766 793,497
Credit carryforwards 32,917 71,383
-------------------- --------------------
Gross deferred tax assets 281,683 864,880
Less valuation allowance (281,683) (864,880)
-------------------- --------------------
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
18
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
whether the Company will realize the benefits of these deductible temporary
differences, a valuation allowance has been established in the amount of
$281,683 as of December 31, 1997 and $864,880 as of December 31, 1998.
At December 31, 1998, the Company has net operating loss carry forwards for
federal tax reporting purposes of approximately $2,334,000, which expire at
various dates, primarily in years 2012 and 2013.
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.
(8) Related Party Transactions
(a) Management Fees
In connection with the initial capitalization of the Company (note 1),
Mirage contributed certain assets to the Company which included certain
patent applications. The Company entered into an administrative services
support agreement with Mirage which calls for monthly payments of $25,000
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 was $246,000 and $395,000
(unaudited) as of September 30, 1999, which has been included in net
assets of discontinued operation - current as of December 31, 1998 and
has been included in net liabilities of discontinued operation - current
as of September 30, 1999.
On October 31, 1997, the Company entered into an administrative services
agreement with Safeguard effective January 1, 1998 which calls for
monthly payments to Safeguard of 1.5% of net revenues subject to minimum
and maximum annual payments of $100,000 and $600,000, respectively. The
agreement extends through December 31, 2002 and continues thereafter
unless terminated by either party. The agreement will terminate early if
the Company is sold and may be renegotiated under certain circumstances.
The total amount owed to Safeguard as of December 31, 1998 was $324,497
and $475,315 (unaudited) as of September 30, 1999, which has been
included in net assets of discontinued operation - current as of December
31, 1998 and has been included in net liabilities of discontinued
operation - current as of September 30, 1999.
19
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
(b) Safeguard
Short-term notes payable to Safeguard consist of the following:
<TABLE>
<CAPTION>
December 31
---------------------------------------------- September 30,
1997 1998 1999
-------------------- -------------------- --------------------
(Unaudited)
<S> <C> <C> <C>
Notes payable to Safeguard, payable on demand at
an annual interest rate of prime (7.75% at
December 31, 1998), plus 1%, with interest
payable monthly $ -- 1,000,000 10,525,000
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 -- 700,000 700,000
-------------------- -------------------- --------------------
$ -- 1,700,000 11,225,000
==================== ==================== ====================
</TABLE>
Long-term notes payable to Safeguard consist of the following:
<TABLE>
<CAPTION>
December 31
---------------------------------------------- September 30,
1997 1998 1999
-------------------- -------------------- --------------------
(Unaudited)
<S> <C> <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 $ 600,000 600,000 600,000
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 1,500,000
-------------------- -------------------- --------------------
$ 600,000 2,100,000 2,100,000
==================== ==================== ====================
</TABLE>
20
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
See note 12 - Subsequent Events, for a discussion of the effect of the
merger on the notes payable to Safeguard.
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 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. The warrant expires on November 30, 2005. As of the
issuance date, the fair value of the warrant was nominal.
During the nine months ended September 30, 1999, Safeguard provided
unsecured loans to the Company totaling $9.5 million (unaudited) which
bear interest at the prime rate plus 1%. The principal together with the
accrued interest is payable on demand. In conjunction with these
unsecured loans, the Company issued warrants to Safeguard to purchase
10,375,000 shares (unaudited) of Common Stock at an exercise price of
$1.00 per share (unaudited). These warrants expire at various dates
ranging from February 2006 through August 2006.
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
(unaudited), and the total value assigned was $1,462,383 (unaudited).
This amount was recorded as additional paid-in capital and as additional
interest expense during the nine months ended September 30, 1999.
21
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
A summary of warrants outstanding at September 30, 1999 (unaudited) is as
follows:
<TABLE>
<CAPTION>
Number of Exercise Expiration
shares price date
-------------------- ------------- ----------------
<S> <C> <C>
600,000 $ 2.50 April 2005
750,000 2.00 November 2005
1,000,000 1.00 January 2006
1,000,000 1.00 February 2006
1,000,000 1.00 March 2006
1,000,000 1.00 March 2006
1,000,000 1.00 April 2006
1,500,000 1.00 May 2006
875,000 1.00 July 2006
400,000 1.00 July 2006
700,000 1.00 July 2006
750,000 1.00 August 2006
1,150,000 1.00 August 2006
--------------- --------- --------------------
11,725,000
---------------
</TABLE>
See note 12 - Subsequent Events, for a discussion of the effect of the merger on
the PTM warrants held by Safeguard.
(9) 401(k) Plan
The Company has a retirement plan under Section 401(k) of the Internal
Revenue Code (401(k) Plan). The terms of the 401(k) Plan provide that
employees over 21 years of age who have completed at least six months of
employment are eligible to participate in the 401(k) Plan. Contributions to
the 401(k) 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 periods ended December 31, 1997 (seven months) and 1998, the
Company made contributions to the 401(k) Plan of approximately $12,000 and
$93,000, respectively.
(10) 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 $519,047 and $523,199 at December 31, 1997
and 1998, respectively, which has been included in net assets of discontinued
operation - long-term.
22
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
(11) 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.
(12) Subsequent Events (Unaudited)
On December 14, 1999, Fin Sports U.S.A., Inc. (FSI), a Nevada public shell
corporation with no operations, acquired all of the outstanding capital stock
of the Company 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.
Following the Merger, the corporate name of FSI was changed to LifeF/X, Inc.
and the corporate name of PTM was changed to LifeF/X Networks, Inc.
Concurrently with the Merger, LifeF/X, Inc. initiated a private placement
offering and subsequently received proceeds of $18 million through the sale
of 6,000,000 units to certain investors 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 at the holder's option, all on certain terms and
conditions.
Effective upon the Merger, FSI became a co-obligor with PTM with respect to
certain debt of PTM owed to Safeguard totaling $13,325,000 at September 30,
1999. On or about December 30, 1999, Safeguard converted the PTM debt plus
related accrued interest of $761,837 into the right to receive warrants for
3,997,500 shares of Common Stock. The warrants have a term of ten years and
are exercisable 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, 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 FSI. The warrants have a term of ten years and
are exercisable one year after the Merger, subject to certain early exercise
events specified in the warrants. 50% of the PTM warrants held by Safeguard
will be carried forward as warrants to purchase 5,862,500 shares of FSI
Common Stock at an exercise price of $2.50 per share and the remaining 50% to
purchase 5,862,500 shares of FSI Common Stock at $5.00 per share. In
addition, Safeguard received warrants to purchase 5,862,500 shares of FSI
Common Stock at an exercise price of $6.00 per share. The total number of
shares of FSI Common Stock issuable upon exercise of the warrants held by
Safeguard after the Merger will be 27,790,917 shares of FSI Common Stock.
Effective upon the Merger, the PTM 1997 Equity Compensation Plan (the PTM
Plan) was terminated and LifeF/X, Inc. adopted a new long-term incentive plan
with terms substantially similar to that of the PTM Plan. The new plan
reserves up to 5,529,375 shares of Common Stock for issuance under this plan.
Following the adoption of the new plan, LifeF/X, Inc. assumed the obligations
of outstanding options
23
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
granted to certain PTM employees under the PTM Plan. These outstanding option
obligations included an option grant to Lucille Salhany (the Chief Executive
Officer, Co-President and a director of the Company) for 1,952,458 shares of
Common Stock (after adjusting for the conversion from PTM shares to FSI
Common Stock shares). This option grant was made by PTM at $1.641 per share
and is subject to a vesting schedule. In addition, in connection with the
merger, LifeF/X, Inc. granted options to various employees subject to vesting
schedules.
The Company plans to spin off all of its non-LifeF/X assets and liabilities
(collectively, the "Spin Off Assets and Liabilities") to PTM Productions
Inc., an entity (PTM Productions) 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, certain leased and owned real
property, outstanding debt to Silicon Valley Bank and certain debt owed by
PTM 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 are expected to be transferred to PTM
Productions following the Merger once the requisite third party consents have
been obtained. Until such time as the spin off transaction has been
completed in its entirety, the Company will hold the Spin Off Assets and
Liabilities (or any portion thereof that has not been transferred to PTM
Productions) and the proceeds thereof in trust for the benefit of PTM
Productions, and neither the Company nor its stockholders will be entitled to
any beneficial interest in the Spin Off Assets and Liabilities. PTM
Productions may direct the Company to dispose of any of the Spin Off Assets
and Liabilities on its behalf provided such disposition will not have any
material adverse effect on the Company.
In connection with the spin off transaction, the Company is required to
obtain consents from a number of third parties, including its lender, Silicon
Valley Bank, which holds a lien covering all of its assets, including the
LifeF/X technology. As part of the spin off transactions, the Company plans
to transfer this loan to PTM Productions and to seek the release of Silicon
Valley Bank's lien on the LifeF/X assets. If the Company is unable to obtain
a complete release from Silicon Valley Bank, Safeguard has agreed to
indemnify PTM from and against any and all losses and liabilities relating to
or arising from the Silicon Valley Bank loan. In addition, in connection
with the spin off transaction, PTM Productions and Safeguard will provide
certain indemnities for the Spin Off Assets and Liabilities as follows: PTM
Productions will indemnify the Company for any losses or liabilities relating
to or arising from the Spin Off Assets and Liabilities, including certain
equipment leases totaling approximately $4 million and a lease for facilities
in Hollywood, California with current monthly rental payments of $60,000.
Until the spin off transaction is complete, Safeguard will indemnify the
Company for any and all amounts due and payable in the ordinary course to the
real estate and equipment lessors arising under the real estate lease and
approximately $2 million in equipment leases that are not yet transferred to
PTM Productions. However, this indemnity will not extend to claims, losses
and liabilities arising outside the ordinary course of conduct under these
leases. In consideration for the Safeguard indemnification, subject to any
senior liens, Safeguard will be granted a security interest in the Spin Off
Assets and Liabilities and will be entitled to any excess operating
24
<PAGE>
PACIFIC TITLE / MIRAGE, INC.
Notes to Financial Statements
December 31, 1997 and 1998
(Information for the nine months ended
September 30, 1998 and 1999 is unaudited)
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.
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 Division 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 PTM 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.
25
<PAGE>
LIFEF/X, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated data presents the Unaudited
Pro Forma Consolidated Balance Sheet of the Company as of September 30, 1999
and Statement of Operations of LifeF/X, Inc. (the Company) for the nine
months ended September 30, 1999 and for the year ended December 31, 1998
after giving effect to the reverse acquisition under the purchase method of
the Company with Fin Sports U.S.A., Inc. (FSI), as if the Merger had occurred
at the beginning of 1998. The Company's fiscal year ends on December 31.
The unaudited pro forma consolidated balance sheet as of September 30, 1999
has been adjusted as if the following events occurred on September 30, 1999:
. The completion of a private placement offering (Unit Offering) and
subsequent receipt of $18,000,000 less $1,200,000 of estimated placement
costs through the sale of 6,000,000 units.
. The issuance of warrants to purchase 5,862,500 shares of Common Stock for
conversion of certain short-term and long-term notes payable to Safeguard
Scientifics totaling $13,325,000.
. The conversion of Class A and B Convertible Preferred Stock into Common
Stock and warrants to purchase Common Stock upon closing of the Unit
Offering and the effects on earnings (loss) per share.
The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1998 has been adjusted to reflect:
. A reduction in interest expense due to the retirement of certain short-
term and long-term notes payable totaling $3,800,000.
. The conversion of Class A and B Convertible Preferred Stock into Common
Stock and warrants to purchase Common Stock upon closing of the Unit
Offering and the effect on earnings (loss) per share.
. The grant of options to Lucille Salhany for the right to purchase
1,952,458 shares of Common Stock at an exercise price below the fair value
of the Common Stock.
The unaudited pro forma consolidated statement of operations for the nine
months ended September 30, 1999 has been adjusted to reflect:
. A reduction in interest expense due to the retirement of certain short-
term and long-term notes payable totaling $13,325,000.
. The conversion of Class A and B Convertible Preferred Stock into Common
Stock and warrants to purchase Common Stock upon closing of the Unit
Offering and the effect on earnings (loss) per share.
. The grant of options to Lucille Salhany for the right to purchase
1,952,458 shares of Common Stock at an exercise price below the fair value
of the Common Stock.
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<PAGE>
LIFEF/X, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The pro forma data are based on the historical financial statements of the
Company and FSI giving effect to the merger of the Company into FSI's wholly
owned subsidiary using the purchase method of accounting and the assumptions
and adjustments outlined in the accompanying Notes to Unaudited Pro Forma
Consolidated Financial Statements.
The following unaudited pro forma consolidated financial data do not give
effect to anticipated expenses of $10,000 related to the acquisition.
The pro forma data are provided for comparative purposes only. They do not
purport to be indicative of the results that actually would have occurred if
the Merger had been consummated on the dates indicated or that may be
obtained in the future. The unaudited pro forma consolidated financial data
should be read in conjunction with the Notes thereto, the audited and
unaudited Financial Statements of the Company and the Notes thereto and the
audited and unaudited Financial Statements of FSI and the Notes thereto,
which are included in the FSI 1998 annual report on Form 10-K and the
quarterly report on Form 10-Q for the nine months ended September 30,
1999.
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<PAGE>
LIFEF/X, INC.
Unaudited Pro Forma Consolidated Balance Sheet
September 30, 1999
<TABLE>
<CAPTION>
Pacific Title / Fin Sports Pro forma Pro forma
Assets Mirage, Inc. U.S.A., Inc. adjustments consolidated
-------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Current assets: $ -- 701 16,800,000 (a) 16,800,701
Cash and cash equivalents -------------- ------------ ----------- ------------
Total current assets -- 701 16,800,000 16,800,701
Net assets of discontinued operation - long-term 1,659,900 -- 1,659,900
-------------- ------------ ----------- ------------
$ 1,659,900 701 16,800,000 18,460,601
============== ============ =========== ============
Liabilities and Shareholders'
Equity (Deficit)
Current liabilities:
Short-term notes payable to related party $ 11,225,000 -- (11,225,000)(b) --
Accrued expenses 236,633 -- 236,633
Net liabilities of discontinued
operation - current 8,546,227 -- 8,546,227
-------------- ------------ ----------- ------------
Total current liabilities 20,007,860 -- (11,225,000) 8,782,860
Long-term notes payable to related party 2,100,000 5,873 (2,100,000)(b) 5,873
-------------- ------------ ----------- ------------
Total liabilities 22,107,860 5,873 (13,325,000) 8,788,733
-------------- ------------ ----------- ------------
Shareholders' equity (deficit):
Preferred Stock 7,996,799 -- (7,996,799)(c) --
Common Stock 3,201 1,083 (1,083)(a) 3,201
-- -- 15,799 15,799
Additional paid-in capital 1,468,383 6,917 41,022,600 (a,b,c,d) 42,497,900
Deferred compensation -- -- (1,171,476)(d) (1,171,476)
Accumulated deficit (29,916,343) (13,172) (1,744,041)(c,d) (31,673,556)
-------------- ------------ ----------- ------------
Net shareholders' equity (deficit) (20,447,960) (5,172) 30,125,000 9,671,868
-------------- ------------ ----------- ------------
$ 1,659,900 701 16,800,000 18,460,601
============== ============ =========== ============
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
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<PAGE>
LIFEF/X, INC.
Unaudited Pro Forma Consolidated Statement of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
Pacific Title/ Fin Sports Pro forma Pro forma
Mirage, Inc. U.S.A., Inc. adjustments consolidated
----------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenue $ --- --- ---
----------------- ----------------- ----------------
Operating costs and expenses:
Selling, general and administrative 181,942 2,679 184,621
Research and development 1,202,762 --- 1,202,762
Stock compensation --- --- 1,757,213 (c) 1,757,213
----------------- ----------------- --------------- ----------------
Total operating costs and expenses 1,384,704 2,679 1,757,213 3,144,596
----------------- ----------------- --------------- ----------------
Loss from operations (1,384,704) (2,679) (1,757,213) (3,144,596)
Interest expense-other 58,850 --- 58,850
----------------- ----------------- --------------- ----------------
Loss from continuing operations
before income tax expense (1,443,554) (2,679) (1,757,213) (3,203,446)
Income tax expense 800 --- 800
----------------- ----------------- --------------- ----------------
Loss from continuing operations $ (1,444,354) (2,679) (1,757,213) (3,204,246)
================= ================= =============== ================
Net (loss) per share on a basic and
diluted basis $ (.13) --- (.17)
================= ================= =============== ================
Weighted-average shares outstanding 11,294,084 1,740,732 19,000,750
================= ================= =============== ================
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
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<PAGE>
LIFEF/X, INC.
Unaudited Pro Forma Consolidated Statement of Operations
Nine months ended September 30, 1999
<TABLE>
<CAPTION>
Pacific Title / Fin Sports Pro forma Pro forma
Mirage, Inc. U.S.A., Inc. adjustments consolidated
------------ ----------- --------- --------
<S> <C> <C> <C> <C>
Revenue $ __ __ __
----------- ----------- --------
Operating costs and expenses:
Selling, general and administrative 147,061 2,753 149,814
Research and development 1,199,360 __ 1,199,360
Stock compensation __ __ 1,757,213 (c) 1,757,213
----------- ---------- --------- ---------
Total operating costs and expenses 1,346,421 2,753 1,757,213 3,106,387
----------- ---------- --------- ---------
Loss from operations (1,346,421) (2,753) (1,757,213) (3,106,387)
Interest expense on borrowings 21,459 __ 21,459
Interest expense - other 1,462,383 __ 1,462,383
----------- ---------- --------- ---------
Loss from continuing operations
before income tax expense (2,830,263) (2,753) (1,757,213) (4,590,229)
Income tax expense 800 __ 800
----------- ---------- --------- ---------
Loss from continuing operations $(2,831,063) (2,753) (1,757,213) (4,591,029)
=========== ========== ========= =========
Net (loss) per share on a basic and
diluted basis $ (.25) __ (.24)
=========== ========== ==========
Weighted-average shares outstanding 11,294,084 1,740,732 19,000,750
=========== ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
30
<PAGE>
LIFEF/X, INC.
Notes to Unaudited Pro Forma Consolidated Financial Statements
September 30, 1999
(1) Background of the Reverse Merger
On December 14, 1999, Fin Sports U.S.A, Inc. (FSI), a Nevada public shell
corporation with no operations, acquired all of the outstanding capital stock
of PTM in consideration of the issuance to the PTM stockholders of an
aggregate of 11,294,084 shares of Common Stock and warrants for the right to
purchase 27,790,917 shares of FSI's Common Stock.
Immediately prior to the merger, FSI had 1,740,732 shares of Common Stock
outstanding and PTM had 8,000,000 shares of Preferred Stock Series A,
7,680,000 shares Preferred Stock Series B and 320,100 shares of Common Stock.
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. The historical financial statements of Pacific Title / Mirage, Inc.
since June 1, 1997 (inception) have been adjusted retroactively to reflect
the equivalent number of shares received in the business combination prior to
the reverse acquisition.
Following the merger, the corporate name of FSI was changed to LifeF/X, Inc.
and the corporate name of PTM was changed to LifeF/X Networks, Inc.
(2) Unaudited Pro Forma Consolidated Balance Sheet Adjustments
(a) Adjustment reflects the cash proceeds of $18 million from the
consummation of the Unit Offering, net of estimated placement costs of
$1.2 million.
(b) Issuance of warrants to purchase 5,862,500 shares of Common Stock for
conversion of certain short-term and long-term notes payable to Safeguard
totaling $13,325,000.
(c) Adjustment reflects elimination of the capital and accumulated deficit
accounts of FSI, in accordance with the purchase method of accounting and
the conversion of PTM Preferred Stock to Common.
(d) Adjustment reflects compensation cost of $1,757,213 related to the vested
portion of the total compensation charge of $2,928,689 associated with
the grant of options for the right to purchase 1,952,458 shares of Common
Stock at an exercise price below the fair value of the Common Stock over
the vesting period.
(3) Unaudited Pro Forma Consolidated Statements of Operations Adjustments
(a) Adjustment reflects conversion of subordinated loans to Safeguard into
Common Stock and the consummation of the Unit Offering. The adjustment
does not include interest income earned on excess cash balances.
Interest expense incurred on subordinated loans for the year ended
December 31, 1998 and the nine months ended September 30, 1999 has been
adjusted assuming the debt was converted at the beginning of the year.
(b) The pro forma loss per share is computed by dividing the net loss by the
weighted-average number of shares outstanding. The calculation of the
weighted-average number of shares outstanding assumes that the 6,000,000
shares of the Company's Common Stock issued in connection with the Unit
Offering were outstanding for the entire period.
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<PAGE>
LIFEF/X, INC.
Notes to Unaudited Pro Forma Consolidated Financial Statements
September 30, 1999
(c) Adjustment reflects compensation cost of $1,757,213 related to the vested
portion of the total compensation charge of $2,928,689 associated with
the grant of options for the right to purchase 1,952,458 shares of Common
Stock at an exercise price below the fair value of the Common Stock over
the vesting period.
32
