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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission File Number 333-32934
_________________
LIFEF/X, INC.
(Name of Small Business Issuer in its Charter)
NEVADA 84-1385529
(State of Incorporation) (I.R.S. Employer Identification No.)
153 NEEDHAM STREET, BUILDING N1, NEWTON, MASSACHUSETTS 02164
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number (617) 551-5849
_________________
Securities to be Registered Under Section 12(b) of the Act:
None
Securities Registered Under Section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
____________________________________________________
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $-0-
As of March 14, 2000, there were 18,999,917 Common Shares of Lifef/x,
Inc. outstanding, and the aggregate market value of the Common Shares
(based upon the average of the high and low sale prices of $28.00 for
Lifef/x, Inc. shares on the OTC Bulletin Board on March 14, 2000) held
by non-affiliates was approximately $290.5 million (for purposes hereof,
directors, executive officers and ten percent or greater shareholders
have been deemed affiliates.)
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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LIFEF/X, INC.
FORM 10-KSB ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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Part I
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Item 1. Description of Business............................... 1
Item 2. Description of Property............................... 8
Item 3. Legal Proceedings..................................... 8
Item 4. Submission of Matters to
a Vote of Security Holders............................ 8
Part II
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Item 5. Market for Common Equity
and Related Stockholder Matters....................... 9
Item 6. Management's Discussion and
Analysis or Plan of Operation......................... 10
Item 7. Financial Statements.................................. 24
Item 8. Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure.... 25
Part III
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Item 9. Directors, Executive Officers,
Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act..... 26
Item 10. Executive Compensation................................ 29
Item 11. Security Ownership of Certain
Beneficial Owners and Management...................... 35
Item 12. Certain Relationships and Related Transactions........ 37
Item 13. Exhibits and Reports on Form 8-K...................... 39
Signatures............................................ 41
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PART I
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Item 1. Description of Business
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Introduction
LifeF/X is a computer-based technology that enables users to animate photo-
realistic 3D digital human faces to enhance digital communication across a
multitude of media platforms, including the Internet. Computers will use our
LifeF/X technology to produce photo-realistic 3D digital animated human faces
from ordinary photographs. Because the instruction sets for animating the 3D
digital human faces are very small, we believe we can achieve real-time
animations over the Internet utilizing modems as slow as 28.8kbps. Lifef/x, Inc.
is presently engaged in research and development with respect to its LifeF/X
technology and has received no related revenue to date. Accordingly, Lifef/x,
Inc. is classified as a development stage company.
Our primary focus is to commercialize the LifeF/X technology for Internet
applications. We believe that there are numerous applications for the LifeF/X
technology for the World Wide Web, including electronic commerce, e-mail,
chatrooms, distance learning, bill presentment, electronic direct mail and PC
gaming. In addition to our core business, we intend to explore other
applications for the LifeF/X technology, including, without limitation,
applications in the theatrical motion picture industry.
We were incorporated as Fin Sports U.S.A., Inc. (Fin Sports), in Nevada, on
June 18, 1987. In conjunction with a merger transaction with Pacific
Title/Mirage, Inc. (Pac Title/Mirage) completed on December 14, 1999, as more
fully described later in this Form 10-KSB, we changed our name to Lifef/x, Inc.
Our corporate offices are located at 153 Needham Street, Building N1, Newton,
Massachusetts 02164. Our telephone number at that location is (617) 551-5849.
The URL for our web site is http://www.lifefx.com.
Unless the context requires otherwise, "we," "us," "our" and similar terms,
as well as references to "LifeF/X" refer to Lifef/x, Inc. and our subsidiary,
Lifef/x Networks, Inc.
Merger Transaction and Background
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 (the
Merger). From September 1993 until the Merger, Fin Sports had no active business
operations.
Pac Title/Mirage was formed in 1997 as the combination of two businesses:
the LifeF/X technology development effort and an optical 2D and restoration
business that was acquired from Pacific Title and Art Studio, a post production
company founded in 1918. From Pac Title/Mirage's formation 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; scanning and recording services; and digital effects.
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, accordingly,
initiated steps to dispose of the non-LifeF/X operations, intending to reduce
cash outflows from the non-LifeF/X operations and to reduce or eliminate Pac
Title/Mirage's bank debt. Therefore, the non-LifeF/X operations have been
reflected as a discontinued operation in the Consolidated Financial Statements
for all periods presented.
LifeF/X sold its non-LifeF/X assets, which consisted of film title and
special effects services, on March 20, 2000. The sale included a transfer of all
liabilities associated with the discontinued operation, including all debt. As a
result, LifeF/X is presently 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
Consolidated Financial Statements.
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As noted above, the December 14, 1999 acquisition was accomplished by the
merger of a wholly-owned subsidiary of Fin Sports with and into Pac
Title/Mirage, with Pac Title/Mirage as the surviving corporation. 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. The transaction was recorded as a reverse acquisition using
the purchase method of accounting, whereby equity of Pac Title/Mirage was
adjusted for the fair value of the acquired tangible net assets of the wholly-
owned subsidiary of Fin Sports. Because Pac Title/Mirage was the acquirer for
accounting purposes, the financial statements presented elsewhere herein are
therefore those of Pac Title/Mirage, not Fin Sports. Following the Merger, the
corporate name of Fin Sports was changed to Lifef/x, Inc. and Pac Title/Mirage
changed its name to Lifef/x Networks, Inc. Lifef/x Networks, Inc. is a wholly-
owned subsidiary of Lifef/x, Inc.
Our research and development expenses totaled $1,754,253 for the year ended
December 31, 1999 and $1,202,762 for the year ended December 31, 1998. Research
and development consisted of efforts related to LifeF/X development activities.
LifeF/X has an exclusive, world-wide, perpetual license agreement with Auckland
UniServices Limited (UniServices) for the continuum 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. Salaries and related
personnel benefits of the LifeF/X development personnel 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.
Our Goals
Our initial strategy is to achieve the rapid and widespread distribution of
our system 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 by first a generic photo-realistic 3D
digital animated face, and later the sender's photo-realistic 3D digital
animated face, converted from the sender's analog or digital photograph. The
LifeF/X technology enables computers to utilize photographs to produce photo-
realistic 3D digital animated human faces. Because the instruction sets 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.
Our primary focus is to commercialize the LifeF/X technology for Internet
applications. We believe that there are numerous applications for the LifeF/X
technology for the World Wide Web, including electronic commerce, e-mail,
chatrooms, distance learning, bill presentment, electronic direct mail and PC
gaming. The LifeF/X technology enables the creation of interactive virtual
humans as hosts, salespeople, teachers, entertainers, game characters, personal
avatars, corporate representatives and advertising personalities on the Internet
at bandwidths of 28.8kbps or more. In addition to our core business, we intend
to explore other applications for the LifeF/X technology, including applications
in the theatrical motion picture industry, although the initial focus will be
exclusively concentrated on Internet applications.
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Growth of the Internet
The Internet has grown rapidly in recent years, 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.
As an interactive, searchable, user-controlled medium, the Web provides a
highly engaging experience and allows users to access a virtually unlimited
variety and supply of content at their convenience. The Web also enables
content providers and advertisers to establish personalized experiences for, and
communications with, consumers.
We believe that the growth in the Internet market represents a significant
opportunity for a provider of products and services that enhance a Web user's
experience.
LifeF/X Technology
The LifeF/X technology was originally developed for accurate modeling of
soft biological tissues which undergo large nonlinear deformations. The first
use was developed for tele-robotic surgery, a professional medical application.
The LifeF/X technology is based on continuum modeling techniques, which are
mathematical tools developed to represent material properties of solids
(tissues) down to the microscopic level or 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 constitutive
mathematical equations that replicate properties associated with biological
muscle movement. The mathematical equations can replicate such properties as
anisotropic skin elasticity, electrical impedance, thermal capacity,
conductivity and optical properties. By beginning with the exact representation
of biological tissues and computing the interaction between structures, such as
force generated by muscles, skin elasticity and bone geometry, our technology
can achieve photo-realistic 3D animation. Materials are anisotropic when they
exhibit properties with different magnitudes when measured along different
directions.
Our initial Internet consumer applications will be driven by user directed
text or speech input. The initial Internet application will produce animated
images of digital human faces that may be of significantly lower spatial
resolution but of higher temporal resolution than film entertainment prototypes
produced to date. The animations will be produced by the LifeF/X technology in
real time rather than by re-combining stored images.
3
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Our objective is to adapt the existing LifeF/X technology to the Internet
and to be a leading provider of branded products and services that enable the
delivery of cost-effective, real time content production of photo-realistic 3D
models for a broad range of market applications, with primary emphasis on
Internet-related business-to-business (B2B) and business-to-consumer (B2C)
opportunities. We intend to establish the LifeF/X technology as the platform-
independent infrastructure standard for interpersonal and intercorporate
interactive communication. To this end a number of new products are under
development and are described below under "Products under Development."
Our Strategy and Value Proposition
Initially, we wish to achieve the rapid and widespread distribution of our
system to personalize interactive communication in Internet-related B2B and B2C
activities. 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 by first a generic photo-realistic 3D digital animated
face, and later the sender's photo-realistic 3D digital animated face, converted
from the sender's analog or digital photograph. 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. The
LifeF/X technology provides significant additional value, as it will permit
individuals to send e-mails and online messages embedded with animation
commands.
As the Web continues to evolve, many businesses and content providers will
seek to utilize interactive audio, video and other multi-media content to enrich
and differentiate their Web sites. We believe that a substantial opportunity
exists to provide software solutions and content aggregation and delivery
services which will provide compelling, interactive, animated content through
photo-realistic 3D models in real time over bandwidths as slow as 28.8kbps. We
envision Web sites utilizing photo-realistic 3D human models as guides,
corporate spokespersons, teachers, entertainers, game characters, personal
avatars, advertising personalities and individual sales help, which will permit
them to extend the functionality of available applications beyond the
traditional opportunities for e-mail, instant messaging and chatrooms, to
training, product support, human resources, supply chain software, Internet
Service Providers (ISP's), Application Service Providers (ASP's), distance
learning, bill presentment and PC gaming, among others.
We believe the LifeF/X technology enables this paradigm shift by providing
a standard platform for a network which would provide the ultimate in
differentiated, personalized communications, regardless of the application.
4
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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 created
from a 2D digital image sent electronically to our planned Web site, or from a
traditional analog photo mailed to us. We will deliver digital Standins to
users via the Web and other media, together with our LifeF/X Genesis Player,
which plays the Standin animation, and our LifeF/X Director software, which adds
emotional content to the animations. We envision that Standins will be used
with e-mail, Web pages, chatrooms, PC games, corporate intranets and extranets
and many other applications and will be compatible with various third party
products, including PC games, operating systems, screen saver engines, e-mail
applications, chatrooms, online help, etc. All Standin products will share a
common technology architecture. Standins will be interchangeable.
Professional Standins. More sophisticated and articulated Standins can be
captured for the computer by our patent-pending proprietary motion capture
system. 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 will be a highly
flexible, programmable player that can be used either for Internet streaming of
animation commands for captured LifeF/X Standin performances or for online,
real-time interactive content generation. The Player will be developed as a
flexible programming component that can be used and programmed within the Web
browser to read e-mail or perform numerous system interactions.
LifeF/X Director. Our LifeF/X Director software will animate and control
Standins for uses such as sending e-mails with embedded animation commands. The
software will enable the user to add four basic emotions (happy, sad, angry,
surprised) and simple motions.
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, will be available at an additional cost for use with the
LifeF/X Creator. LifeF/X Creator will have a graphical interface with variable
intensity controls for emotions and movements and is intended to 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.
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Marketing and Distribution
We plan to market directly to the user via our planned Web site and use
event marketing techniques and viral marketing, which is the re-distribution
from user to user. Our viral marketing will include distribution, without
charge, of millions of LifeF/X Standins and related LifeF/X Genesis Players
and Director software to consumers. We also plan to co-brand and co-market
our products with partners with whom we plan to develop strategic
relationships.
Future Enhancements
In conjunction with our licensor, UniServices, 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.
Our Competition
The market for Internet avatar products is new, and we expect it to be
competitive. An avatar is a computer-generated animated image which is used to
guide and direct the user or to represent one or more users. The principal
competitive products in the Internet avatar market include, but may not be
limited to, Microsoft V-Chat 2.0, Microsoft Agent, Compaq's Faceworks, 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 Internet avatar products and services
being developed by competitors of which we are not aware.
If the Internet avatar market becomes a viable market, we may not be able
to establish or maintain a competitive position against current or potential
competitors as they enter the market. Many of our current and potential
competitors have substantially greater financial, technical, marketing,
distribution and other resources, greater name recognition, stronger market
presence and longer operating histories than ours. As a result, they may be
able to adapt more quickly to new or emerging technologies and changes in
customer requirements. We cannot assure that we will be able to compete
successfully.
Our Technology Differentiator
The LifeF/X technology is partially derived from a finite element system
licensed from UniServices. Finite element modeling consists of representing an
object (which may be complex in shape, may be made of a number of sub-
components, and may vary over different regions) by dividing it into numerous
small pieces (like a 3D puzzle) having simpler shapes and properties that can be
handled mathematically and numerically utilizing 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 replcate the behavior of the whole object.
This mathematical modeling environment allows the application of finite element
analysis and other techniques to a variety of complex bioengineering problems.
The system represents over 100 person-years of development effort at
UniServices.
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Our LifeF/X technology has enabled us to develop proprietary techniques for
generating accurate reproduction of expressions and tissue wrinkling. Our
proprietary system provides an environment for developing advanced models of
flexible materials, such as tissue, which undergo large nonlinear deformations
and where the material properties may be anisotropic. The LifeF/X technology is
also unique because of the richness of the data incorporated in the models.
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, excluding professional medical,
engineering and scientific applications. The license requires quarterly license
fees and development payments to be made to the licensor. These payments total
$500,000 per year through November 2002. The Company has perpetual renewal
options at a cost of $200,000 per year. However, we have the right to cancel
the license after November 2002. We have filed three patent applications in the
United States and other countries specifically covering image capturing and
creation. One patent has been issued ("Rapid High Resolution Image Capture
System", U.S. Patent # 5,999,209), one has been allowed but not yet issued and
one application is still pending. We plan to apply for other patents in the
future. UniServices has not patented the source code licensed to LifeF/X.
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.
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Item 2. Description of Property
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We have leased approximately 2,000 square feet of research and development
space in the greater Los Angeles area under a two year lease (expiring 2002)
with renewal options and approximately 10,000 square feet of administrative
and research and development space in the greater Boston area under a five
year lease (expiring 2005) at a monthly rent of approximately $25,000. Each
of these facilities is Class A office space and we will not expend any material
amounts for leasehold improvements.
Item 3. Legal Proceedings
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We are not involved in any claims or legal proceedings, nor have we been
involved in any such proceedings that have had or may have a significant effect
on our financial position.
Item 4. Submission of Matters to a Vote of Security Holders
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On November 16, 1999, Fin Sports filed a Schedule 14C - Definitive
Information Statement with the SEC in connection with resolutions of the board
of directors of Fin Sports and persons owning a majority of the outstanding
voting securities of Fin Sports, for (1) the election of directors for the
upcoming year, (2) providing for amendments to its Articles of Incorporation
(i) to effect a forward split of 1.5384741 shares for one, (ii) to increase the
authorized capital of Fin Sports from 50 million shares to 100 million shares of
$0.001 par value common stock, and (iii) to change the name of Fin Sports, Inc.
to Lifef/x, Inc. or some similar name selected by the board of directors, and
(3) to adopt the Lifef/x, Inc. 1999 Long Term Incentive Plan.
The board of directors, unanimously, and Leonard W. Burningham, Duane S.
Jenson and Sheryl Ross, (persons who collectively owned in excess of 95% of the
outstanding voting securities of Fin Sports), unanimously adopted, ratified and
approved resolutions for the election of directors, to effect the forward split,
the capital increase and the name change, and to adopt the Lifef/x, Inc. 1999
Long Term Incentive Plan. No other votes were required or necessary.
8
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PART II
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Item 5. Market for Common Equity and Related Stockholder Matters
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(a) Market information
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 following table sets
forth, on a per share basis, and for the periods indicated, the high and low
sales prices of the Common Stock as reported on the OTC Bulletin Board. All
sales prices are exclusive of commissions or discounts of any nature and are set
forth after giving effect to all stock splits and stock dividends, if any.
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Price Range
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High Low
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Fiscal Year Ended December 31, 1999
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December 15, 1999 to December 31, 1999 23 12 7/16
Fiscal Year Ending December 31, 2000
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January 1, 2000 to March 15, 2000 30 13
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(b) Holders
As of March 15, 2000 there were 18,999,917 shares of our Common Stock
outstanding and approximately 287 shareholders of record.
(c) Dividends
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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Item 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the notes thereto appearing elsewhere.
Certain statements contained herein that are not related to historical
results, including statements regarding LifeF/X's business strategy and
objectives, future financial position, expectations about pending litigation
and estimated cost savings, are forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Securities Exchange
Act"), and involve risks and uncertainties. Although management believes
that the assumptions on which these forward-looking statements are based
are reasonable, there can be no assurance that such assumptions will prove
to be accurate and actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include regulatory policies, competition from
other similar businesses, and market and general economic factors. All
forward-looking statements contained in this Form 10-KSB are qualified in
their entirety by this statement.
Merger Transaction and Background
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 Merger, Fin Sports had no active
business operations.
Pac Title/Mirage was formed in 1997 as the combination of two businesses:
the LifeF/X technology development effort and an optical 2D and restoration
business that was acquired from Pacific Title and Art Studio, a post production
company founded in 1918. From Pac Title/Mirage's formation 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.
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 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, accordingly, initiated steps to dispose
of the non-LifeF/X operations, intending to reduce cash outflows from the non-
LifeF/X operations and to 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 financial statements for all periods presented.
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As noted above, the December 14, 1999 acquisition was accomplished by the
merger of a wholly-owned subsidiary of Fin Sports with and into Pac
Title/Mirage, with Pac Title/Mirage as the surviving corporation. 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. The transaction was recorded as a reverse acquisition using
the purchase method of accounting, whereby equity of Pac Title/Mirage was
adjusted for the fair value of the acquired tangible net assets of the wholly-
owned subsidiary of Fin Sports. Because Pac Title/Mirage was the acquirer for
accounting purposes, the financial statements presented elsewhere herein are
those of Pac Title/Mirage, not Fin Sports. Following the Merger, Fin Sports
changed its name to Lifef/x, Inc. and its wholly-owned subsidiary, Pac
Title/Mirage, changed its name to Lifef/x Networks, Inc.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue - LifeF/X intends to develop and adapt the existing LifeF/X
technology for commercial applications and to be the platform-independent
infrastructure standard for, and a leading provider of, branded products and
services that enable the delivery of photo-realistic 3D digital models for a
broad range of market applications with primary emphasis on Internet-related
opportunities. All of our products are currently in the research and
development or planning stages and there have been no sales from the LifeF/X
technology through December 31, 1999.
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 ratably
as options vest over the two year vesting period of the options. 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 were up approximately $42,000 in
1999 over 1998 because Pac Title/Mirage occupied an additional facility for
only the latter portion of 1998 but all of 1999.
11
<PAGE>
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. Research and
development consists of efforts related to LifeF/X development activities.
LifeF/X has an exclusive, world-wide, perpetual license agreement with Auckland
UniServices Limited for the continuum 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. Salaries and related personnel
benefits of the LifeF/X development personnel 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.
Interest expense - Effective on December 30, 1999, Safeguard exchanged
$14,086,837 of Pac Title/Mirage debt and accrued interest thereon 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 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, which represents the fair value of 10,375,000
warrants to purchase Pac Title/Mirage Common Stock provided to Safeguard in
conjunction with $9.5 million of loans made by Safeguard to Pac Title/Mirage in
1999.
Discontinued operation - In March 1999, Pac Title/Mirage's Board of
Directors decided to concentrate on LifeF/X development and, accordingly,
initiated steps to dispose of non-LifeF/X operations. Results from the
discontinued operation for the year ended December 31, 1999 consist of the
following: (1) An operating loss on discontinued operation prior to the
measurement date (March 31, 1999) of $3,002,332 (which 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 the following: a $7,449,874
reserve for operating losses on discontinued operation from the measurement date
(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 (inception) 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 only
$18,705 for the seven month period ended December 31, 1997. Expenses in 1998
were higher due to increased occupancy costs and because the results for 1998
reflect a full year of expenses while 1997 represents only a partial year and
the start-up of the operations.
12
<PAGE>
Research and development expenses - Research and development amounted to
$1,202,762 for the year ended December 31, 1998 compared to $624,900 for the
period from June 1, 1997 (inception) through December 31, 1997. License and
development fees under the license agreement with Auckland UniServices Limited
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 only has two months of expense for
license and development fees as the UniServices license and development
agreement was not effective until November 1, 1997.
Discontinued operation - The loss on discontinued operation for the year
ended December 31, 1998 was $4,060,980. This includes a write off of $1.1
million of goodwill attributable to Pac Title/Mirage's digital effects
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
(inception) to December 31, 1997.
Liquidity and Capital Resources
In 1997, Pac Title/Mirage obtained an $8,000,000 term loan from a bank and
received $8,000,000 in proceeds from capital stock issued to Safeguard. A
significant portion of these funds was used in 1997 for Pac Title/Mirage's
purchase of its optical 2D and restoration business from Pacific Title and Art
Studio for approximately $15.5 million. The term loan required monthly principal
repayments of $133,333 over five years. In December 1999, principal repayments
were increased to $153,333 per month for January and February 2000, and to
$183,333 per month thereafter. The total outstanding principal balance on the
term loan was $7,866,667, $6,266,667 and $4,666,667 at December 31, 1997, 1998
and 1999, respectively.
Pac Title/Mirage also obtained a $3 million revolving credit facility from
the same bank. Outstanding borrowings under the line of credit were $900,000,
$2,550,000, and $2,484,000 at December 31, 1997, 1998 and 1999, respectively.
LifeF/X sold its non-LifeF/X assets, which consisted of film title and
special effects services, on March 20, 2000. The sale included a transfer of
all liabilities associated with the discontinued operation, including all debt.
As a result, LifeF/X is presently 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 3 to the
Consolidated Financial Statements. Historically, our revenues have been solely
related to our discontinued operation.
Since the bank loans were made in November 1997, Pac Title/Mirage (and
following the Merger, LifeF/X) has met all of its principal and interest
payments to the bank in a timely manner. LifeF/X has agreed that no additional
advances will be taken under the credit line, notwithstanding that there is
collateral in excess of the amount required to secure the line under the bank's
collateral formula. Further, LifeF/X has agreed that, in the event that the
collateral is insufficient to support the borrowings under the line, the line
will be paid down to the amount that is supported by the collateral and that
such new lower borrowing level will be the maximum amount eligible to be
borrowed in the future.
13
<PAGE>
The term loan agreement and revolving credit facility contain various
covenants related to financial ratios, minimum levels of net worth and other
limitations. We were in compliance with these covenants through October 31,
1998. Notwithstanding that we have not been in compliance with our financial
covenants since October 31, 1998, the bank, based on the continued support
provided by Safeguard and the timeliness of our scheduled loan payments, has not
declared any defaults or pursued any remedies against us to date. Refer to note
4 to the Consolidated Financial Statements. As of December 15, 1999, 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. On March 20, 2000, the bank agreed to extend
repayment of the amounts outstanding under its line of credit and forbear with
respect to the debt covenants on the term debt through May 29, 2000. However,
since at December 31, 1999 there was no assurance that the bank would extend the
term past May 29, 2000, all of the term debt has been classified in net
liabilities of discontinued operation - current at December 31, 1999. 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.
The other principal sources of financing have been cash provided by
operations and advances from Safeguard. Safeguard loaned Pac Title/Mirage
$600,000 in 1997, an additional $3,200,000 in 1998 and an additional $12,300,000
during the year ended December 31, 1999.
Effective upon the Merger, Fin Sports became a co-obligor with Pac
Title/Mirage with respect to certain debt owed to Safeguard totaling $13,325,000
at September 30, 1999. Effective December 30, 1999, Safeguard exchanged this
debt plus $761,837 of accrued interest thereon for warrants to buy 3,997,500
shares of Common Stock. The warrants have a term of ten years at an exercise
price of $.01 per share and are exercisable one year after the Merger, subject
to certain early exercise events specified in the warrants. Safeguard loans to
LifeF/X subsequent to September 30, 1999 have been assumed by PTM Productions,
Inc., the buyer of our discontinued operation.
Concurrent with the Merger, LifeF/X initiated a private placement offering
to raise $18 million through the sale to certain 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 received all funds. At December 31, 1999 we or our escrow agent had received
over $17,000,000. The first portion of the private placement closed in December
1999 and the second portion closed in February 2000.
These proceeds were raised to fund continuing LifeF/X development, with
primary emphasis on Internet applications of the technology. The funds raised
in the private placement will be used for the continuing LifeF/X business.
Safeguard has agreed to indemnify LifeF/X for liabilities associated with the
non-LifeF/X operations and has committed to continue funding the non-LifeF/X
operations. In addition to LifeF/X Internet development, the proceeds of the
private placement will be used to fund product marketing and distribution,
acquire management and support resources and build the infrastructure to
facilitate future growth. The proceeds of the private placement have been and,
until expended, will be invested in highly liquid short-term investments.
14
<PAGE>
LifeF/X has sold all of its non-LifeF/X assets to PTM Productions, Inc., an
entity owned by the pre-Merger Pac Title/Mirage shareholders, in consideration
for the assumption of liabilities (these assets and liabilities collectively,
the "Discontinued Operation Assets and Liabilities"). The Discontinued
Operation Assets and Liabilities consist of the assets and liabilities relating
to non-LifeF/X operations, including certain leased and all owned real property,
outstanding bank debt and all debt owed to Safeguard for loans made by
Safeguard during the period between October 1, 1999 and the sale of these assets
to, and the assumption of the related liabilities by, PTM Productions, Inc. See
Note 3 to Consolidated Financial Statements.
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 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 among other things, 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.
Risk Factors That May Affect Future Results
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 currently deem 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.
15
<PAGE>
We have not yet completed or released any product based upon our
LifeF/X technology and may be unable to complete a commercially viable product.
- -------------------------------------------------------------------------------
All products we intend to introduce are currently in the research and
development or planning phases. We might find it more difficult or complicated
to complete development of these products than we now believe, resulting in
delays or greater costs than we expect, or that we cannot make the products at a
commercially viable price. Early stage ventures like LifeF/X have a high
failure rate.
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 much more experience with the imaging parts of our planned
products than text-to-speech.
Our business would be seriously impaired if our
rights in the LifeF/X technology are compromised in any way.
- ------------------------------------------------------------
We have one patent issued, one patent allowed but not yet issued and one
patent pending with the United States Patent Office relating to computer
graphics and motion capture technologies, but we do not own all of the LifeF/X
technology. We license a portion of the LifeF/X technology from Auckland
UniServices Limited. UniServices has not patented the source code for the
LifeF/X technology. Therefore, we rely on non-disclosure, confidentiality and
non-competition agreements with our employees to protect many of our rights in
the LifeF/X technology. If these agreements are breached by our employees, it
may be necessary for us to incur significant expenses to enforce our contractual
rights and protect our rights in the LifeF/X technology. Our business plan and
strategy are to commercialize the LifeF/X technology. Termination of our
relationship with UniServices for any reason, termination of our exclusive
rights to the LifeF/X technology (which could occur if we fail to make
development fee payments or we disclose the LifeF/X technology to third parties
without authorization) would result in serious harm to our business, financial
position and results of operations.
Substantial competition may impair our ability to generate revenue.
- -------------------------------------------------------------------
The market for Internet avatar products is new, and we expect it to be
competitive. An avatar is a computer-generated animated image which is used to
guide and direct the user or to represent one or more users. The principal
competitive products in the Internet avatar market include, but may not be
limited to, Microsoft V-Chat 2.0, Microsoft Agent, Compaq's Faceworks, 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 Internet avatar products and services
being developed by competitors of which we are not aware.
16
<PAGE>
If the Internet avatar market becomes a viable market, we may not be able
to establish or maintain a competitive position against current or potential
competitors as they enter the market. Many of our current and potential
competitors have substantially greater financial, technical, marketing,
distribution and other resources, greater name recognition, stronger market
presence and longer operating histories than ours. As a result, they may be
able to adapt more quickly to new or emerging technologies and changes in
customer requirements. We cannot assure that we will be able to compete in this
market successfully.
If the market for Internet avatars develops, we could face competitive
pressures from new technologies or from modification of existing technologies.
We may also face competition from a number of indirect competitors with
substantial customer bases in the computer and other technical fields.
Additionally, Internet portals and other Internet gatekeepers that control
access to transactions could also promote our competitors or charge us
substantial fees. Our competitors may also be acquired by, receive investments
from, or enter into other commercial relationships with, larger, better-
established and better-financed companies. We may be unable to compete
successfully against current and potential competitors, and the competitive
pressures we face could seriously harm our business.
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 temper 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.
We are dependent on our key personnel and also
need additional personnel to grow our business.
- -----------------------------------------------
Development of the LifeF/X technology is a highly technical endeavor. As a
result, we depend on key technical personnel who combine specialized technical
knowledge of photo-realistic 3D digital human animation with broad knowledge of
the Internet.
There are four key technical employees, the loss of any of whom would be a
setback to our product development schedule, but would not be fatal to our long-
term development efforts. Each of these key technical employees is under
contract to LifeF/X and incentivized with stock options.
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 or that we will successfully assimilate newly hired employees. As a
result, we may be unable to successfully attract, assimilate or retain qualified
personnel. The failure to retain and attract the necessary personnel could
seriously harm our business, financial condition and results of operations.
17
<PAGE>
If we do not respond effectively to technological change, our
products and service could become obsolete and our business would suffer.
- -------------------------------------------------------------------------
The development of our photo-realistic 3D digital human animation products
and other technology entails significant technical and business risks. To
remain competitive, we must continue to enhance and improve the responsiveness,
functionality and features of our LifeF/X product offerings. The Internet and
the electronic commerce industry are characterized by:
. rapid technological change;
. changes in user and customer requirements and preferences;
. frequent introductions of new products and services embodying new
technologies; and
. the emergence of new industry standards and practices.
The evolving nature of the Internet could render our existing technology
and systems obsolete. Our success will depend, in part, on our ability to:
. license or acquire leading technologies useful in our business;
. develop new services and technology that will address the increasingly
sophisticated and varied needs of our users; and
. respond to technological advances and emerging industry and regulatory
standards and practices in a cost-effective and timely manner.
Future advances in technology may not be beneficial to, or compatible with,
our business. Furthermore, we may not successfully use new technologies
effectively or adapt our technology and systems to user requirements or emerging
industry standards on a timely basis. Our ability to remain technologically
competitive may require substantial expenditures and lead time. If we are
unable to adapt in a timely manner to changing market conditions or user
requirements, our business, financial condition and results of operations could
be seriously harmed.
There is no market for digital photo-realistic
animation products and services and this market may not develop.
- ----------------------------------------------------------------
A market for digital photo-realistic animation products and services has
not yet developed, and its development is subject to substantial uncertainty.
We cannot assure you that this market will ever develop. Our success will
depend on commercial acceptance of our LifeF/X technology.
18
<PAGE>
We have received no revenue from our LifeF/X technology, expect
to incur losses in the future, and may never achieve profitability.
- -------------------------------------------------------------------
As of December 31, 1999, we had no sales from our continuing operations
related to our LifeF/X technology. Our lack of revenue from exploitation of
LifeF/X technology reflects our research and development focus and the
unavailability of commercial products utilizing the LifeF/X technology. We do
not expect to receive revenue until the second half of 2001. As a result, we
will need to raise additional capital in the future. If we are unable to
develop our products for their proposed applications, our business will suffer
and our financial condition and results of operations will be seriously
affected.
If we do not achieve brand recognition, our business will suffer.
- -----------------------------------------------------------------
We must quickly build our LifeF/X brand to gain market acceptance for our
photo-realistic 3D digital animation products and services. 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. If we fail to gain market acceptance for our photo-
realistic 3D digital animation products and services, our business will suffer
dramatically.
Our business plan requires that we partner with other
companies, and if we fail to partner cost-effectively in a
timely manner with successful partners, our business will suffer.
- -----------------------------------------------------------------
We will pursue strategic partnerships with new or complementary businesses
to gain market acceptance for our technology, produce revenue and expand and
develop our photo-realistic 3D digital animation product and services offerings.
At present, we have no commitments or agreements with any strategic partner.
To the extent we pursue strategic partnerships with new or complementary
businesses, we may not be able to expand our products or service offerings
and related operations in a cost-effective or timely manner. We may experience
increased costs, delays and diversions of management attention when commencing
any new businesses or services. Furthermore, any new business or service we
launch that is not favorably received or perceived by users could damage our
reputation and brand name in the relevant markets. We also cannot be certain
that we will generate satisfactory revenues from any expanded services or
products to offset related costs. Any expansion of our operations may require
additional expenses, and these efforts may strain our management, financial
and operational resources.
19
<PAGE>
If we cannot effectively manage our growth,
our ability to provide services will suffer.
- --------------------------------------------
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. Furthermore, if we experience extensive interest in
our photo-realistic 3D digital animation products and services, we may fail to
meet the expectations of customers due to the strains this demand will place on
our infrastructure and systems. We have a limited basis upon which to evaluate
the capability of our systems or the interest our technology will generate. We
anticipate that we will expand our operations significantly in the near future,
and further expansion will be required to address the anticipated growth in our
user base and market opportunities. To manage the expected operations and
personnel growth, we will need to improve existing systems, procedures and
controls and implement new ones. In addition, we will need to expand our
technical, marketing, finance and administrative staff, and train and manage our
increasing employee base. We may not be able to effectively manage this growth.
Our growth and operating results could be impaired
if we are unable to meet our future capital requirements.
- ---------------------------------------------------------
We believe that our current cash balance will allow us to fund our
operations for at least the next 12 months. However, we will require
substantial working capital to fund our business and will need to raise
additional capital. In approximately 10 months we plan to seek additional
funding, in the form of equity or debt or a combination of equity and debt, to
meet the cash requirements of our business. We cannot be certain that
additional funds will be available when needed on satisfactory terms, if at all.
Our future capital needs depend on many factors, including:
. the 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 competitive factors.
The various elements of our business and growth strategies, including our
plans to fully support the commercial release of our photo-realistic 3D digital
human animation products and services, our introduction of new products and
services and our investments in infrastructure, will require additional capital.
If we are unable to raise additional necessary capital in the future, we may be
required to curtail our operations significantly or obtain funding through the
relinquishment of significant technology or markets. Also, raising additional
equity capital might have a dilutive effect on existing shareholders.
20
<PAGE>
Personal relationships of key personnel are
important to LifeF/X's business and prospects.
- ----------------------------------------------
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. UniService acts as a licensing agent for the University
of Auckland in this relationship. 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 could adversely impact us.
System and online security 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.
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 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
The success of our business will depend on the continued
growth of the Internet and the acceptance by consumers of
the Internet as a medium for advertising, commerce and communications.
- ----------------------------------------------------------------------
Our success depends, in part, on widespread acceptance and use 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 users will be willing to shift
their habits from traditional media to online media. For LifeF/X to be
successful, our users must accept and utilize electronic commerce to satisfy
their product needs. Our future revenues and profits, if any, substantially
depend upon our target users' acceptance and use of the Internet and other
online services as effective media of commerce.
21
<PAGE>
The Internet may not become a viable long-term commercial marketplace, due
to potentially inadequate development of the necessary network infrastructure,
delayed development of enabling technologies and performance improvements, or
other factors. The commercial acceptance and use of the Internet may not
continue to develop at historical rates. Our business, financial condition and
results of operations would be seriously harmed if:
. use of the Internet and other online services does not continue to
increase or increases more slowly than expected;
. the infrastructure for the Internet and other online services does not
effectively support future expansion of electronic commerce;
. concerns over security and privacy inhibit the growth of the Internet;
or
. the Internet and online services do not become viable commercial
marketplaces.
Our operating results could be impaired if we become
subject to burdensome government regulation and legal uncertainties.
- --------------------------------------------------------------------
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable 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:
. user privacy;
. pricing;
. content;
. copyrights;
. trade regulation;
. distribution; and
. characteristics and quality of products and services.
The adoption of any additional laws or regulations may decrease the
expansion of the Internet. A decline in the growth of the Internet could
decrease demand for our products and services and increase our cost of doing
business. Moreover, the applicability of existing laws to the Internet is
uncertain with regard to many issues, including property ownership, export of
specialized technology, sales tax, libel and personal privacy. Our business,
financial condition and results of operations could be seriously harmed by any
new legislation or regulation. Furthermore, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services, could also harm our business.
We plan to offer our LifeF/X product offerings over the Internet in
multiple states and 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.
22
<PAGE>
Certain provisions of Nevada law could
delay, defer or prevent a change in control.
- --------------------------------------------
LifeF/X is subject to the anti-takeover provisions of Sections 784.438
through 784.444 of the Nevada Corporation Law ("NCL"), which will prohibit us
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, and potentially for a further period, unless
the business combination is approved in a prescribed manner under the NCL.
These provisions of Nevada law could have the effect of delaying, deferring or
preventing a change in control of LifeF/X.
23
<PAGE>
Item 7. Financial Statements
- -----------------------------
The financial statements required by Item 7 of Form 10-KSB are
incorporated herein by reference to Exhibit 99.1.
LIFEF/X, INC. AND SUBSIDIARY
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Exhibit
99.1
Page #
-------
<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>
24
<PAGE>
Item 8. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
- ------------------------------------------------------------
Mantyla, McReynolds & Associates (Mantyla), 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 such 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 procedures, which disagreements, if not
resolved to the satisfaction of Mantyla, would have caused such firm to make
reference to the subject matter of the disagreements in connection with its
reports on Fin Sports' financial statements. In addition, there were no such
events as described under Item 304 of 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 procedures. 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.
25
<PAGE>
PART III
--------
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act
- ---------------------------------------------------------------------
The following table sets forth the names and ages of all of our directors
and executive officers as of March 15, 2000. All directors will serve until the
next annual meeting of shareholders and until their successors are elected and
qualified, 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
</TABLE>
Background and Experience
Michael Rosenblatt. Mr. Rosenblatt became Co-President and Chairman of
LifeF/X upon the Merger. 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.
26
<PAGE>
Lucille S. Salhany. Ms. Salhany became Chief Executive Officer, Co-
President and a director of LifeF/X upon the Merger. 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 (UPN) and currently serves on
the UPN operating committee. 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 network's 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 upon the Merger. 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.
Dr. Ian Hunter. Dr. Hunter became a director of LifeF/X upon the Merger.
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 upon the
Merger. 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, 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.
27
<PAGE>
Dr. Serge Lafontaine. Dr. Lafontaine became the Chief Technology Officer
of LifeF/X upon the Merger. 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.
28
<PAGE>
Item 10. 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.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
=====================================================================================================================
Annual Compensation Long Term Compensation Awards
- ---------------------------------- ---------------------- ----------------------------------------------------
Name and Principal Year Salary Bonus Restricted Securities All Other
Position ($) ($) Stock Awards Underlying Compensation
Options/SAR(#)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lucille S. Salhany 1999 30,769 (1) -- -- 1,952,459 --
Chief Executive 1998 -- -- -- -- --
Officer and
Co-President
- ---------------------------------------------------------------------------------------------------------------------
Michael Rosenblatt 1999 73,769 (2) -- -- 1,911,511 --
Chairman of the Board 1998 51,000 -- -- -- --
and Co-President
- ---------------------------------------------------------------------------------------------------------------------
Richard A. Guttendorf, 1999 -- (4) -- -- -- --
Jr. 1998 -- (4) -- -- -- --
Chief Financial
Officer, Secretary
and Director
- ---------------------------------------------------------------------------------------------------------------------
Robert Verratti 1999 -- -- -- 50,001 --
1998 150,631 (3) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Serge Lafontaine 1999 15,385 (1) -- -- 301,541 --
Chief Technology 1998 -- -- -- -- --
Officer, LifeF/X
Networks, Inc.
- ---------------------------------------------------------------------------------------------------------------------
(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.
=====================================================================================================================
</TABLE> 29
<PAGE>
1999 Option Grants: 1999 Long-Term Incentive Plan
Pac Title/Mirage had a stock option plan (the 1997 Compensation 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. Effective upon
the Merger, this stock option plan was terminated and LifeF/X adopted the
Lifef/x, Inc. 1999 Long-Term Incentive Plan (the New Plan) with terms
substantially similar to those of the 1997 Compensation Plan. The New Plan
reserves up to 7,981,850 shares of LifeF/X Common Stock for issuance under the
New Plan. 2,452,475 of the shares reserved for issuance under the New Plan are
subject to shareholder approval of the modifications to the New Plan approved by
the board of directors of LifeF/X on March 14, 2000. Following the adoption of
the New Plan, LifeF/X assumed the obligations of outstanding options granted to
Pac Title/Mirage employees under the 1997 Compensation Plan.
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 and the fair value of LifeF/X'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. In addition, LifeF/X
recognized $25,950 of compensation expense for options granted to a non-
employee, representing the fair value of the options on the grant date.
In addition, in connection with the Merger, LifeF/X granted options to
various employees, subject to vesting schedules. Under the New Plan, the strike
price for nonstatutory stock option grants must be at least 85% of fair market
value on the grant date. Outstanding options under the New Plan vest pursuant to
vesting schedules established by the Compensation Committee and expire on or
before the tenth anniversary of the grant date, subject to early termination in
accordance with the New Plan.
30
<PAGE>
The following table presents information concerning individual grants of
stock options made during 1999 to each of the executive officers and directors
of LifeF/X.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Number of Percent of Market
Securities Total Options/ Value on
Underlying SARs Granted Exercise Date of
Options/SARs To Employees Price Grant Expiration
Granted (#) in Fiscal Year ($/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
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 (as adjusted for the conversion of Pac Title/Mirage shares to LifeF/X
shares upon the Merger). No options were exercised by officers in 1998 or 1999.
31
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs at
Shares December 31, 1999 (#) December 31, 1999 (#)(1)
Acquired on Value --------------------------- ---------------------------
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------- --------- ----------- ------------- ----------- -------------
<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
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 subject to the terms and
conditions of LifeF/X's 1999 Long-Term Incentive 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. In the event Ms. Salhany's employment terminates due
to her death, permanent disability or because she has breached her fiduciary
duty, engaged in any action constituting fraud, embezzlement or theft, is found
guilty of or pleads guilty or nolo contendere to a felony or misdemeanor
involving moral turpitude which results in material harm to LifeF/X, is grossly
neglectful in performing or willfully refuses to perform her duties, or
materially fails or refuses to comply with any valid and legal directive of the
board of directors, she shall receive only such portion of her base salary and
vacation (if any) which may have accrued but remained unpaid prior to her
termination. 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.
32
<PAGE>
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
subject to the terms and conditions of LifeF/X's 1999 Long-Term Incentive 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. In the event Mr.
Rosenblatt's employment terminates due to his death, permanent disability or
because he has breached his fiduciary duty, engaged in any action constituting
fraud, embezzlement or theft, is found guilty of or pleads guilty or nolo
contendere to a felony or misdemeanor involving moral turpitude which results in
material harm to LifeF/X, is grossly neglectful in performing or willfully
refuses to perform his duties, or materially fails or refuses to comply with any
valid and legal directive of the board of directors, he shall receive only such
portion of his base salary and vacation (if any) which may have accrued but
remained unpaid prior to his termination. 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 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 subject to the terms
and conditions of LifeF/X's 1999 Long-Term Incentive 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. In the event Dr. Lafontaine's employment
terminates due to his death, permanent disability or because he has breached his
fiduciary duty, engaged in any action constituting fraud, embezzlement or theft,
is found guilty of or pleads guilty or nolo contendere to a felony or
misdemeanor involving moral turpitude which results in material harm to LifeF/X,
is grossly neglectful in performing or willfully refuses to perform his duties,
or materially fails or refuses to comply with any valid and legal directive of
the board of directors, he shall receive only such portion of his base salary
and vacation (if any) which may have accrued but remained unpaid prior to his
termination. If Dr. Lafontaine's employment is terminated by LifeF/X for any
other reason, he shall 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.
33
<PAGE>
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 such
indemnification. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
LifeF/X pursuant to the foregoing provisions, we have been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Executive officers, directors and ten percent or more beneficial owners of
the Company are required to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission pursuant to
Section 16(a) of the Securities Exchange Act of 1934. The Company has reviewed
such reports received by it and believes that, except as specified below, all of
its executive officers, directors and ten percent or more beneficial owners of
the Company complied with all applicable Section 16(a) filing requirements
during the fiscal year ended December 31, 1999.
Form 3's - Initial Statement of Beneficial Ownership of Securities, were
filed late for Lucille S. Salhany, Michael Rosenblatt, Richard A. Guttendorf
Jr., Stephen Andriole and Robert Verratti. Form 3's were not filed for Ian
Hunter and Serge Lafontaine. The individuals are in the process of preparing and
filing the required information on Form 3. Safeguard, a ten percent beneficial
owner, did not file Form 3 or Form 5.
Form 3's were filed late for the following officers of Fin Sports: Duane S.
Jenson, Wayne Bassham, Kent Faulkner and Todd Albiston.
Form 4's - Statement of Changes in Beneficial Ownership, were filed late for
Michael Rosenblatt and Mirage Technologies LP.
Form 5's - Annual Statement of Change in Beneficial Ownership, for the
fiscal year ended December 31, 1999 were not filed for Michael Rosenblatt, Ian
Hunter and Serge Lafontaine. The individuals are in the process of preparing and
filing the required information on Form 5.
34
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following table sets forth certain information as of March 17, 2000
with respect to the beneficial ownership of our Common Stock of each of our
directors, each of our executive officers and all of our executive officers and
directors as a group and the percentage of our Common Stock so owned. We are not
aware of any other beneficial owner of more than 5% of the outstanding shares of
Common Stock.
As used in this section, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Exchange Act as consisting of sole
or shared voting power (including the power to vote or direct the vote) and/or
sole or shared investment power (including the power to dispose of or direct the
disposition of) with respect to the security through any contract, arrangement,
understanding, relationship or otherwise, subject to community property laws
where applicable. Each person has sole voting and investment power with respect
to the 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 02164.
<TABLE>
<CAPTION>
Number of Percentage
Shares of Total(1)
--------- -----------
<S> <C> <C>
Directors and Officers
- ----------------------
Michael Rosenblatt..................................... 2,561,591 (2)(3) 13.1%
Lucille S. Salhany..................................... 585,738 (4) 3.0%
Richard A. Guttendorf, Jr.............................. 40,000 (5) 0.2%
Dr. Ian Hunter......................................... 1,935,885 (6) 10.2%
Robert Verratti........................................ 524,997 (7) 2.7%
Dr. Stephen J. Andriole................................ 30,000 0.2%
Dr. Serge Lafontaine................................... 2,046,137 (8) 10.7%
All Directors and Executive
Officers (7 persons)................................... 7,724,348 (9) 37.8%
5% or More Beneficial Ownership
- -------------------------------
Safeguard Scientifics, Inc............................. 2,361,594 (10) 12.4%
435 Devon Park Drive
Wayne, PA 19087
Michael MacCloskey..................................... 967,856 (11) 5.1%
2847 Thomas Avenue
Dallas, Texas 75204
</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.
35
<PAGE>
(2) Michael Rosenblatt is the record holder of 1,731,272 shares and has the
right to acquire 585,738 shares within 60 days pursuant to options granted under
the 1999 Long-Term Incentive 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 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 585,738 shares within 60 days
pursuant to options granted under the 1999 Long-Term Incentive 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 pursuant to options granted under the 1999
Long-Term Incentive Plan described under "Executive Compensation."
(8) Serge Lafontaine is the record holder of 1,774,102 shares and has the right
to acquire 110,252 shares within 60 days pursuant to options granted under the
1999 Long-Term Incentive 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 1,456,727 shares within 60
days.
(10) Safeguard Scientifics, Inc. is the record holder of 2,358,261 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).
36
<PAGE>
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
UniServices License
We license a portion of the LifeF/X technology from Auckland UniServices
Limited 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, excluding professional medical, engineering and
scientific applications. License and development fees under the license
agreement with Auckland UniServices Limited are $500,000 per year through
November 2002 and $200,000 per year thereafter. 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.
Ian Hunter Consulting Agreement
Dr. Ian Hunter serves as a technical and engineering consultant to LifeF/X
under a consulting agreement with a term of one year which commenced on January
4, 2000. Under the terms of his consulting agreement, Dr. Hunter's compensation
is $150,000.
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., an entity owned by the pre-Merger Pac Title/Mirage
shareholders. Owners of PTM Productions, Inc. include our Chairman and Co-
President Michael Rosenblatt (11.31%), our director Ian Hunter (11.31%),
Safeguard Scientifics (59%), our director Robert Verratti (2%) and our Chief
Technology Officer Serge Lafontaine (11.31%). 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 value of our liabilities assumed by PTM Productions
exceeded the 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 related to the assets purchased and the
liabilities assumed.
37
<PAGE>
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 subject to minimum annual
payments of $100,000 and maximum annual payments of $600,000. This agreement has
an initial term through December 31, 2002 and continues 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 LifeF/X is
sold. The total amount owed to Safeguard of $535,692 as of December 31, 1999 was
one of the liabilities assumed by PTM Productions in connection with its
purchase of the discontinued operation, while all amounts accruing under the
contract after December 31, 1999 will be paid by LifeF/X.
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.
38
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
- -------------------------------------------
(a). Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 Articles of Incorporation of Lifef/x, Inc. (2)
3.2 Certificate of Amendment to the Articles of Incorporation
of Fin Sports U.S.A., Inc. dated February 4, 1995 (2)
3.3 Certificate of Amendment to the Articles of Incorporation
of Fin Sports U.S.A., Inc. dated September 25, 1995 (2)
3.4 Bylaws of Lifef/x, Inc. (2)
3.5 Amendment to Bylaws of Fin Sports U.S.A., Inc. (1)
4.1 Registration Rights Agreement Dated December 14, 1999 (1)
4.2 Fin Sports U.S.A., Inc. Subscription Agreement (1)
10.1 Employment Agreement dated December 1, 1999 re: Serge
LaFontaine (1)
10.2 Employment Agreement dated December 1, 1999 re: Michael
Rosenblatt (1)
10.3 Employment Agreement dated December 1, 1999 re: Lucille
Salhany (1)
10.4 Consulting Agreement dated January 4, 2000 re: Ian
Hunter (1)
10.5 Lifef/x, Inc. 1999 Long Term Incentive Plan including
Amendment (1)
10.6 Technologies License, Development, Consulting and
Collaboration Agreement between Auckland UniServices
Limited and Pacific Title/Mirage, Inc. effective as of
November 1, 1997 (confidential treatment applied for)
10.7 Indemnification Agreement dated December 14, 1999 (1)
10.8 Security Agreement dated March 20, 2000 (1)
10.9 Assignment and Assumption Agreement dated December 14,
1999 (1)
10.10 General Bill of Sale, Assignment and Assumption Agreement
dated March 20, 2000 (1)
10.11 Software License Agreement dated March 20, 2000 (1)
10.12 Indemnification Agreement dated December 14, 1999 re:
Robert Verratti (1)
10.13 Lock-Up/Leak-Out Agreement dated December 14, 1999 (1)
10.14 Massachusetts Office Lease dated March 16, 2000 (1)
10.15 Master Lease dated July 25, 1967 covering the office
space leased to Lifef/x, Inc. by the sublessor pursuant
to Exhibit 10.14 (2)
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 (2)
27.1 Financial Data Schedule (2)
99.1 Lifef/x, Inc. and Subsidary Consolidated Financial
Statements for the Fiscal Years Ended December 31,
1999 and 1998 and Independent Auditors' Report (2)
</TABLE>
----------------
(1) Incorporated by reference to Form SB-2 filed by Lifef/x, Inc.
on March 21, 2000.
(2) Filed herewith.
39
<PAGE>
(b). Reports on Form 8-K
A Form 8-K was filed on December 15, 1999 to report the acquisition
on December 14, 1999 of Pacific Title/Mirage, Inc. by Fin
Sports U.S.A., Inc. This was amended by the filing of Form 8-K/A on
February 29, 2000 and Form 8-K/A, Amendment No. 1, on March 2, 2000
to provide the financial statements of the acquired business as
required by Form 8-K.
40
<PAGE>
SIGNATURES
In accordance with section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LIFEF/X, INC.
-------------
/s/ Michael Rosenblatt
-------------------------
Michael Rosenblatt
Chairman of the Board
and Co-President
March 28, 2000
/s/ Lucille S. Salhany
-----------------------
Lucille S. Salhany
Co-President and Chief
Executive Officer
March 28, 2000
/s/ Richard A. Guttendorf, Jr.
-------------------------------
Richard A. Guttendorf, Jr.
Chief Financial Officer
and Secretary
March 27, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<S> <C>
/s/ Michael Rosenblatt /s/ Lucille S. Salhany
- ---------------------------- ---------------------------
Michael Rosenblatt, Chairman of Lucille S. Salhany, Co-President,
the Board and Co-President Chief Executive Officer and Director
March 28, 2000 March 28, 2000
/s/ Richard A. Guttendorf, Jr. /s/ Ian Hunter
- ------------------------------- --------------------
Richard A. Guttendorf, Jr., Chief Ian Hunter, Director
Financial Officer, Secretary and March 28, 2000
Director
March 27, 2000
/s/ Robert Verratti /s/ Stephen Andriole
- -------------------------- --------------------------
Robert Verratti, Director Stephen Andriole, Director
March 28, 2000 March 22, 2000
</TABLE>
41
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
FIN SPORTS U.S.A., INC.
I, the undersigned, being a natural person more than eighteen (18) years of
age, acting as incorporator of the above-named corporation (hereinafter referred
to as the "Corporation") under the provisions of the Nevada Business Corporation
Act, do hereby adopt the following Articles of Incorporation for such
Corporation:
ARTICLE I
NAME
The name of the Corporation hereby created shall be:
FIN Sports U.S.A., Inc.
ARTICLE II
DURATION
The Corporation shall continue in existence perpetually unless sooner
dissolved according to law.
ARTICLE III
PURPOSE
The Corporation is organized for the purpose of:
(a) engaging in any and all lawful purposes, activities and pursuits, and
the Corporation shall have all the powers allowed or permitted by the laws
of the state of Nevada.
ARTICLE IV
CAPITALIZATION
The Corporation is authorized to issue 1,000,000 common shares, all of
which shall have a par value of $0.01 per share. Each share shall have equal
rights as to voting and in the event of dissolution of liquidation.
<PAGE>
ARTICLE V
DENIAL OF PRE-EMPTIVE RIGHTS
No holder of any shares of the Corporation, whether now or hereafter
authorized, shall have any pre-emptive or preferential rights to acquire shares
or securities of the Corporation.
ARTICLE VI
PAID IN CAPITAL
The Corporation will not commence business until the consideration of the
value of at least $1,000.00 has been received by it as consideration for the
issuance of shares.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation shall indemnify any and all persons who may serve or who
have served at any time as directors or officers or who at the request of the
Board of Directors of the Corporation, may serve or any time have served as
directors or officers of another corporation in which the Corporation at such
time owned or may own shares of stock or of which it was or may be a creditor,
and their respective heirs, administrators, successors and upon judgments,
counsel fees and amounts paid in settlement (before or after suit is commenced),
actually and necessarily by claim, action, suit or proceeding in which they, or
any of them, are made parties, or a party, or which may be asserted against them
or any of them, by reason of being or have been directors or officers of the
Corporation, or of such other corporation, officer of the Corporation, or of
such other corporation or former director or officer or person shall be adjudged
in any action, suit or proceeding to be liable for his own negligence or
misconduct in the performance of his duty. Such indemnification shall be in
addition to any other rights to which those indemnified may be entitled under
any law, by law, agreement, vote of shareholder or otherwise.
ARTICLE VIII
OFFICERS' AND DIRECTORS' CONTRACTS
No contract or other transaction between this Corporation and any other
firm or corporation shall be affected by the fact that a director or officer of
this Corporation has an interest in, or is a director or officer of this
Corporation or any other corporation. Any officer or director, individually or
with others, may be a party to, or may have an interest in, any transaction of
this Corporation or any transaction in which this Corporation is a party or has
an interest. Each person who is now or may become an officer and director of
this Corporation is hereby relieved from liability that he might otherwise
obtain in the event such officer or director contracts with this Corporation for
the benefit of himself or any firm or other corporation in which he may have an
interest, provided each officer or director acts in good faith.
2
<PAGE>
ARTICLE IX
ADOPTION AND AMENDMENT OF BYLAWS
The initial Bylaws of the Corporation shall be adopted by its board of
directors. The power to alter or amend or repeal the Bylaws or adopt new Bylaws
shall be vested in the board of directors, but the holders of common stock of
the Corporation may also alter, amend or repeal the Bylaws or adopt new Bylaws.
The Bylaws may contain any provisions for the regulation and management of the
affairs of the Corporation not inconsistent with law or these Articles of
Incorporation.
ARTICLE X
REGISTERED OFFICE AND AGENT
The address of the initial registered office of the Corporation and its
initial registered agent at such address is
The Corporation Trust Company of Nevada
One East First Street
Reno, Nevada 99501
ARTICLE XI
DIRECTORS
The Corporation shall not have fewer directors than the number of
shareholders who own an equity interest in the Corporation. At such time as the
Corporation has three (3) or more shareholders, it shall not have less than (3)
nor more than nine (9) directors. The permissible number of directors may be
increased or decreased from time to time by the board of directors in accordance
with Section 78.330 of the Nevada Revised Statutes or any amendment or successor
statute. The original name and address of the person who is to serve as
director until the first annual meeting of shareholders and until his successor
is duly elected and shall qualify is:
3
<PAGE>
Herbert M. Holmes
c/o Terrel W. Smith
136 South Main, #602
Salt Lake City, Utah 84101
ARTICLE XII
INCORPORATOR
The name and address of the incorporator is:
Herbert M. Holmes
c/o Terrel W. Smith
136 South Main, #602
Salt Lake City, Utah 84101
DATED this 19th day of May, 1987.
/S/ HERBERT M. HOLMES
Herbert M. Holmes
STATE OF UTAH )
) ss.
COUNTY OF SALT LAKE )
I, Vicki L. McCollin, a notary public, hereby certify that on the 19th day
of May, 1987, personally appeared before me Herbert M. Holmes, being by me first
duly sworn, who acknowledged to me that he is the person who signed the
foregoing document as the incorporator and that the statements contained herein
are true.
/s/ Vicki L. McCollin
NOTARY PUBLIC
Residing in /S/ Salt Lake County
My Commission Expires:
/S/ ______________ 2/6/89
4
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
TO THE ARTICLES OF INCORPORATION OF
FIN SPORTS U.S.A., INC.
We, the undersigned, Wayne Bassham , President and Director, of Fin Sports
U.S.A., Inc. a Nevada corporation (the "Company"), do hereby certify:
I.
Pursuant to Section 78.390 of the Nevada Revised Statutes, the Articles of
Incorporation of the Corporation shall be amended as outlined in Section III
hereof.
II.
The foregoing amendment was adopted by Unanimous Consent of the Board of
Directors pursuant to Section 78.315 of the Nevada Revised Statutes, and by
Consent of Majority Stockholder pursuant to Section 78.320 of the Nevada Revised
Statutes.
III.
Pursuant to the resolutions adopted by the Board of directors and Majority
Stockholder as set forth in Paragraph II above, the 7,000,000 outstanding shares
of the Corporation were reverse split on a basis of 1 for 6.5, effective
February 10, 1999, retaining the authorized shares at 50,000,000 and par value
at one mill ($0.001) per share, with appropriate adjustments being made in the
additional paid in capital and stated capital accounts of the Corporation;
provided, however, that no stockholder, computed on a per stock certificate of
record basis on the effective date hereof, currently owning 100 or more shares
shall be reduced to less than 100 shares as a result of the reverse split and
that no stockholder owning less than 100 shares, on the per stock certificate
basis on the effective date hereof, shall be affected by the reverse split; such
additional
<PAGE>
shares required to provide the minimum of 100 shares to be conveyed to the
Company by a principal stockholder of the Company; and provided, further, that
all fractional shares shall be rounded to the nearest whole share.
IV.
The number of shares entitled to vote on the amendment was 7,000,000.
V.
The number of shares voted in favor of the amendment was 5,489,188, with
none opposing and none abstaining.
/S/ WAYNE BASSHAM
Wayne Bassham, President and Director
STATE OF UTAH )
: ss
COUNTY OF SALT LAKE )
On the 4 day of February, 1995, personally appeared before me, a Notary
Public, Wayne Bassham, who acknowledged that he is the President and Director of
Fin Sports U.S.A., Inc. and that he is authorized to and did execute the above
instrument.
/S/ KATHLEEN L. MORRISON
NOTARY PUBLIC
(Notary Seal)
2
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
TO THE ARTICLES OF INCORPORATION OF
FIN SPORTS U.S.A., INC.
We, the undersigned, Duane S. Jenson, President, and Sheryl Ross,
Secretary, of Fin Sports U.S.A., Inc. a Nevada corporation the ("Corporation"),
do hereby certify:
I.
The name of the Corporation is Fin Sports U.S.A., Inc.
II.
The following amendments to the Articles of Incorporation of the
Corporation were adopted by the written consent of the stockholders of the
Corporation owing in excess of a majority of the outstanding voting securities
of the Corporation on September 17, 1993, and September 25, 1995, respectively,
following the resolutions of the Board of Directors adopting, ratifying and
approving these amendments:
First: Article IV shall be amended as follows, to-wit:
III.
ARTICLE IV.
The Corporation is authorized to issue 50,000,000 common shares, all of
which shall have a par value of $0.001 per share. Each share shall have equal
rights as to voting and in the event of dissolution or liquidation.
Second: The 2,800 outstanding shares of the Corporation are forward split
on a basis of 2,500 for 1, increasing the presently outstanding shares from
2,800 shares to 7,000,000 shares.
IV.
The number of shares entitled to vote on the amendments was 2,800.
V.
The number of shares voted in favor of the amendments was 2,800 by the
written consent given on September 17, 1993, and 2,195 by the written consent
given on September 25, 1995, with none opposing and none abstaining.
<PAGE>
/S/ DUANE S. JENSON, PRES
Duane S. Jenson, President
/S/ SHERYL ROSS
Sheryl Ross, Secretary
STATE OF UTAH )
: ss
COUNTY OF SALT LAKE )
On the 25 day of September, 1995, personally appeared before me, a Notary
Public, Duane S. Jenson, who acknowledged that he is the Secretary of the
Corporation, and that he is authorized to and did execute the above instrument.
/S/ SHERYL ROSS
NOTARY PUBLIC
(Notary Seal)
STATE OF UTAH )
: ss
COUNTY OF SALT LAKE )
On the 25 day of September, 1995, personally appeared before me, a Notary
Public, Sheryl Ross, who acknowledged that he is the President of the
Corporation, and that he is authorized to and did execute the above instrument.
/S/ DONNA J. GEORGE
NOTARY PUBLIC
(Notary Seal)
2
<PAGE>
EXHIBIT 3.4
BYLAWS
OF
FIN SPORTS U.S.A., INC.
ARTICLE I
OFFICES
Section 1.01 Location of Office. The corporation may maintain such offices
within or without the State of Nevada as the Board of Directors may from time to
time designate or require.
Section 1.02 Principal Office. The address of the principal office of the
corporation shall be at the address of the registered office of the corporation
as so designated in the office of the Lieutenant Governor/Secretary of State of
the state of incorporation, or at such other address as the Board of Directors
shall from time to time determine.
ARTICLE II
SHAREHOLDERS
Section 2.01 Annual Meeting. The annual meeting of the shareholders shall
be held in May of each year or at such other time designated by the Board of
Directors and as is provided for in the notice of the meeting, for the purpose
of electing directors and for the transaction of such other business as may come
before the meeting. If the election of directors shall not be held on the day
designated for the annual meeting of the shareholders, or at any adjournment
thereof, the Board of Directors shall cause the election to be held at a special
meeting of the shareholders as soon thereafter as may be convenient.
Section 2.02 Special Meetings. Special meetings of the shareholders may be
called at any time by the chairman of the board, the president, or by the Board
of Directors, or in their absence or disability, by any vice president, and
shall be called by the president or, in his or her absence or disability, by a
vice president or by the secretary on the written request of the holders of not
less than one-tenth of all the shares entitled to vote at the meeting, such
written request to state the purpose or purposes of the meeting and to be
delivered to the president, each vice-president, or secretary. In case of
failure to call such meeting within 60 days after such request, such shareholder
or shareholders may call the same.
Section 2.03 Place of Meetings. The Board of Directors may designate any
place, either within or without the state of incorporation, as the place of
meeting for any annual meeting or for any special meeting called by the Board of
Directors. A waiver of notice signed by all shareholders entitled to vote at a
meeting may designate any place, either within or without the state of
incorporation, as the place for the holding of such meeting. If no designation
is made, or
<PAGE>
if a special meeting be otherwise called, the place of meeting shall be at the
principal office of the Corporation.
Section 2.04 Notice of Meetings. The secretary or assistant secretary, if
any, shall cause notice of the time, place, and purpose or purposes of all
meetings of the shareholders (whether annual or special), to be mailed at least
ten (10) days, but not more than fifty (50) days, prior to the meeting, to each
shareholder of record entitled to vote.
Section 2.05 Waiver of Notice. Any shareholder may waive notice of any
meeting of shareholders (however called noticed, whether or not called or
noticed and whether before, during, or after the meeting), by signing a written
waiver of notice or a consent to the holding of such meeting, or an approval of
the minutes thereof. Attendance at a meeting, in person or by proxy, shall
constitute waiver of all defects of call or notice regardless of whether waiver,
consent, or approval is signed or any objections are made. All such waivers,
consents, or approvals shall be made a part of the minutes of the meeting.
Section 2.06 Fixing Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any annual meeting of
shareholders or any adjournment thereof, or shareholders entitled to receive
payment of any dividend or in order to make a determination of shareholders for
any other proper purpose, the Board of Directors of the corporation may provide
that the share transfer books shall be closed, for the purpose of determining
shareholders entitled to notice of or to vote at such meeting, but not for a
period exceeding fifty (50) days. If the share transfer books are closed for the
purpose of determining shareholders entitled to notice of or to vote at such
meeting, such books shall be closed for at least ten (10) days immediately
preceding such meeting.
In lieu of closing the share transfer books, the Board of Directors may fix
in advance a date as the record date for any such determination of shareholders,
such date in any case to be not more than fifty (50) and, in case of a meeting
of shareholders, not less than ten (10) days prior to the date on which the
particular action requiring such determination of shareholders is to be taken.
If the share transfer books are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting or
to receive payment of a dividend, the date on which notice of the meeting is
mailed or the date on which the resolution of the Board of Directors declaring
such dividend is adopted, as the case may be, shall be the record date for such
determination of shareholders. When a determination of shareholders entitled to
vote at any meeting of shareholders has been made as provided in this Section,
such determination shall apply to any adjournment thereof. Failure to comply
with this Section shall not affect the validity of any action taken at a meeting
of shareholders.
Section 2.07 Lists. The officer or agent of the corporation having charge
-----
of the share transfer books for shares of the corporation shall make, at least
ten (10) days before each meeting of the shareholders, a complete list of the
shareholders entitled to vote at such meeting or an adjournment thereof,
arranged in alphabetical order, with the address of, and the number of shares
held by each, which list, for a period of ten (10) days prior to such meeting,
shall be kept on file at the registered office of the corporation and shall be
subject to inspection by any shareholder during the whole time of the meeting.
The original share transfer book shall be
2
<PAGE>
prima facia evidence as to the shareholders who are entitled to examine such
list or transfer books, or to vote at any meeting of shareholders.
Section 2.08 Quorum. One-half of the total voting power of the outstanding
shares of the corporation entitled to vote, represented in person or by proxy,
shall constitute a quorum at a meeting of the shareholders. If a quorum is
present, the affirmative vote of the majority of the voting power represented by
shares at the meeting and entitled to vote on the subject shall constitute
action by the shareholders, unless the vote of a greater number or voting by
classes is required by the laws of the state of incorporation of the corporation
or the Articles of Incorporation. If less than one-half of the outstanding
voting power is represented at a meeting, a majority of the voting power
represented by shares so present may adjourn the meeting from time to time
without further notice. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed.
Section 2.09 Voting of Shares. Each outstanding share of the corporation
entitled to vote shall be entitled to one vote on each matter submitted to vote
at a meeting of shareholders, except to the extent that the voting rights of the
shares of any class or series of stock are determined and specified as greater
or lesser than one vote per share in the manner provided by the Articles of
Incorporation.
Section 2.10 Proxies. At each meeting of the shareholders, each shareholder
entitled to vote shall be entitled to vote in person or by proxy; provided,
however, that the right to vote by proxy shall exist only in case the instrument
authorizing such proxy to act shall have been executed in writing by the
registered holder or holders of such shares, as the case may be, as shown on the
share transfer of the corporation or by his or her or her attorney thereunto
duly authorized in writing. Such instrument authorizing a proxy to act shall be
delivered at the beginning of such meeting to the secretary of the corporation
or to such other officer or person who may, in the absence of the secretary, be
acting as secretary of the meeting. In the event that any such instrument shall
designate two or more persons to act as proxies, a majority of such persons
present at the meeting, or if only one be present, that one shall (unless the
instrument shall otherwise provide) have all of the powers conferred by the
instrument on all persons so designated. Persons holding stock in a fiduciary
capacity shall be entitled to vote the shares so held and the persons whose
shares are pledged shall be entitled to vote, unless in the transfer by the
pledge or on the books of the corporation he or she shall have expressly
empowered the pledgee to vote thereon, in which case the pledgee, or his or her
proxy, may represent such shares and vote thereon.
Section 2.11 Written Consent to Action by Shareholders. Any action required to
be taken at a meeting of the shareholders, or any other action which may be
taken at a meeting of the shareholders, may be taken without a meeting, if a
consent in writing, setting forth the action so taken, shall be signed by all of
the shareholders entitled to vote with respect to the subject matter thereof.
3
<PAGE>
ARTICLE III
DIRECTORS
Section 3.01 General Powers. The property, affairs, and business of the
corporation shall be managed by its Board of Directors. The Board of Directors
may exercise all the powers of the corporation whether derived from law or the
Articles of Incorporation, except such powers as are by statute, by the Articles
of Incorporation or by these Bylaws, vested solely in the shareholders of the
corporation.
Section 3.02 Number, Term, and Qualifications. The Board of Directors
shall consist of three to nine persons. Increases or decreases to said number
may be made, within the numbers authorized by the Articles of Incorporation, as
the Board of Directors shall from time to time determine by amendment to these
Bylaws. An increase or a decrease in the number of the members of the Board of
Directors may also be made upon amendment to these Bylaws by a majority vote of
all of the shareholders, and the number of directors to be so increased or
decreased shall be fixed upon a majority vote of all of the shareholders of the
corporation. Each director shall hold office until the next annual meeting of
shareholders of the corporation and until his or her successor shall have been
elected and shall have qualified. Directors need not be residents of the state
of incorporation or shareholders of the corporation.
Section 3.03 Classification of Directors. In lieu of electing the entire
number of directors annually, the Board of Directors may provide that the
directors be divided into either two or three classes, each class to be as
nearly equal in number as possible, the term of office of the directors of the
first class to expire at the first annual meeting of shareholders after their
election, that of the second class to expire at the second annual meeting after
their election, and that of the third class, if any, to expire at the third
annual meeting after their election. At each annual meeting after such
classification, the number of directors equal to the number of the class whose
term expires at the time of such meeting shall be elected to hold office until
the second succeeding annual meeting, if there be two classes, or until the
third succeeding annual meeting, if there be three classes.
Section 3.04 Regular Meetings. A regular meeting of the Board of
Directors shall be held without other notice than this Bylaw immediately
following, and at the same place as, the annual meeting of shareholders. The
Board of Directors may provide by resolution the time and place, either within
or without the state of incorporation, for the holding of additional regular
meetings without other notice than such resolution.
Section 3.05 Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the president, vice president, or any two
directors. The person or persons authorized to call special meetings of the
Board of Directors may fix any place, either within or without the state of
incorporation , as the place for holding any special meeting of the Board of
Directors called by them.
Section 3.06 Meetings by Telephone Conference Call. Members of the Board
of Directors may participate in a meeting of the Board of Directors or a
committee of the Board of Directors by means of conference telephone or similar
communication equipment by means of
4
<PAGE>
which all persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this Section shall constitute presence in
person at such meeting .
Section 3.07 Notice. Notice of any special meeting shall be given at least
ten (10) days prior thereto by written notice delivered personally or mailed to
each director at his or her regular business address or residence, or by
telegram. If mailed, such notice shall be deemed to be delivered when deposited
in the United States mail so addressed, with postage thereon prepaid. If notice
be given by telegram, such notice shall be deemed to be delivered when the
telegram is delivered to the telegraph company. Any director may waive notice of
any meeting. Attendance of a director at a meeting shall constitute a waiver of
notice of such meeting, except where a director attends a meeting solely for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened.
Section 3.08 Quorum. A majority of the number of directors shall constitute
a quorum for the transaction of business or any meeting of the Board of
Directors, but if less than a majority is present at a meeting, a majority of
the directors present may adjourn the meeting from time to time without further
notice.
Section 3.09 Manner of Acting. The act of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, and the individual directors shall have no power as such.
Section 3.10 Vacancies and Newly Created Directorship. If any vacancies
shall occur in the Board of Directors by reason of death, resignation or
otherwise, or if the number of directors shall be increased, the directors then
in office shall continue to act and such vacancies or newly created
directorships shall be filled by a vote of the directors then in office, though
less than a quorum, in any way approved by the meeting. Any directorship to be
filled by reason of removal of one or more directors by the shareholders may be
filled by election by the shareholders at the meeting at which the director or
directors are removed.
Section 3.11 Compensation. By resolution of the Board of Directors, the
directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors, and may be paid a fixed sum for attendance at each
meeting of the Board of Directors or a stated salary as director. No such
payment shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
Section 3.12 Presumption of Assent. A director of the corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his or her dissent shall be entered in the minutes of the meeting, unless he or
she shall file his or her written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof, or shall forward
such dissent by registered or certified mail to the secretary of the corporation
immediately after the adjournment of the meeting. Such right to dissent shall
not apply to a director who voted in favor of such action.
Section 3.13 Resignations. A director may resign at any time by delivering
a written resignation to either the president, a vice president, the secretary,
or assistant secretary, if any.
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The resignation shall become effective on its acceptance by the Board of
Directors; provided, that if the board has not acted thereon within ten days
(10) from the date presented, the resignation shall be deemed accepted.
Section 3.14 Written Consent to Action by Directors. Any action required to
be taken at a meeting of the directors of the corporation or any other action
which may be taken at a meeting of the directors or of a committee, may be taken
without a meeting, if a consent in writing, setting forth the action so taken,
shall be signed by all of the directors, or all of the members of the committee,
as the case may be. Such consent shall have the same legal effect as a unanimous
vote of all the directors or members of the committee.
Section 3.15 Removal. At a meeting expressly called for that purpose, one
or more directors may be removed by a vote of a majority of the shares of
outstanding stock of the corporation entitled to vote at an election of
directors.
ARTICLE IV
OFFICERS
Section 4.01 Number. The officers of the corporation shall be a president,
one or more vice-presidents, as shall be determined by resolution of the Board
of Directors, a secretary, a treasurer, and such other officers as may be
appointed by the Board of Directors. The Board of Directors may elect, but shall
not be required to elect, a chairman of the board and the Board of Directors may
appoint a general manager.
Section 4.02 Election, Term of office, and Qualifications. The officers
shall be chosen by the Board of Directors annually at its annual meeting. In the
event of failure to choose officers at an annual meeting of the Board of
Directors, officers may be chosen at any regular or special meeting of the Board
of Directors. Each such officer (whether chosen at an annual meeting of the
Board of Directors to fill a vacancy or otherwise) shall hold his or her office
until the next ensuing annual meeting of the Board of Directors and until his or
her successor shall have been chosen and qualified, or until his or her death,
or until his or her resignation or removal in the manner provided in these
Bylaws. Any one person may hold any two or more of such offices, except that the
president shall not also be the secretary. No person holding two or more offices
shall act in or execute any instrument in the capacity of more than one office.
The chairman of the board, if any, shall be and remain a director of the
corporation during the term of his or her office. No other officer need be a
director.
Section 4.03 Subordinate Officers, Etc. The Board of Directors from time
to time may appoint such other officers or agents as it may deem advisable,
each of whom shall have such title, hold office for such period, have such
authority, and perform such duties as the Board of Directors from time to time
may determine. The Board of Directors from time to time may delegate to any
officer or agent the power to appoint any such subordinate officer or agents and
to prescribe their respective titles, terms of office, authorities, and duties.
Subordinate officers need not be shareholders or directors.
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Section 4.04 Resignations. Any officer may resign at any time by delivering
a written resignation to the Board of Directors, the president, or the
secretary. Unless otherwise specified therein, such resignation shall take
effect on delivery.
Section 4.05 Removal. Any officer may be removed from office at any special
meeting of the Board of Directors called for that purpose or at a regular
meeting, by vote of a majority of the directors, with or without cause. Any
officer or agent appointed in accordance with the provisions of Section 4.03
hereof may also be removed, either with or without cause, by any officer on whom
such power of removal shall have been conferred by the Board of Directors.
Section 4.06 Vacancies and Newly Created Offices. If any vacancy shall
occur in any office by reason of death, resignation, removal, disqualification,
or any other cause, or if a new office shall be created, then such vacancies or
newly created offices may be filled by the Board of Directors at a regular or
special meeting.
Section 4.07 The Chairman of the Board. The Chairman of the Board, if there
be such an officer, shall have the following powers and duties:
(a) He or she shall preside at all shareholders' meetings;
(b) He or she shall preside at all meetings of the Board of
Directors; and
(c) He or she shall be a member of the executive committee, if
any.
Section 4.08 The President. The president shall have the following powers
and duties:
(a) If no general manager has been appointed, he or she shall be
the chief executive officer of the corporation, and, subject to the direction of
the Board of Directors, shall have general charge of the business, affairs, and
property of the corporation and general supervision over its officers,
employees, and agents;
(b) If no chairman of the board has been chose, or if such
officer is absent or disabled, he or she shall preside at meetings of the
shareholders and Board of Directors;
(c) He or she shall be a member of the executive committee, if
any;
(d) He or she shall be empowered to sign certificates
representing shares of the corporation, the issuance of which shall have been
authorized by the Board of Directors; and
(e) He or she shall have all power and shall perform all duties
normally incident to the office of a president of a corporation, and shall
exercise such other powers and perform such other duties as from time to time
may be assigned to him or her by the Board of Directors.
Section 4.09 The Secretary. The secretary shall have the following powers
and duties:
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(a) He or she shall keep or cause to be kept a record of all of
the proceedings of the meetings of the shareholders and of the Board of
Directors in books provided for that purpose;
(b) He or she shall cause all notices to be duly given in
accordance with the provisions of these Bylaws and as required by statute;
(c) He or she shall be the custodian of the records and of the
seal of the corporation, and shall cause such seal (or a facsimile thereof) to
be affixed to all certificates representing shares of the corporation prior to
the issuance thereof and to all instruments, the execution of which on behalf of
the corporation under its seal shall have been duly authorized in accordance
with these Bylaws, and when so affixed, he or she may attest the same;
(d) He or she shall assume responsibility that the books,
reports, statements, certificates, and other documents and records required by
statute are property kept and filed;
(e) He or she shall have charge of the share books of the
corporation and cause the share transfer books to be kept to be kept in such
manner as to show at any time the amount of the shares of the corporation of
each class issued and outstanding, the manner in which and the time when such
stock was paid for, the names alphabetically arranged and the addresses of the
holders of record thereof, the number of shares held by each holder and time
when each became such holder of record; and he or she shall exhibit at all
reasonable times to any director, upon application, the original or duplicate
share register. He or she shall cause the share book referred to in Section 6.04
hereof to be kept and exhibited at the principal office of the corporation, or
at such other place as the Board of Directors shall determine, in the manner and
for the purposes provided in such Section;
(f) He or she shall be empowered to sign certificates
representing shares of the corporation, the issuance of which shall have been
authorized by the Board of Directors; and
(g) He or she shall perform in general all duties incident to the
office of secretary and such other duties as are given to him or her by these
Bylaws or as from time to time may be assigned to him or her by the Board of
Directors or the president.
Section 4.10 The Treasurer. The treasurer shall have the following powers
and duties:
(a) He or she shall have charge and supervision over and be
responsible for the monies, securities, receipts, and disbursements of the
corporation;
(b) He or she shall cause the monies and other valuable effects
of the corporation to be deposited in the name and to the credit of the
corporation in such banks or trust companies or with such banks or other
depositories as shall be selected in accordance with Section 5.03 hereof;
(c) He or she shall cause the monies of the corporation to be
disbursed by checks or drafts (signed as provided in Section 5.04 hereof) drawn
on the authorized depositories of the corporation, and cause to be taken and
preserved property vouchers for all monies disbursed;
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(d) He or she shall render to the Board of Directors or the
president, whenever requested, a statement of the financial condition of the
corporation and of all of this transactions as treasurer, and render a full
financial report at the annual meeting of the shareholders, if called upon to do
so;
(e) He or she shall cause to be kept correct books of account of
all the business and transactions of the corporation and exhibit such books to
any director on request during business hours;
(f) He or she shall be empowered from time to time to require
from all officers or agents of the corporation reports or statements given such
information as he or she may desire with respect to any and all financial
transactions of the corporation: and
(g) He or she shall perform in general all duties incident to the
office of treasurer and such other duties as are given to him or her by these
Bylaws or as from time to time may be assigned to him or her by the Board of
Directors or the president.
Section 4.11 General Manager. The Board of Directors may employ and
appoint a general manager who may, or may not, be one of the officers or
directors of the corporation. The general manager, if any, shall have the
following powers and duties:
(a) He or she shall be the chief executive officer of the
corporation and, subject to the directions of the Board of Directors, shall have
general charge of the business affairs and property of the Corporation and
general supervision over its officers, employees and agents;
(b) He or she shall be charged with the exclusive management of
the business of the corporation and of all of its dealings, but at all times be
subject to the control of the Board of Directors;
(c) Subject to the approval of the Board of Directors or the
executive committee, if any, he or she shall employ all employees of the
corporation, or delegate such employment to subordinate officers, and shall have
authority to discharge any person so employed; and
(d) He or she shall make a report to the president and directors
as often as required, setting forth the results of the operations under his or
her charge, together with suggestions looking toward improvement and betterment
of the condition of the corporation, and shall perform such other duties as the
Board of Directors may require.
Section 4.12 Salaries. The salaries and other compensation of the
officers of the corporation shall be fixed from time to time by the Board of
Directors, except that the Board of Directors may delegate to any person or
group of persons the power to fix the salaries or other compensation of any
subordinate officers or agents appointed in accordance with the provisions of
Section 4.03 hereof. No officer shall be prevented from receiving any such
salary or compensation by reason of the fact that he or she is also a director
of the corporation.
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Section 4.13 Surety Bonds. In case the Board of Directors shall so
require, any officer or agent of the corporation shall execute to the
corporation a bond in such sums and with such surety or sureties as the Board of
Directors may direct, conditioned upon the faithful performance of his or her
duties to the corporation, including responsibility for negligence and for the
accounting of all property, monies, or securities of the corporation which may
come into his or her hands.
ARTICLE V
EXECUTION OF INSTRUMENTS, BORROWING OF MONEY,
AND DEPOSIT OF CORPORATE FUNDS
Section 5.01 Execution of Instruments. Subject to any limitation contained
in the Articles of Incorporation or these Bylaws, the president or any vice
president or the general manger, if any, may in the name and on behalf of the
corporation, execute and deliver any contract or other instrument authorized in
writing by the Board of Directors. The Board of Directors may, subject to any
limitation contained in the Articles of Incorporation or in these Bylaws,
authorize in writing any officer or agent to execute and deliver any contract or
other instrument in the name and on behalf of the corporation; any such
authorization may be general or confined to specific instances.
Section 5.02 Loans. No loans or advances shall be contracted on behalf of
the corporation, no negotiable paper or other evidence of its obligation under
any loan or advance shall be issued in its name, and no property of the
corporation shall be mortgaged, pledged, hypothecated, transferred, or conveyed
as security for the payment of any loan, advance, indebtedness, or liability of
the corporation, unless and except as authorized by the Board of Directors. Any
such authorization may be general or confined to specific instances.
Section 5.03 Deposits. All monies of the corporation not otherwise
employed shall be deposited from time to time to its credit in such banks and/or
trust companies or with such bankers or other depositories as the Board of
Directors may select, or as from time to time may be selected by any officer or
agent authorized to do so by the Board of Directors.
Section 5.04 Checks, Drafts, Etc. All notes, drafts, acceptances, checks,
endorsements, and, evidences of indebtedness of the corporation, subject to the
provisions of these Bylaws, shall be signed by such officer or officers or such
agent or agents of the corporation and in such manner as the Board of Directors
from time to time may determine. Endorsements for deposit to the credit of the
corporation in any of its duly authorized depositories shall be in such manner
as the Board of Directors from time to time may determine.
Section 5.05 Bonds and Debentures. Every bond or debenture issued by
the corporation shall be evidenced by an appropriate instrument which shall be
signed by the president or vice president and by the secretary and sealed with
the seal of the corporation. The seal may be a facsimile, engraved or printed
where such bond or debenture is authenticated with the manual signature of an
authorized officer of the corporation or other trustee designated by the
indenture of trust or other agreement under which such security is issued, the
signature of any of
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the corporation's officers named thereon may be a facsimile. In case any officer
who signed, or whose facsimile signature has been used on any such bond or
debenture, should cease to be an officer of the corporation for any reason
before the same has been delivered by the corporation, such bond or debenture
may nevertheless be adopted by the corporation and issued and delivered as
through the person who signed it or whose facsimile signature has been used
thereon had not ceased to be such officer.
Section 5.06 Sale, Transfer, Etc. of Securities. Sales, transfers,
endorsements, and assignments of stocks, bonds, and other securities owned by or
standing in the name of the corporation, and the execution and delivery on
behalf of the corporation of any and all instruments in writing incident to any
such sale, transfer, endorsement, or assignment, shall be effected by the
president, or by any vice president, together with the secretary, or by an
officer or agent thereunto authorized by the Board of Directors.
Section 5.07 Proxies. Proxies to vote with respect to shares of other
corporations owned by or standing in the name of the corporation shall be
executed and delivered on behalf of the corporation by the president or any vice
president and the secretary or assistant secretary of the corporation, or by any
officer or agent thereunder authorized by the Board of Directors.
ARTICLE VI
CAPITAL SHARES
Section 6.01 Share Certificates. Every holder of shares in the corporation
shall be entitled to have a certificate, signed by the president or any vice
president, and the secretary or assistant secretary, and sealed with the seal
(which may be a facsimile, engraved or printed) of the corporation, certifying
the number and kind, class or series of shares owned by him or her in the
corporation; provided, however, that where such a certificate is countersigned
by (a) a transfer agent or an assistant transfer agent, or (b) registered by a
registrar, the signature of any such president, vice president, secretary, or
assistant secretary may be a facsimile. In case any officer who shall have
signed, or whose facsimile signature or signatures shall have been used on any
such certificate, shall cease to be officer of the corporation, for any reason,
before the delivery of such certificate by the corporation, such certificate may
nevertheless be adopted by the corporation and be issued and delivered as though
the person who signed it, or whose facsimile signature or signatures shall have
been used thereon, has not ceased to be such officer. Certificates representing
shares of the corporation shall be in such form as provided by the statutes of
the state of incorporation. There shall be entered on the share books of the
corporation at the time of issuance of each share, the number of the certificate
issued, the name and address of the person owning the shares represented
thereby, the number and kind, class or series of such shares, and the date of
issuance thereof. Every certificate exchanged or returned to the corporation
shall be marked "Canceled" with the date of cancellation.
Section 6.02 Transfer of Shares. Transfers of shares of the corporation
shall be made on the books of the corporation by the holder of record thereof,
or by his or her attorney thereunto duly authorized by a power of attorney duly
executed in writing and filed with the secretary of the corporation or any of
its transfer agents, and on surrender of the certificate or
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certificates, properly endorsed or accompanied by proper instruments or
transfer, representing such shares. Except as provided by law, the corporation
and transfer agents and registrars, if any, shall be entitled to treat the
holder of record of any stock as the absolute owner thereof for all purposes,
and accordingly, shall not be bound to recognize any legal, equitable, or other
claim to or interest in such shares on the part of any other person whether or
not it or they shall have express or other notice thereof.
Section 6.03 Regulations. Subject to the provisions of this Article VI
and of the Articles of Incorporation, the Board of Directors may make such rules
and regulations as they may deem expedient concerning the issuance, transfer,
redemption, and registration of certificates for shares of the corporation.
Section 6.04 Maintenance of Stock Ledger at Principal Place of Business. A
share book (or books where more than one kind, class, or series or stock is
outstanding) shall be kept at the principal place of business of the
corporation, or at such other place as the Board of Directors shall determine,
containing the names, alphabetically arranged, of original shareholders of the
corporation, their addresses, their interest, the amount paid on their shares,
and all transfers thereof and the number and class of shares held by each. Such
share books shall at all reasonable hours be subject to inspection by persons
entitled by law to inspect the same.
Section 6.05 Transfer Agents and Registrars. The Board of Directors may
appoint one or more transfer agents and one or more registrars with respect to
the certificates representing shares of the corporation, and may require all
such certificates to bear the signature of either or both. The Board of
Directors may from time to time define the respective duties of such transfer
agents and registrars. No certificate for shares shall be valid until
countersigned by a transfer agent, if at the date appearing thereon the
corporation had a transfer agent for such shares, and until registered by a
registrar, if at such date the corporation had a registrar for such shares.
Section 6.06 Closing of Transfer Books and Fixing of Record Date.
(a) The Board of Directors shall have power to close the share
books of the corporation for a period of not to exceed fifty (50) days preceding
the date of any meeting of shareholders, or the date for payment of any
dividend, or the date for the allotment of rights, or capital shares shall go
into effect, or a date in connection with obtaining the consent of shareholder
for any purpose.
(b) In lieu of closing the share transfer books as aforesaid, the
Board of Directors may fix in advance a date, not to exceed fifty (50) days
preceding the date of any meeting of shareholders, or the date for the payment
of any dividend, or the date for the allotment of rights, or the date when any
change or conversion or exchange of capital shares shall go into effect, or a
date in connection with obtaining any such consent, as a record date for the
determination of the shareholders entitled to a notice of, and to vote at, any
such meeting and any adjournment thereof, or entitled to receive payment of any
such dividend, or to any such allotment of rights, or exercise the rights in
respect of any such change, conversion or exchange of capital stock, or to give
such consent.
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claims that may be made against it or any such transfer agent or registrar on
account of the issuance of such new certificate. A new certificate may be issued
without requiring any bond when, in the judgement of the Board of Directors, it
is proper to do so.
Section 6.08 No Limitation on Voting Rights; Limitation on Dissenter's Rights.
To the extent permissible under the applicable law of any jurisdiction to which
the corporation may become subject by reason of the conduct of business, the
ownership of assets, the residence of shareholders, the location of offices or
facilities, or any other item, the corporation elects not to be governed by the
provisions of any statute that (i) limits, restricts, modifies, suspends,
terminates, or otherwise affects the rights of any shareholder to cast one vote
for each share of common stock registered in the name of such shareholder on the
books of the corporation, without regard to whether such shares were acquired
directly from the corporation or from any other person and without regard to
whether such shareholder has the power to exercise or direct the exercise of
voting power over any specific fraction of the shares of the corporation or from
any other person and without regard to whether such shareholder has the power to
exercise or direct the exercise of voting power over any specific fraction of
the shares of common stock of the corporation issued and outstanding or (ii)
grants to any shareholder the right to have his or her stock redeemed or
purchased by the corporation or any other shareholder on the acquisition by any
person or group of persons of shares of the corporation. In particular, to the
extent permitted under the laws of the state of incorporation, the corporation
elects not to be governed by any such provision, including the provisions of the
Section 78.378 - 78.3793 inclusive of the Nevada Revised Statutes or any statute
of similar effect or tenor.
ARTICLE VII
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
Section 7.01 How Constituted. The Board of Directors may designate an
executive committee and such other committes as the Board of Directors may deem
appropriate, each of which committees shall consist of two or more directors.
Members of the executive committee and of any such other committees shall be
designated annually at the annual meeting of the Board of Directors; provided,
--------
however, that at any time the Board of Directors may abolish or reconstitute the
executive committee or any other committee. Each member of the executive
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committee and of any other committee shall hold office until his or her
successor shall have been designated or until his or her resignation or removal
in the manner provided in these Bylaws.
Section 7.02 Powers. During the intervals between meetings of the Board of
Directors, the executive committee shall have and may exercise all powers of the
Board of Directors in the management of the business and affairs of the
corporation, except for the power to fill vacancies in the Board of Directors or
to amend these Bylaws, and except for such powers as by law may not be delegated
by the Board of Directors to an executive committee.
Section 7.03 Proceedings. The executive committee, and such other committees
as may be designated hereunder by the Board of Directors, may fix its own
presiding and recording officer or officers, and may meet at such place or
places, at such time or times and on such notice (or without notice) as it shall
determine from time to time. It will keep a record of its proceedings and shall
report such proceedings to the Board of Directors at the meeting of the Board of
Directors next following.
Section 7.04 Quorum and Manner of Acting. At all meetings of the executive
committee, and of such other committees as may be designated hereunder by the
Board of Directors, the presence of members constituting a majority of the total
authorized membership of the committee shall be necessary and sufficient to
constitute a quorum for the transaction of business, and the act of a majority
of the members present at any meeting at which a quorum is present shall be the
act of such committee. The members of the executive committee, and of such
other committees as may be designated hereunder by the Board of Directors, shall
act only as a committee and the individual members thereof shall have not powers
as such.
Section 7.05 Resignations. Any member of the executive committee, and of such
other committees as may be designated hereunder by the Board of Directors, may
resign at any time by delivering a written resignation to either the president,
the secretary, or assistant secretary, or to the presiding officer of the
committee of which he or she is a member, if any shall have been appointed and
shall be in office. Unless otherwise specified herein, such resignation shall
take effect on delivery.
Section 7.06 Removal. The Board of Directors may at any time remove any member
of the executive committee or of any other committee designated by it hereunder
either for or without cause.
Section 7.07 Vacancies. If any vacancies shall occur in the executive
committee or any other committee designated by the Board of Directors hereunder,
by reason of disqualification, death, resignation, removal, or otherwise, the
remaining members shall, until the filling of such vacancy, constitute the then
total authorized membership of the committee and, provided that two or more
members are remaining, continue to act. Such vacancy may be filled at any
meeting of the Board of Directors.
Section 7.08 Compensation. The Board of Directors may allow a fixed sum and
expenses of attendance to any member of the executive committee, or of any other
committee designated by it hereunder, who is not an active salaried employee of
the corporation for attendance at each meeting of said committee.
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ARTICLE VIII
INDEMNIFICATION, INSURANCE, AND OFFICER
AND DIRECTOR CONTRACTS
Section 8.01 Indemnification: Third Party Actions. The corporation shall have
the power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending, or completed action, or suit by or in
the right of the corporation to procure a judgment in its favor by reason of the
fact that he or she is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees)
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him or her in connection with any such action, suit or proceeding,
if he or she acted in good faith and in a manner he or she reasonably believed
to be in or not opposed to the best interest of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful. The termination of any action, suit, or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and
with respect to any criminal action or proceeding, he or she had reasonable
cause to believe that his or her conduct was unlawful.
Section 8.02 Indemnification: Corporate Actions. The corporation shall have
the power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending, or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by reason of the
fact that he or she is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection with the
defense or settlement of such action or suit, if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification shall be made
in respect of any claim, issue, or matter as to which such a person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his or her duty to the corporation, unless and only to the extent that the court
in which the action or suit was brought shall determine on application that,
despite the adjudication of liability but in view of all circumstances of the
case, the person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
Section 8.03 Determination. To the extent that a director, officer, employee,
or agent of the corporation has been successful on the merits or otherwise in
defense of any action, suit, or proceeding referred to in Sections 8.01 and 8.02
hereof, or in defense of any claim, issue, or matter therein, he or she shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection therewith. Any other indemnification under
Section 8.01 and 8.02 hereof, shall be made to the corporation upon a
determination that indemnification of the officer, director, employee or agent
is proper in the circumstances because he or she has met the applicable standard
of conduct set forth in Sections 8.01 and 8.02 hereof. Such determination shall
be made either (i) by the Board of
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ARTICLE VIII
INDEMNIFICATION, INSURANCE, AND OFFICER
AND DIRECTOR CONTRACTS
Section 8.01 Indemnification: Third Party Actions. The corporation shall
have the power to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending, or completed action, or suit by or
in the right of the corporation to procure a judgment in its favor by reason of
the fact that he or she is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees)
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him or her in connection with any such action, suit or proceeding,
if he or she acted in good faith and in a manner he or she reasonably believed
to be in or not opposed to the best interest of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful. The termination of any action, suit, or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and
with respect to any criminal action or proceeding, he or she had reasonable
cause to believe that his or her conduct was unlawful.
Section 8.02 Indemnification: Corporate Actions. The corporation shall
have the power to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending, or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by reason of the
fact that he or she is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection with the
defense or settlement of such action or suit, if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification shall be made
in respect of any claim, issue, or matter as to which such a person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his or her duty to the corporation, unless and only to the extent that the court
in which the action or suit was brought shall determine on application that,
despite the adjudication of liability but in view of all circumstances of the
case, the person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
Section 8.03 Determination. To the extent that a director, officer,
employee, or agent of the corporation has been successful on the merits or
otherwise in defense of any action, suit, or proceeding referred to in Sections
8.01 and 8.02 hereof, or in defense of any claim, issue, or matter therein, he
or she shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection therewith. Any
other indemnification under Section 8.01 and 8.02 hereof, shall be made to the
corporation upon a determination that indemnification of the officer, director,
employee or agent is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in Sections 8.01 and 8.02 hereof. Such
determination shall be made either (i) by the Board of
16
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Directors by a majority of a quorum consisting of directors who were not parties
to such action, suit, or proceeding; or (ii) by independent legal counsel by a
written opinion; or (iii) by the shareholders by a majority vote of a quorum of
shareholders at any meeting duly called for such purpose.
Section 8.04 General Indemnification. The indemnification provided by this
Section shall not be deemed exclusive of any other indemnification granted under
any provision of any statute, in the corporation's Articles of Incorporation,
these Bylaws, agreement, vote of shareholders or disinterested directors, or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent, and shall inure to
the benefit of the heirs and legal representatives of such a person.
Section 8.05 Advances. Expenses incurred in defending a civil or criminal
action, suit or proceeding as contemplated in this Section may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon a majority vote of a quorum of the Board of Directors and upon
receipt of an undertaking by or on behalf of the director, officers, employee,
or agent to repay such amount or amounts unless if it is ultimately determined
that he or she is to be indemnified by the corporation as authorized by this
Section.
Section 8.06 Scope of Indemnification. The indemnification authorized by
this Section shall apply to all present and future directors, officers,
employees, and agents of the corporation and shall continue as to such persons
who cease to be directors, officers, employees, or agents of the corporation,
and shall inure to the benefit of the heirs, executors, and administrators of
all such persons and shall be in addition to all other indemnification permitted
by law.
Section 8.07 Insurance. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, employee, or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise against any liability asserted against him
or her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against any such liability and under the laws of the state
of incorporation, as the same may hereafter be amended or modified.
ARTICLE IX
FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
Board of Directors.
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ARTICLE X
DIVIDENDS
The Board of Directors may from time to time declare, and the corporation
may pay, dividends on its outstanding shares in the manner and on the terms and
conditions provided by the Articles of Incorporation and these Bylaws.
ARTICLE XI
AMENDMENTS
All Bylaws of the corporation, whether adopted by the Board of Directors or
by the shareholders, shall be subject to amendment, alteration, or repeal, and
new Bylaws may be made, except that:
(a) No Bylaws adopted or amended by the shareholders shall be
altered or repealed by the Board of Directors;
(b) No Bylaws shall be adopted by the Board of Directors which
shall require more than a majority of the voting shares for a quorum at a
meeting of shareholders, or more than a majority of the votes cast to constitute
action by the shareholders, except where higher percentages are required by law;
provided, however that (I) if any Bylaw regulating an impending election of
directors is adopted or amended or repealed by the Board of Directors, there
shall be set forth in the notice of the next meeting of shareholders for the
election of directors, the Bylaws so adopted or amended or repealed, together
with a concise statement of the changes made; and (ii) no amendment, alteration
or repeal of this Article XI shall be made except by the shareholders.
CERTIFICATE OF SECRETARY
The undersigned does hereby certify that he or she is the secretary of FIN
SPORTS U.S.A., INC., a corporation duly organized and existing under and by
virtue of the laws of the State of Nevada; that the above and foregoing bylaws
of said corporation were duly and regularly adopted as such by the Board of
Directors of the corporation at a meeting of the Board of Directors, which was
duly and regularly held on the 1/st/ day of November, 1996 and that the above
and foregoing Bylaws are no in fully force and effect.
DATED this 1/st/ day of November, 1998.
By /s/ Kent Faulkner
Secretary
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EXHIBIT 10.15
LEASE
-----
Between
SECOND BROMFIELD PROPERTIES, INC.,
as Lessor
and
HONEYWELL, INC.
as Lessee
Dates as of July 25, 1967
1
<PAGE>
THIS LEASE AGREEMENT, dated as of July 25, 1967, between SECOND BROMFIELD
PROPERTIES, INC., (the Lessor), a Delaware corporation, having an address at c/o
Wood, Struthers & Winthrop, 20 Exchange Place, New York, New York 10005, as
lessor, and HONEYWELL, INC. (the Lessee), a Delaware corporation, having its
principal office at 2701 Fourth Avenue South, Minneapolis, Minnesota 55408, as
lessee.
WITNESSETH THAT:
The Lessor does hereby demise, lease and let unto the Lessee, the office
buildings and engineering facility described in Schedule A attached hereto,
together with all buildings, structures and other improvements now or hereafter
located on such premises (the building or buildings and the land upon which such
building or buildings are situated are herein called the "Leased Premises"),
subject to such of the exceptions, if any, set forth in such Schedule A as shall
at the time be in effect and applicable to the Leased Premises;
TO HAVE AND TO HOLD the Leased Premises unto the Lessee its successors and
assigns for an interim term commencing on August 10, 1967, and ending at
midnight, September 30, 1967 (the Interim Term) and a primary term commencing an
October 1, 1967, and ending at midnight, September 30, 1987 (the Primary Term),
and thereafter, the Lessee shall have the right and option to extend this Lease
for eight consecutive extended terms (the Extended Terms) unless and until this
Lease shall be sooner terminated pursuant to any conditional limitation or
condition herein set forth. Each Extended Term shall commence on the day
immediately succeeding the expiration date of the next proceeding term of this
Lease and shall end at midnight on the day immediately preceding the fifth
anniversary of the first day of such Extended Term. The Lessee shall exercise
its right to extend this Lease for any Extended Term by giving notice of such
extension to the Lessor not less than 180 days prior to the expiration of
<PAGE>
the then existing term of this Lease. The Lessee shall yield and pay for such
terms the respective amounts set forth in Schedule B hereof (the Basic Rent) on
the dates set forth in said Schedule (the Basic Rent Payment Dates) . The Basic
Rent and other sums payable by the Lessee hereunder shall be payable in lawful
money of the United States of America at the Lessor's address set forth above or
to such agent or person or persons or at such other address as the Lessor from
time to time may designate.
It is mutually agreed and understood between the Lessor and the Lessee as
follows:
1. Additional Payments by Lessee
-----------------------------
(a) As additional rent, the Lessee shall pay when due and payable,
and before any fine, penalty, interest or cost may be added for nonpayment, all
taxes, assessments (including, without limitation, all assessments for public
improvements or benefits, whether or not commenced or completed prior to the
date hereof and whether or not to be completed within the term hereof), ground
rents, water, sewer and other rents, excises, levies, fees and charges of every
character, whether general or special, ordinary or extraordinary, or foreseen or
unforeseen (including all interest and penalties thereon) which at any time
during the term of this Lease may be assessed, levied or imposed against or in
respect of or be a lien upon the Leased Premises or any part thereof or any
estate, right or interest therein or any rents therefrom or any occupancy, use
or possession of or activity conducted on the Leased Premises, or any part
thereof, other than income or franchise taxes of the Lessor (except that the
Lessee shall pay all permit, license or similar fees and charges imposed upon
the Lessor by reason of its being engaged in the business of owning and leasing
the Leased Premises and all gross receipts and similar taxes applicable to the
Lessor's receipt of rents hereunder levied by the jurisdiction in which the
Leased Premises are located), and the Lessee will furnish the Lessor, promptly
upon request, with official receipts
2
<PAGE>
or other satisfactory proof evidencing such payment. All such items levied
during the first and last year of the term of this Lease shall be prorated
between the parties in accordance with the number of days of the Lessee's actual
tenancy under this Lease. All installments of such items falling due during and
before expiration of the term hereof shall be paid by the Lessee and all such
installments falling due after expiration of the lease term shall be the
responsibility of the Lessor.
(b) During such term, the Lessee shall pay all water rates assessed
for water used and all gas and electric bills and other utility charges at the
time such charges become due and payable.
(c) The Lessee will pay, upon demand, interest at the rate of 7% per
annum an all overdue installments of Basic Rent and all other sums payable to
the Lessor hereunder, from the due date thereof until payment.
(d) It is the purpose and intent of the parties hereto that the
Basic Rent herein reserved, shall be absolutely net to the Lessor without
deduction of any kind, and that all costs, fees, charges, expenses and
obligations of every kind relating to the Leased Premises shall be paid and
discharged by the Lessee, except certain income and franchise taxes of the
Lessor as aforesaid.
(e) In the event of any failure on the part of the Lessee to pay any
additional rent or other sums payable hereunder, the Lessor shall have all of
the rights, powers and remedies provided for in this Lease or at law or in
equity or otherwise in the case of nonpayment of the Basic Rent.
3
<PAGE>
2. No Counterclaim, Etc.
---------------------
The Basic Rent, additional rent and all other sums payable by the Lessee
hereunder shall be paid without notice, demand, counterclaim, setoff, deduction
or defense and without abatement, suspension, deferment, diminution or
reduction, and the obligations and liabilities of the Lessee hereunder shall in
no way be released, discharged or otherwise affected (except as expressly
provided in this Lease) by reason of any occurrence whatsoever, including,
without limitation: (a) any damage to or destruction of or any condemnation or
taking of the Leased Premises or any part thereof; (b) any restriction or
prevention of or interference with any use of the Leased Premises or any part
thereof; (c) any title defect or encumbrance or any eviction from the Leased
Premises or any part thereof by title paramount or otherwise; (d) any amendment
or modification of or supplement to any instrument evidencing, securing or
relating to any indebtedness of the Lessor or any assignment or transfer of any
thereof, or any furnishing or acceptance of additional security, or any release
of any security, for any such indebtedness; (e) any waiver, consent, extension,
indulgence or other action or inaction under or in respect of any such
instrument, or any exercise or non-exercise of any right, remedy, power or
privilege under or in respect of any such instrument or any assignment or
transfer of any thereof; (f) any default by the Lessor under, or any invalidity
of, or any irregularity or any other defect in, any such instrument; (g) any
transfer of the assets of the Lessor to, or any consolidation or merger of the
Lessor with or into, any other person or corporation (including the Lessee), or
any disposition by the Lessee of any shares of stock of the Lessor; (h) any
bankruptcy, insolvency, reorganization, composition, adjustment, dissolution,
liquidation or other like proceeding relating to the Lessor, or any action taken
with respect to this Lease by any trustee or receiver of the Lessor, or by any
court, in any such proceeding; (i) any claim which the Lessee has or might
4
<PAGE>
have against the Lessor; (j) Any failure on the part of the Lessor to perform or
comply with any of the terms hereof or of any other agreement with the Lessee;
or (k) any other occurrence whatsoever, whether similar or dissimilar to the
foregoing; whether or not the Lessee shall have notice or knowledge of any of
the foregoing. Except as expressly provided herein, the Lessee waives all rights
now or hereafter conferred by statute or otherwise to quit, terminate or
surrender this Lease or the Leased Premises or any part thereof, or to any
abatement, suspension, deferment, diminution or reduction of the Basic Rent,
additional rent or any other sum payable by it hereunder.
3. Transfer of Lessor's Interest
-----------------------------
(a) The Lessor may at any time or from time to time assign, by way
of mortgage, deed of trust, pledge or otherwise any or all of its rights and
interest, in whole or in part, as lessor under this Lease, and from and after
receipt of written notice of any such assignment by the Lessee, (i) the assignee
may enforce any and all of the terms of this Lease, to the extent so assigned,
as though the assignee had been a party hereto, (ii) no action or failure to act
on the part of the Lessor shall adversely affect or limit any rights of the
assignee, (iii) no assignment shall release the Lessor from any of its
obligations under this Lease or constitute an assumption of any such obligations
on the part of the assignee, (iv) no amendment or modification of this Lease and
no waiver or consent hereunder shall be valid unless joined in writing by the
assignee, (v) no Basic Rent may be prepaid prior to the due date thereof without
the prior written consent of the assignee, and (vi) all notices, demands,
consents, requests, approvals and other instruments given by the Lessee
hereunder shall also be delivered to the assignee. All the rights and interests
of the assignee herein shall be terminated upon the
5
<PAGE>
termination of such assignment in the manner specified in the instrument
effecting such assignment.
(b) This Lease shall not be subject or subordinate in any respect to
any conveyance, mortgage or deed of trust which may now or hereafter be placed
on or affect the Leased Premises.
4. Condition and Use
-----------------
(a) The Lessee is fully familiar with the condition of the Leased
Premises, has received the same in good condition and agrees that the Leased
Premises comply in all respects' with any requirements of this Lease. The Lessor
makes no representation or warranty with respect to the condition of the Leased
Premises or their fitness or availability for any particular use and shall not
be liable for any latent or other defect therein.
(b) The Lessee may use the Leased Premises for any lawful purpose
and will not do or permit any act or thing which is contrary to any requirement
of law or which might impair the value of the Leased Premises or any part
thereof or which constitutes a public or private nuisance or waste.
5. Repairs, etc.
-------------
(a) The Lessee shall at all times during the term of this Lease, at
its sole cost and expense, keep the whole and every part of the Leased Premises
and the adjoining sidewalks, curbs, fences and vaults, if any, in good order and
condition, and shall promptly make all necessary or appropriate repairs,
replacements and renewals thereof, whether interior or exterior, structural or
nonstructural, ordinary or extraordinary, foreseen or unforeseen. All repairs,
replacements and renewals shall be equal in quality and class to the original
work, and the
6
<PAGE>
Lessee shall, upon the expiration of this Lease, deliver up the
Leased Premises in as good condition and repair as received, reasonable wear and
tear excepted.
(b) The Lessee, at its sole cost and expense, will do or cause
others to do all shoring of the foundations and walls of any building or other
improvement included in the Leased Premises or of the ground adjacent thereto,
and every other act, necessary or appropriate for the preservation and safety
thereof by reason of or in connection with any excavation or other building
operation upon the Leased Premises or any adjoining property, whether or not the
owner of the Leased Premises shall, by any requirement of law, be required to
take such action or be liable for failure to do so.
(c) The Lessee shall have the right during the term of this Lease,
at its sole cost and expense, at any time or from time to time, to make in or
with respect to the Leased Premises, such additions, alterations, repairs and
improvements as it shall see fit to make including the right to enlarge any
building location on the Leased Premises, install such additional fixtures,
equipment, machinery and appliances as it may require, provided that if any
additions, alterations or improvements shall change the general character of the
Leased Premises or substantially change the basic structure of any building or
other improvement included therein or adversely affect the value of the Leased
Premises, the prior written approval of the Lessor shall be obtained.
6. Inspection, Etc.
----------------
(a) The Lessor and any assignee of the Lessor and their authorized
representatives may, at all reasonable times during the term of this Lease upon
three (3) days' prior written notice, inspect the Leased Premises or any part
thereof. Neither the Lessor nor any
7
<PAGE>
such assignee shall have any duty to make or incur any liability or obligation
for not making any such inspection.
(b) The Lessor may, at all reasonable times during the term of this
Lease, upon three (3) days prior written notice, enter upon the Leased Premises
for the purpose of showing the same to prospective purchasers, and, during the
final twelve (12) months of such term, to prospective lessees, and may display
on the Leased Premises during such periods, in a manner not unreasonably to
interfere with the business of the Lessee, the usual "For Sale" and "For Let"
signs.
7. Fixtures and improvements
-------------------------
All of the buildings and improvements installed or placed on the
Leased Premises by the Lessee at any time during the term of this Lease,
including alterations, repairs and improvements, are to become part of the
Leased Premises and remain thereon at the expiration or termination of this
Lease, however occurring, provided that the facilities and fixtures, including,
without limitation, the air-conditioning equipment, heating equipment and
electrical lines, feeders, transformers and equipment and the electrical
lighting fixtures and all counters, shelving and movable partitions, heretofore
or hereafter installed by or at the expense of the Lessee in, to or on the
Leased Premises, and any renewals or replacements thereof, and all other
erections, additions and/or improvements made to, in or on the Leased Premises
by and at the expense of the Lessee and susceptible of being removed from the
Leased Premises without substantial injury thereto (Facilities and Fixtures),
shall remain the property of the Lessee and the Lessee shall be entitled to
remove the same or any part thereof at any time or times during the Primary Term
of the Lease and any Extended Terms thereof, but the Lessee shall repair at its
own expense any damage done to the Leased Premises in the course of such
removal, and any Facilities and
8
<PAGE>
Fixtures not so removed shall become the property of the Lessor without any
payment therefor by the Lessor. The Lessor's signs, if any, located on the
Leased Premises at the expiration or termination of this Lease may be purchased
by the Lessee at such time by payment of one dollar in cash to the Lessor and
may similarly be removed.
8. Lessee's Covenants
------------------
The Lessee covenants and agrees (in each case, whether or not compliance
therewith or conformity thereto shall require structural changes in any building
or other improvement included in the Leased Premises, or in any sidewalk, curb,
fence or vault, if any, adjoining the Leased Premises, or shall interfere with
the use and enjoyment of the Leased Premises, or any part thereof): (i) to pay,
at the times and in the manner herein provided, all taxes, assessments, rents,
excises, levies, fees and other governmental charges and utility charges and
insurance premiums, payable by it hereunder; (ii) to comply with all laws,
statutes, codes, ordinances, orders, judgments, decrees, injunctions,
regulations, rules, permits, licenses, authorizations, directions and
requirements of all governments, departments, commissions, boards, courts,
authorities, agencies, officials and officers, foreseen or unforeseen, ordinary
or extraordinary; (iii) to comply with all instruments of record which now or at
any time hereafter may be applicable to the Leased premises or any part thereof,
or any of the adjoining sidewalks, curbs, fences and vaults, if any, or the
ownership or use of any thereof; and (iv) to conform to all requirements of all
policies of insurance covering the Leased Premises or insuring the Lessor or the
Lessee in connection therewith; and (v) not to do or permit to be done on or in
connection with the Leased Premises any act or thing which might impose any
liability or responsibility upon the Lessor or subject the Leased Premises to
any mortgage, lien, encumbrance or charge, other than the exceptions referred to
in Schedule A hereto and any mortgage or deed of trust
9
<PAGE>
created by the Lessor to secure indebtedness incurred in connection with its
acquisition of the Leased Premises, and to discharge any such mortgage, lien,
encumbrance or charge which may arise. Notwithstanding anything to the contrary
contained in the previous sentence, the Lessee in good faith, at its own expense
and in a lawful and diligent manner, may contest (in the case of any item of
importance, after prior written notice to the Lessor) the propriety of any such
tax, assessment, rent, excise, levy, fee or charge or the validity, effect,
operation or application of any such law, statute, code, ordinance, order,
judgment, decree, injunction, regulation, rule, permit, license, authorization,
direction, requirement or instrument. The Lessee agrees that every such contest
shall be by appropriate proceedings which shall operate during the pendency
thereof to prevent (i) except as set forth hereafter the collection of, or other
realization upon, such tax, assessment, rent, levy, fee, rent or charge or lien
encumbrance; (ii) the sale, forfeiture or loss of the Leased Premises, or any
part thereof, or the Basic Rent or any additional rent, or any portion thereof;
(iii) any interference with the use and occupancy of the Leased Premises or any
part thereof; and (iv) any interference with the payment of the Basic Rent or
any additional rent, or any portion thereof. The failure to comply with the
provisions of the first sentence of this Section 8 during the period of such
contest shall not constitute a default hereunder. If, upon termination of any
such contest, payment of or compliance with the contested item is required, the
lessee shall pay or comply with the same forthwith. The Lessee shall indemnify
and save harmless the Lessor from all liability for fines, penalties,
forfeitures and like charges imposed upon it by reason of any such contest or of
the Lessee's noncompliance during the period thereof. In case of a tax contest,
the Lessee shall first pay said tax under protest and in case of contest of any
other item, shall furnish to the Lessor, if requested, an indemnity bond in an
amount reasonably satisfaction factory to the Lessor executed by the Lessee and
a surety
10
<PAGE>
company reasonably satisfactory to the Lessor or, at Lessee's option,
deposit moneys with the Lessor in such an amount as shall be reasonably
necessary to indemnify the Lessor as aforesaid.
9. Indemnification, Etc.
---------------------
(a) The Lessee will protect, indemnify and save the Lessor harmless
from and against any and all liabilities, claims, damages, penalties, causes of
action, costs and expenses (including reasonable attorneys' fees and expenses)
of any nature arising from any accident, injury to or death of persons or loss
of or damage to property occurring on the Leased Premises or on adjoining
sidewalks, curbs, fences or vaults, if any, or in any manner growing out of or
connected with the Lessee's use and occupancy of the Leased Promises or the
condition thereof or of the adjoining sidewalks, curbs, fences or vaults, if
any, during the term of this Lease. In case any action, suit or proceeding is
brought against the Lessor by reason of any such occurrence, the Lessee upon the
request of the Lessor, will at the Lessee's expense resist and defend such
action, suit or proceeding, or cause the same to be resisted and defended by
counsel designated by the Lessee and subject to the reasonable approval of the
Lessor. The obligations of the Lessee under this section shall survive any
termination of this Lease.
(b) Nothing contained in this Lease shall constitute any consent or
request by the Lessor, express or implied, for the performance of any labor or
services or the furnishing of any materials or other property with respect to
the Leased Premises, nor be construed as giving the Lessee any right, power or
authority to contract for or permit the performance of any labor or services or
the furnishing of any materials or other property in such fashion as would
permit the making of any claim against the Lessor in respect thereof.
11
<PAGE>
10. Insurance
---------
(a) The Lessee will at all times maintain insurance on the Leased
Premises of the following character:
(i) insurance against loss or damage by fire, lightning,
windstorm, hail, explosion, aircraft, smoke damage, vehicle damage and other
risks from time to time included under "extended coverage" policies and such
other risks as are or shall customarily be insured against with respect to
property that is similar to the Leased Premises, in amounts sufficient to
prevent the Lessor or the Lessee from becoming a co-insurer of any loss under
the applicable policies, but in any event in amounts not less than the full
insurable value of the Leased Premises. The term "full insurable value", as used
herein, means actual replacement value less physical depreciation
(ii) general public liability insurance against claims for
bodily injury, death or property damage occurring on, in or about the Leased
Premises and the adjoining streets, sidewalks and passageways, such insurance to
afford protection to the Lessor of not less than $500,000 with respect to bodily
injury or death to any one person, not less than $1,000,000 with respect to any
one accident, and not less than $500,000 with respect to property damage.
Policies for such insurance shall be for the mutual benefit of the Lessor and
the Lessee and, to the extent obtainable, the Mortgagees under the Mortgage
hereinafter referred to.
(iii) workmen's compensation insurance covering all persons
employed in connection with any work done on or about the Leased Premises in
connection with which claims for death or bodily injury could be asserted
against the Lessor, the Lessee or the Leased Premises, provided that in lieu of
such insurance, the Lessee may furnish the Lessor with
12
<PAGE>
satisfactory evidence that the Lessee has adopted a satisfactory method for the
payment of compensation permitted by the laws of the state in which the Leased
Premises is located.
(iv) such other insurance on the Leased Premises in such
amounts and against such other insurable hazards which at the time are commonly
obtained in the case of property similar to the Leased Premises, including war
risk insurance when and to the extent obtainable from the United States
Government or an agency thereof. Such insurance shall be written by companies of
recognized financial standing which are authorized to do an insurance business
in the state in which the Leased Premises is located and such insurance shall
name as the insured parties thereunder the Lessor and the Lessee, as their
interests may appear. Such insurance may be obtained by the Lessee by
endorsement on its blanket insurance policies provided that such blanket
policies fulfill the requirements specified above in this paragraph 10(a). The
Lessor shall not be required to prosecute any claim against any insurer or to
contest any settlement proposed by any insurer, provided, however, that the
Lessee may, at its sole cost and expense, prosecute any such claim or contest
any such settlement, and in such event the Lessee may bring any such prosecution
or contest in the name of the Lessor, the Lessee, or both and the Lessor will
join therein at the Lessee's written request upon the receipt by the Lessor of
an indemnity from the Lessee against any and all costs, liabilities and expenses
in connection with such prosecution or contest. Notwithstanding any of the
provisions of this paragraph 10(a), so long as the Lessee shall, in accordance
with sound accounting practices, maintain self-insurance reserves against loss
or damage from the risks required to be insured against pursuant to clause (i)
of this Section 10(a), the Lessee may, in lieu of insuring the Leased Premises
as provided above be and become a self-insurer thereof to the extent of up to
$10,000 of the insurable value of the Leased Premises.
13
<PAGE>
(b) Insurance claims by reason of damage or destruction to any
portion of the Leased Premises shall be adjusted by the Lessee, but the Lessor
shall have the right to join with the Lessee in adjusting any such loss. If the
entire amount of any proceeds paid pursuant to such claims shall not exceed
$50,000 then such proceeds shall be payable to the Lessee. If the entire amount
of any proceeds paid pursuant to such claims shall exceed $50,000, such proceeds
shall be paid to the Lessee by the recipient thereof but only upon certificates
of the Lessee, signed by the Treasurer or Vice President of the Lessee,
delivered to the Lessor from time to time as the work of rebuilding, replacing
and repairing the damage or destruction to the Leased Premises required by
paragraph 11(b) progresses. Upon completion of such work any remaining proceeds
will be paid to the Lessee upon delivery to the Lessor of a certificate of the
Lessee, signed by the Treasurer or a Vice President thereof, to the effect that
such work has been completed and complies with the requirements of paragraph
11(b). No payment of any proceeds shall be made to the Lessee pursuant to this
paragraph 10(b) if any default shall have happened and be continuing under this
Lease unless and until such default shall have been cured or removed.
(c) Every such insurance policy shall bear a first mortgagee
endorsement in favor of any mortgagee or mortgagees of the Leased Premises
(herein, together with any assignee of said mortgagee's or mortgagees' interest
in the Mortgage hereinafter referred to, called the Mortgagees) under a
mortgage, deed of trust, indenture of mortgage and deed of trust or other
similar security instrument covering the Leased Premises (herein called the
Mortgage), and any loss under any such policy shall be made payable to the
Mortgagees, provided, however, that any recoveries under any of said policies
shall be applied by the Mortgagees, in the manner provided in paragraph 10(b).
Every such policy shall contain to the extent obtainable, an agreement by the
insurer that it will not cancel such policy except after 10 days prior written
14
<PAGE>
notice to the Lessor and to the Mortgagees and that any loss otherwise payable
thereunder shall be payable notwithstanding any act or negligence of the Lessor
or the Lessee which might, absent such agreement result in a forfeiture of all
or a part of such insurance payment and notwithstanding (i) the occupation or
use of the Leased Premises for purposes more hazardous than permitted by the
terms of such policy, (ii) any foreclosure or other action or proceeding taken
by the Mortgagees or either of them pursuant to any provision of the Mortgage
upon the happening of an event of default, as defined therein, or (iii) any
change in title or ownership of the Leased Premises.
(d) The Lessee shall deliver to the Lessor promptly after the
execution and delivery of this Lease the original or duplicate policies or
certificates of the insurers, satisfactory to the Mortgagees, if any, evidencing
all the insurance which is then required to be maintained by the Lessee
hereunder, and the Lessee shall, within 30 days prior to the expiration of any
such insurance, deliver other original or duplicate policies or other
certificates of the insurers evidencing the renewal of such insurance. Should
the Lessee fail to effect, maintain or renew any insurance provided for in this
paragraph 10, or to pay the premium therefor, or to deliver to the Lessor any of
such policies or certificates, then and in any of said events the Lessor, at its
option, but without obligation so to do, may, upon 5 days' notice to the Lessee
of its intention so to do, procure such insurance, and any sums expended by it
to procure any such insurance shall be additional rent hereunder and shall be
repaid by the Lessee within 5 days following the date an which such expenditure
shall be made by Lessor.
(e) The Lessee shall not obtain or carry separate insurance
concurrent in form or contributing in the event of loss with that required in
this paragraph 10 to be furnished by the Lessee unless the Lessor is included
therein as a named insured, with loss payable as in this
15
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Lease provided. The Lessee shall immediately notify the Lessor whenever any such
separate insurance is obtained and shall deliver the policy or policies or
certificates evidencing the same.
11. Damage or Destruction
---------------------
(a) If, during the term of this Lease, any building or other
improvement included in the Leased Premises is partially damaged or destroyed by
fire, the elements or any other cause, the Lessee shall, whether or not the
insurance proceeds, if any, on account of such damage or destruction are
sufficient for the purpose, at its expense repair or rebuild the same within a
reasonable time as nearly as possible to its value, condition and character
immediately prior to such damage or destruction, and there shall be no abatement
of rent during the time of repair or rebuilding.
(b) If the Leased Premises shall be substantially damaged or
destroyed in any single casualty so that the Leased Premises shall be unsuitable
for restoration for the Lessee's continued use and occupancy in the Lessee's
business, then at the Lessee's option, in lieu of rebuilding, replacing and
repairing the Leased Premises as provided in this Lease, the Lessee may give
notice to the Lessor, within 30 days after the occurrence of such damage or
destruction, of the Lessee's intention to terminate this Lease on any business
day specified in such notice which occurs not less than 60 nor more than 120
days after the date of such damage or destruction, provided that such notice
shall be accompanied by a certificate of the Lessee, signed by the Treasurer or
a vice President thereof, stating that, in the judgment of the Board of
Directors of the Lessee, the Leased Premises are unsuitable for the Lessee's
continued use and occupancy and the Lessee's business by reason of such
casualty, the Lessee does not intend to rebuild, replace or repair the Leased
Premises and the Lessee has discontinued the use of the Leased Premises or
intends to discontinue such use within 90 days after such casualty, and
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<PAGE>
provided, further that if such termination date occurs during the Interim or
Primary Terms, as a part of said notice the Lessee shall give its irrevocable
offer to purchase the Leased Premises on such termination date at a price
determined in accordance with Schedule C. If the Lessor shall reject such offer
to purchase by notice given to the Lessee not later than the 10th day prior to
such termination date, or if such termination date occurs during an Extended
Term of this Lease, this Lease shall terminate on such date, except with respect
to obligations and liabilities of the Lessee under this Lease, actual or
contingent, which have arisen on or prior to such date, upon payment by the
Lessee of all installments of Basic Rent and all other sums then due and payable
under this Lease to and including such date of termination. Unless the Lessor
shall have rejected such offer to purchase by notice to Lessee given not later
than the 10th day prior to such termination date, the Lessor shall be
conclusively presumed to have accepted said offer to purchase, and, if the
Lessee shall not be in default under this Lease on such termination date, the
Lessor shall transfer and convey the Leased Premises on such date and shall pay
over or assign all rights to receive the proceeds of any insurance payable in
connection with such damage or destruction to the Lessee upon the terms and
provisions, set forth in paragraph 14, against payment by the Lessee of the
purchase price therefor, together with all installments of Basic Rent and all
other sums then due and payable under this Lease to and including such date of
termination.
(c) All insurance proceeds received by or payable to the Lessor or
any assignee of the Lessor on account of any damage to or destruction of the
Leased Premises or any part thereof (less the actual costs fees and expenses
incurred in the collection thereof) shall be applied or dealt with by the Lessor
or such assignee, as the case may be, as follows:
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(i) All such proceeds actually received on account of any
such damage or destruction other than a Total Destruction shall, unless the
Lessee is in default hereunder, be paid over to the Lessee or as it may direct
from time to time as the repair or rebuilding progresses to pay (or reimburse
the Lessee for) the cost thereof, but only upon the written request of the
Lessee accompanied by evidence reasonably satisfactory to the Lessor or such
assignee, as the case may be, that the sum requested has been paid or is then
due and payable and is a proper item of such cost. Upon receipt by the Lessor or
such assignee, as the case may be, of evidence reasonably satisfactory to it
that the repair or rebuilding has been completed and the cost thereof paid in
full and that there are no mechanic's or similar liens for labor or materials
supplied in connection therewith, the balance, if any, of such proceeds shall,
unless the Lessee is in default hereunder, be paid over or assigned to the
Lessee or as it may direct.
(ii) All such proceeds received or payable on account of a
Total Destruction shall, upon payment of the purchase price for the Leased
Premises, be paid over or assigned to the Lessee or as it may direct.
(d) The Lessee shall give the Lessor prompt written notice of any
material damage to or destruction of all or any part of the buildings or other
improvements included in the Leased Premises, specifying the particulars of the
same in reasonable detail.
12. Condemnation
------------
(a) If (i) the entire Leased Premises shall be taken in or by
condemnation or other eminent domain proceedings pursuant to any law, general or
special or (ii) any substantial portion of the Leased Premises which is
sufficient to render the remaining portion thereof unsuitable for the Lessee's
continued use or occupancy in the Lessee's business shall be taken in
18
<PAGE>
or by any such proceedings (any taking of such entire or substantial portion
being termed a Total Taking), then the Lessee shall, within 30 days after any
such taking, give notice to the Lessor of its intention to terminate this Lease
on any business day specified in such notice which occurs not less than 60 nor
more than 120 days after such taking. If such date of termination occurs during
the Interim or Primary Terms, as part of said notice of termination the Lessee
shall (A) make an irrevocable offer to purchase the remaining portion of the
Leased Premises (or, in case of the taking of the entire Leased Premises, the
award payable in connection with such taking or the right to receive the same
when made, if no payment thereof has yet been made) on said termination date at
a price determined in accordance with Schedule C hereof, and (B) if less than
the entire Leased Premises shall have been taken, deliver to the Lessor a
certificate of the Lessee, signed by the Treasurer or any Vice President
thereof, stating that, in the judgment of the Board of Directors of the Lessee,
the portion of the Leased Premises so taken is sufficient to fulfill the
conditions set forth in clause (ii) of this paragraph 12(a), that the Lessee
does not intend to repair, rebuild or restore the Leased Premises and that the
Lessee had discontinued the use of the Leased Premises or intends to discontinue
such use 90 days after such taking. If the Lessor shall reject such offer to
purchase by notice given to the Lessee not later than the 10th day prior to such
termination date, or if such termination date occurs during an Extended Term of
this Lease, this Lease shall terminate on such date, except with respect to
obligations and liabilities of the Lessee under this Lease, actual or
contingent, which have arisen on or prior to such date, upon payment by the
Lessee of all installments of Basic Rent and all other sums then due and payable
under this Lease to and including such date of termination. Unless the Lessor
shall have rejected such offer to purchase by notice to the Lessee given not
later than the 10th day prior to such termination date, the Lessor shall be
conclusively presumed to have accepted said offer to
19
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purchase, and on such date of termination, the Lessor shall transfer and convey
the remaining portion of the Leased Premises, if any, to the Lessee or its
nominee upon the terms and provisions set forth in paragraph 14 and shall pay to
the Lessee or its nominee the entire award actually received by the Lessor in
connection with such taking, less any expenses incurred in collecting such award
(such award less such expenses being herein called the "net award"), or, if such
award shall not have been received by the Lessor, the Lessor shall assign to the
Lessee all its right, title and interest in and to such award, in either case
against payment by the Lessee of the purchase price therefor, together with all
installments of Basic Rent and all other sums then due and payable under this
Lease to and including such date of termination.
(b) In case of any condemnation or taking affecting the Leased
Premises other than a Total Taking, the Lessee shall, whether or not the awards
or payments, if any on account thereof are sufficient for the purpose, restore
the Leased Premises within a reasonable time as nearly as possible to the value,
condition and character thereof immediately prior to such occurrence, and this
Lease shall remain in full force and effect and there shall be no abatement or
reduction of rent as a result thereof.
(c) The Lessor shall be entitled to all condemnation awards and
payments made or payable on account of any such taking, and the Lessee hereby
irrevocably assigns, transfers and sets over to the Lessor all rights of the
Lessee to any award or payment on account of any such occurrence and irrevocably
authorizes and empowers the Lessor, in the name of the Lessee or otherwise, to
file and prosecute what would otherwise be the Lessee's claim for any such award
or payment and to collect, receipt for and retain the same. Provided that the
Lessee is not then in default hereunder, the Lessor shall apply such awards and
payments in the manner set forth in paragraph 12 (a), 12 (b) and 12 (f) to the
extent any such paragraph may be
20
<PAGE>
applicable. The Lessee will pay all reasonable costs, fees and expenses incurred
by the Lessor or any assignee of the Lessor in connection with any such
occurrence and the seeking and obtaining of any award or payment on account
thereof.
(d) The Lessee shall give the Lessor prompt written notice of any
such condemnation or taking or the commencement of any proceedings or
negotiations which would result in any such occurrence, specifying the
particulars of the same in reasonable detail.
(e) The foregoing provisions shall also apply in the event of a
negotiated sale to a public or quasi-public authority under threat of or in lieu
of condemnation, provided that if at the time of any such proposed sale the
Lessee is in possession of the Leased Premises, the Lessee's prior consent to
such sale must be obtained.
(f) All awards and payments received by or payable to the Lessor or
any assignee of the Lessor on account of any condemnation, taking, or negotiated
sale in lieu thereof (less the actual costs, fees and expenses incurred in the
collection thereof if not paid by the Lessee as hereinabove provided) shall be
applied or dealt with by the Lessor or such assignee, as the case may be, as
follows:
(A) All such awards and payments actually received, other
than those in respect to a Total Taking, shall be applied as follows:
(i) Subject to subparagraph (ii) below, such awards
and payments shall be applied to pay the cost of restoration of the Leased
Premises, such application to be effected substantially in the same manner and
subject to the same conditions as provided in the section hereof entitled
"Damage or Destruction" with respect to insurance proceeds, except that, in case
the total amount of such awards and payments shall not exceed $10,000, such
21
<PAGE>
awards and payments shall be paid over to the Lessee, if not in default
hereunder, forthwith upon written request therefor and without compliance with
any of such conditions.
(ii) In case of a taking of the Leased Premises for
temporary use, such awards and payments shall be held and applied to the payment
of Basic Rent, additional rent and other amounts becoming payable by the Lessee
hereunder for the period of temporary use, provided that, if any portion of such
awards and payments is made by reason of any damage to or destruction of the
Leased Premises during such taking for temporary use, such portion shall be held
and applied as provided in subparagraph (i) above after such taking is
terminated.
(iii) The balance, if any, of such awards and payments
not required to be held or applied in accordance with the foregoing
subparagraphs (i) and (ii) shall, unless the Lessee is in default hereunder, be
paid over or assigned to the Lessee or as it may direct.
(B) All such awards and payments received or payable
on account of a Total Taking shall, upon payment of the purchase price for the
facility be paid over in accordance with the provisions of paragraph 12(a).
13. Economic Abandonment
--------------------
So long as the Lessee is not in default under this Lease if the Leased
Premises shall have become uneconomic and unsuitable for the Lessee's continued
use and occupancy and if the Board of Directors of the Lessee has determined to
discontinue the use of the Leased Premises in its business operations during the
period ending on the first anniversary of the date of the delivery of the notice
mentioned hereafter in this paragraph 13, or if the Lessee has on or before such
date of delivery already discontinued such use, then the Lessee may notify the
Lessor on or
22
<PAGE>
after September 1, 1977, of its intention to terminate this Lease
on any business day specified in such notice which occurs during the Primary
Term and which is not less than 180 nor more than 240 days after the date of the
delivery of such notice, provided that, as a part of said notice, Lessee shall
make an irrevocable offer to purchase the Leased Premises on such date of
termination at a price determined in accordance with Schedule C hereof. Such
notice and offer shall be accompanied by a certificate, signed by the Treasurer
or any Vice President of the Lessee, to the effect that the Lessee's Board of
Directors has determined that the Leased Premises have become uneconomic or
unsuitable for the Lessee's continued use and occupancy, and to the further
effect that the Lessee has discontinued the use of the Leased Premises or
intends to discontinue such use during the period ending on the first
anniversary of the date of the delivery of such notice to the Lessor. If the
Lessor shall reject such offer to purchase by notice given to the Lessee not
later than the 10th day prior to such termination date, this Lease shall
terminate on such termination date, except with respect to obligations and
liabilities of the Lessee under this Lease, actual or contingent, which have
arisen on or prior to such date, upon payment by the Lessee of the Basic Rent
due and payable by it to and including such date of termination. Unless the
Lessor shall have rejected such offer to purchase by notice to the Lessee given
not later than the 10th day prior to such termination date, the Lessor shall be
conclusively presumed to have accepted said offer to purchase, and on such
termination date the Lessor shall convey the Leased Premises to the Lessee
pursuant to paragraph 14, against payment by the Lessee of the purchase price
therefor, together with all installments of Basic Rent and all other sums then
due under this Lease and unpaid to and including such termination date.
23
<PAGE>
14. Procedure Upon Purchase
-----------------------
(a) In the event of the purchase of the Leased Premises or any part
thereof by the Lessee pursuant to any provision of this Lease, the Lessor need
not transfer and convey to the Lessee or its nominee any better title thereto
than existed on the date of the commencement of this Lease, and the Lessee shall
accept such title, subject, however, to all liens, encumbrances, charges,
exceptions and restrictions attaching thereto on or after the commencement date
of this Lease which have not been created or caused by Lessor and to all
applicable laws, regulations and ordinances, but free of the lien of the
Mortgage, if any.
(b) Upon the date fixed for any such purchase of the Leased Premises
of a part thereof pursuant to any provision of this Lease, the Lessee shall pay
to the Lessor at its address set forth above or at any other place designated by
the Lessor the purchase price therefor specified herein and the Lessor shall
there deliver to the Lessee (i) a deed with covenants against acts of the
Lessor, which deed relates to the Leased Premises or the portion thereof then
being sold to the Lessee and shall convey and transfer at least the title
thereto which is described in paragraph 14, together with (ii) such other
instruments as shall be necessary to transfer to the Lessee any other property
then required to be sold by the Lessor pursuant to this Lease. The Lessee shall
pay all charges incident to such conveyance and transfer, including any counsel
fees, escrow fees, recording fees, title insurance premiums and all applicable
federal, state and local taxes (other than any income or franchise taxes levied
upon or assessed against the Lessor) which may be incurred or imposed by reason
of the conveyance and transfer of the Leased Premises or part thereof then being
purchased, or by reason of the delivery of said deed and other instruments. Upon
the completion of such purchase, but not prior thereto (whether or not any delay
in the completion of, or the failure to complete, such purchase shall be the
fault of the
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<PAGE>
Lessor), this Lease and all obligations hereunder (including the
obligations to pay Basic Rent and additional rent) shall terminate with respect
to the Leased Premises except with respect to obligations and liabilities of the
Lessee, actual or contingent, under this Lease which arose on or prior to said
date of purchase.
15. Assignment And Subletting
-------------------------
The Lessee may sublet the Leased Premises or any part thereof, and with the
consent of the Lessor (which consent will not be unreasonably withheld), may
assign all of its rights and interests under this Lease, provided that each such
sublease shall expressly be made subject to the provisions of this Lease. If
the Lessee assigns all its rights under this Lease, the assignee under such
assignment shall expressly assume all of the obligations of the Lessee hereunder
in a written instrument delivered to the Lessor within 30 days after such
assignment. No assignment or sublease made as permitted by this paragraph 15
shall affect or reduce any of the obligations of the Lessee hereunder, and all
the obligations of the Lessee hereunder shall continue in full force and effect
as the obligations of a principal and not as the obligations of a guarantor or
surety, to the same extent as though no assignment or subletting had been made.
No sublease or assignment made as permitted by this paragraph 15 shall impose
any obligations on the Lessor, or otherwise affect any of the rights of the
Lessor under this Lease. Neither this Lease nor the terms hereby demised shall
be mortgaged by Lessee, nor shall the Lessee mortgage or pledge the interest of
the Lessee in and to any sublease of the Leased Premises or the rentals payable
thereunder. Any such mortgage or pledge, and any such sublease or assignment
made in violation of this paragraph 15 shall be void. The Lessee shall within
10 days after the execution and delivery of any such assignment, deliver a
conformed copy thereof to the Lessor and within 10 days after the execution and
delivery of any such sublease, the Lessee shall give notice to the
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<PAGE>
Lessor of the existence and term of such sublease, and of the name and address
of the sublessee thereunder. So long as the Lessee shall not be in default
hereunder, the Lessee shall be entitled to receive and retain all rents payable
pursuant to any lease of a portion of the Leased Premises existing on the date
of the commencement of this Lease.
16. Reimbursement for Alterations and Additions
-------------------------------------------
(a) On any date during the Primary Term, Lessee may by notice to
Lessor request that Lessor pay to Lessee the amount of Lessee's unreimbursed
expenses, determined as provided hereinafter in this Section 16 (herein called
the Reimbursable Expenses), which have been incurred by Lessee in connection
with construction of any buildings, structures or other improvements which is
permitted by Section 5 but which is not required under any other provision of
this Lease, provided that the amount of the Reimbursable Expenses exceeds
$200,000. Such request shall be accompanied by a certificate, signed by the
President or a Vice President of Lessee and dated the date of such request,
setting forth in reasonable detail the amount and character of the Reimbursable
Expenses and a description of the buildings, structures or other improvements in
connection with which such Expenses were incurred, stating that the construction
in connection with which such Expenses were incurred has been completed in
compliance with the requirements of this Section 16, specifying the date on
which the construction of each such building, structure and other improvement
was completed, and stating that such Expenses are reimbursable in the amounts
requested under the term of this Section 16. Upon receipt of such request and
certificate, Lessor agrees to pay to Lessee an amount equal to such Expenses so
certified, but only if the following further conditions shall have been
fulfilled within 90 days after the receipt of such request and certificate:
26
<PAGE>
(i) Additional notes of Lessor (herein called the
Improvement Notes) , issued for the purpose of obtaining funds to make such
payment to Lessee and fulfilling the terms and conditions of the Indenture shall
have been sold by Lessor after the receipt of Lessor of such request and
certificate from Lessee, and the proceeds of the sale of the Improvement Notes
actually received by Lessor shall have been at least equal to the amount of the
payment to be made to Lessee pursuant to its request as provided above;
(ii) Lessor and Lessee shall have executed, acknowledged and
delivered a supplement to this Lease, which supplement (herein called the Lease
Supplement) shall, as of the date of such payment to Lessee (herein called the
Reimbursement Date) and thereafter during the continuance of this Lease: (A)
increase each Basic Rent payment required to be made during the Primary Term
and, if necessary, the Extended Terms of this Lease by an equal amount which
shall be at least sufficient to make each payment, when due, of principal of,
and interest on, the Improvement Notes. (B) increase the purchase prices set
forth in Schedule C hereof that would be payable upon a purchase of the Leased
Premises by Lessee pursuant to Sections 11(b), 12(a), 13 and 16(b) hereof by
amounts which shall at all times thereafter be at least sufficient to prepay the
then outstanding principal amount of the Improvement Notes, together with all
accrued interest thereon and (C) make such other changes, if any, as shall be
required by the modifications made by the Lease supplement, and ratify and
confirm this Lease in all other respects;
(iii) Lessor and Lessee shall have executed, acknowledged and
delivered a supplement to the Assignment of Lease and Agreement dated as of July
25, 1967 from Lessor and Lessee to the Trustees (herein called the Assignment)
relating to this Lease, which supplement (herein called the Assignment
Supplement) shall, as of the Reimbursement
27
<PAGE>
Date and thereafter during the continuance of this Lease, expressly and
specifically subject this Lease as supplemented by the Lease Supplement to the
assignment of this Lease as originally executed which was made by the Indenture
and the Assignment as originally executed;
(iv) Lessor shall have received an opinion of counsel for
Lessee, dated the Reimbursement Date and in form and substance satisfactory to
Lessor, to the effect that: (A) Lessee has fulfilled all the requirements of
this Lease which must be fulfilled by Lessee in connection with the
reimbursement of Lessee by Lessor of the Reimbursable Expenses, (B) the Lease
Supplement and the Assignment Supplement have been duly authorized, executed and
delivered by Lessee and are legal, valid and binding obligations of Lessee
enforceable against Lessee in accordance with their respective terms, and to the
effect that such Supplements effectively amend this Lease and the Assignment,
respectively, and this Lease as so supplemented and said Assignment as so
supplemented are legal, valid and binding obligations of Lessee enforceable
against Lessee in accordance with their respective terms and have been recorded
or filed in all offices in which recording or filing is necessary in order to
publish notice or to protect the validity thereof, (C) neither the execution or
delivery of such Supplements, nor the consummation of the transactions
contemplated therein, nor compliance with the provisions thereof, conflict or
will conflict with, or result in a breach of, any of the terms, conditions or
provisions of, or constitute a default under, Lessee's certificate of
incorporation or by-laws, or any contract or agreement to which Lessee is a
party or by which it is bound, nor will any of such acts result in a violation
of any law, order, rule, regulation, injunction, judgment or decree of any court
or governmental authority, (D) no approval, authorization, order, license,
permit, franchise or consent of, or registration, declaration or filing with,
any government authority is required in connection with the execution, delivery
or performance by Lessee of such
28
<PAGE>
Supplements, or, if any such approval, authorization, order, license, permit,
franchise, consent, registration, declaration or filing is required, specifying
the same and stating that the same has been obtained or made and is in full
effect, and (E) Lessee is a validly organized and existing corporation in good
standing under the laws of the state in which it is incorporated and is duly
qualified to do business and is in good standing in the state in which the
Leased Premises are located; it being understood that such opinion may be
subject to the qualification that the rights and remedies set forth in this
Lease and the Assignment as supplemented by such Supplements are subject to any
applicable bankruptcy and insolvency law;
(v) An amendment or endorsement to the mortgage title
insurance policy theretofore delivered to the Trustees pursuant to Section
3.11(a) of the Indenture with respect to the Leased Premises, satisfactory in
form and substance, to Lessor and the Trustees, increasing the net amount of
such mortgage title insurance by an amount equal to the Reimbursable Expenses,
redating such policy to the Reimbursement Date, and not containing any
additional exceptions to title to the Leased Premises other than Permitted
Encumbrances, as defined in the Indenture;
(vi) A copy of a revised survey of the Leased Premises, dated
within 30 days of the Reimbursement Date and satisfactory in form and substance
to Lessor and the Trustee, showing the exact location and dimensions of the
Leased Premises including the improvements thereon; and the exact location of
all lot and street lines, all means of access to the Leased Premises, all wires
pipes and other conduits and easements relating to the Leased Premises; and
(vii) Such other certificates of Lessee as Lessor may
reasonably request in order to enable Lessor to finance the cost of the
Reimbursable Expenses.
29
<PAGE>
(b) Lessor shall incur no liability under this Lease by reason of
its inability to finance the cost of the Reimbursable Expenses. If (i) Lessor
shall have made diligent efforts to sell the Improvement Notes in order to
finance the Reimbursable Expenses, (ii) Lessor and Lessee are unable to agree
upon the interest rate which such Improvement Notes will bear, and if the rent
increases which the Lessee shall have been willing to make shall be sufficient
to amortize 100% of the principal amount of such Improvement Notes by their
maturity, at an interest rate which is not less than the prime rate then
chargeable by First National City Bank for commercial loans plus 1% and (iii)
Lessor does not reimburse Lessee within a period of 90 days after the date of
the receipt of Lessee's request for such reimbursement (herein called the Final
Date), Lessee shall, within 30 days after the Final Date, have the right to give
notice to Lessor of its intention to terminate this Lease on any business day
specified in such notice which occurs not less than 30 nor more than 60 days
after such notice. As part of such notice, Lessee shall make an irrevocable
undertaking to purchase the Leased Premises on such date of termination at a
price determined in accordance with Schedule C hereof, and this Lease shall
terminate on such termination date, except with respect to obligations and
liabilities of Lessee under this Lease, actual or contingent, which have arisen
on or prior to such date, upon payment by Lessee of the Basic Rent due and
payable by it to and including such date of termination. On such termination
date Lessor shall convey the Leased Premises to Lessee pursuant to Section 14
against payment by Lessee of the purchase price therefor, together with all
installments of Basic Rent and all other sums then due under this Lease and
unpaid to and including such termination date. Notwithstanding the preceding
provisions of this Section 16, Lessee shall not have the right to terminate this
Lease and to purchase the Leased Premises, as provided in Section 16, if Lessor
shall be unable to reimburse Lessee for the Reimbursable Expenses due to the
failure of Lessee
30
<PAGE>
(i) to negotiate in good faith the increase in Basic Rent and the increases in
the purchase prices, referred to in clause (ii) of Section 16 (a), in order to
make the payments of interest and principal on the Improvement Notes, or (iii)
to deliver to Lessor the certificates, documents, opinion and other instruments
referred to in paragraph 16 (a). If Lessee does not elect to terminate this
Lease as hereinabove provided, this Lease shall continue in full effect and
Lessee shall have no right against Lessor due to failure of Lessor to reimburse
Lessee as provided in paragraph 16 (a).
17. Right to Perform
----------------
If the Lessee shall fail to make any payment or perform any act required to
be made or performed by it hereunder, the Lessor, without notice to or demand
upon the Lessee and without waiving or releasing any obligation or default of
the Lessee, may (but shall be under no obligation to) at any time thereafter
make such payment or perform such act for the account and at the expense of the
Lessee, and may enter upon the Leased Premises or any part thereof for such
purpose, and take all such action thereon as, in the opinion of the Lessor, may
be reasonably necessary or appropriate therefor. No such entry shall be deemed
to be an eviction of the Lessee. All payments so made by the Lessor and all
costs and expenses (including reasonable attorneys' fees and expenses) incurred
in connection therewith or in connection with the performance by the Lessor of
any such act shall constitute additional rent hereunder.
18. Events of Default
-----------------
(a) Provided always and these presents are made upon the express
condition that, if any one or more of the following events ("Events of Default")
shall occur;
(i) if the Lessee abandons the Leased Premises, except as
hereinbefore provided, before the expiration of the term hereof; or
31
<PAGE>
(ii) if the Lessee shall fail to pay any Basic Rent when and
as the same becomes due and payable, and such failure shall continue for more
than five (5) days after the Lessee shall have received written notice thereof
from the Lessor; or
(iii) if the Lessee shall fail to pay any additional rent or
other sum (other than Basic Rent) payable by it to the Lessor when and as the
same becomes due and payable, and such failure shall continue for more than ten
(10) days after the Lessee shall have received written notice thereof from the
Lessor; or
(iv) if the Lessee does not or shall neglect or fail to
perform or observe any other covenant or condition herein contained, which on
its part is to be performed, and such neglect or failure shall continue for more
than twenty (20) days after the Lessee shall have received written notice
thereof from the Lessor; or
(v) if the Lessee shall make a general assignment for the
benefit of creditors, or shall admit in writing its inability to pay its debts
as they become due, or shall file a petition in bankruptcy, or shall be
adjudicated a bankrupt or insolvent, or shall file a petition seeking any
reorganization, arrangement, composition. readjustment, liquidation, dissolution
or similar relief under any present or future statute, law or regulation, or
shall file an answer admitting or not contesting the material allegations of a
petition against it in any such proceeding, or shall seek or consent to or
acquiesce in the appointment of any trustee, receiver or liquidator of Lessee or
any material part of its properties; or
(vi) if, within sixty (60) days after the commencement of any
proceeding against the Lessee seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, such proceeding shall not have
been dismissed, or if, within sixty (60) days after the
32
<PAGE>
appointment without the consent or acquiescence of the Lessee, of any trustee,
receiver or liquidator of the Lessee or of any material part of its properties,
such appointment shall not have been vacated; or
(vii) if the Lessee shall default in the same manner as
specified in clauses (a), (b), (c) or (d) above under any other lease between
the Lessor and the Lessee having provisions substantially similar to those of
this Lease; then and in any such event the Lessor may at its option terminate
this Lease, or terminate the Lessee's right to possession without terminating
this Lease, by giving written notice thereof to the Lessee, and may, without
further notice or demand, enter into or upon the Leased Premises and repossess
the same as of their former estate and expel the Lessee and those claiming under
it and remove its effects (forcibly, if necessary) without prejudice to any
remedies which might otherwise be available for arrears of rent or preceding
breach of covenant; and any such termination, repossession, removal or
expulsion, whether by direct act of the Lessor or through the medium of legal
proceedings for that purpose instituted, shall not affect the liability of the
Lessee or its successors and assigns for Basic Rent, additional rent or other
sums past due or to become due in the future under the terms of this Lease, but
the same shall continue and remain liabilities and obligations of the Lessee as
if such termination, repossession, expulsion and removal had not taken place.
(b) In the event of any such termination, entry, repossession,
expulsion or removal, the Lessee, so far as permitted by applicable law, waives
(i) any notice of repossession or of the institution of legal proceedings to
that end, (ii) any right of redemption or repossession, (iii) any right to a
trial by jury in any proceeding or any matter in any way connected with this
Lease, and (iv) the benefits of any laws exempting property from liability for
rent or for debt.
33
<PAGE>
(c) All reasonable costs and expenses (including attorneys' fees and
expenses) of the Lessor incurred as a result of any such default or Event of
Default shall constitute additional rent hereunder.
19. Further Rights of Default
-------------------------
(a) At any time or from time to time after any such termination,
repossession, expulsion or removal, the Lessor may (but shall be under no
obligation to) relet the Leased Premises or any part thereof for the account of
the Lessee, without notice to the Lessee, for such term and on such conditions
and for such uses as the Lessor, in its uncontrolled discretion may determine,
and may collect and receive the rents therefor and apply the same to the amounts
due or to become due hereunder, but (except to the extent of such application of
rents) no such reletting shall relieve the Lessee of any of its liabilities or
obligations hereunder.
(b) In the event of any such termination, entry, repossession,
expulsion or removal, the Lessee will pay to the Lessor Basic Rent and all
additional rent and other sums required to be paid by the Lessee up to the time
of such termination, entry, repossession, expulsion or removal, and thereafter,
the Lessee, until the end of what would have been the term of this Lease in the
absence of such termination, entry, repossession, expulsion or removal and
whether or not the Leased Premises or any part thereof shall have been relet,
shall be liable to the Lessor for, and shall pay to the Lessor, as liquidated
and agreed current damages for the Lessee's default (a) the Basic Rent and all
additional rent and other sums which would be payable under this Lease by the
Lessee in the absence of such termination, entry, repossession, expulsion or
removal less (b) the net proceeds, if any, of any reletting effected for the
account of the Lessee pursuant to this section, after deduction from such
proceeds all Lessor's expenses in connection with such reletting including,
without limitation, all repossession costs, brokerage commissions,
34
<PAGE>
legal expenses, attorneys' fees, employees' expenses, reasonable alteration
costs, and expenses of preparation for such reletting). The Lessee will pay such
current damages quarterly on the days on which the Basic Rent would have been
payable under this Lease in the absence of such termination, entry,
repossession, expulsion or removal, and the Lessor shall be entitled to recover
the same from the Lessee on each such day.
(c) At any time after any such termination, entry, repossession,
expulsion or removal whether or not the Lessor shall have collected any current
damages as aforesaid, the Lessor shall be entitled to recover from the Lessee on
demand, as and for liquidated and agreed final damages for the Lessee's default,
an amount in cash equal to the excess, if any, of (a) the Basic Rent, additional
rent and all other sums which would be payable to the Lessor under this Lease
from the date of such demand (or if it be earlier, the date to which the Lessee
shall have satisfied in full its obligations under the preceding paragraph to
pay current damages) for what would be the then unexpired term of this Lease in
the absence of such termination, entry, repossession, expulsion or removal, over
(b) the then fair net rental value of the Leased Premises for the same period.
If any applicable statute or rule of law shall validly limit the amount of such
liquidated final damages to less than the amount above agreed on, the Lessor
shall be entitled to the maximum amount allowable under such statute or rule of
law.
20. Lessor's Lien, No Merger, etc.
------------------------------
(a) The Lessee hereby grants the Lessor a first lien upon all of the
interest of the Lessee under this Lease and in and to the Leased Premises, which
lien may be foreclosed, and the Lessee hereby assigns to the Lessor all rents,
issues, profits and income arising from and under any subleases permitted hereby
(and, upon demand, will assign to the Lessor all such subleases) , to secure the
payment of the rents and other sums payable by the Lessee hereunder
35
<PAGE>
and the performance of all other obligations of the Lessee hereunder, provided
that, unless and until a default or Event of Default occurs hereunder, the
Lessee may continue to collect, receive and enjoy all such rents, issues,
profits and income. The Lessor shall be entitled, as a matter of right, to have
a receiver appointed for the Leased Premises if a default or Event of Default
occurs hereunder.
(b) There shall be no merger of this Lease nor of the leasehold
estate created by this Lease with the fee estate in the Leased Premises or any
part thereof by reason of the fact that the same person, firm, corporation or
other entity may acquire or own or hold, directly or indirectly (by reason of
the foreclosure of the lien provided for in this section or otherwise), (a) this
Lease or the leasehold estate created by this Lease or any interest in this
Lease or in any such leasehold estate and (b) the fee estate in the Leased
Premises or any part thereof or any interest in such fee estate, and no such
merger shall occur unless and until all persons, corporations, firms and other
entities, including each assignee having any interest in (i) this Lease or the
leasehold estate created by this Lease or (ii) the fee estate in the Leased
Premises or any part thereof shall join in a written instrument affecting such
merger and shall duly record the same.
21. Remedies Cumulative
-------------------
Each right, power and remedy of the Lessor provided for in this Lease or
now or hereafter existing at law or in equity or by statute or otherwise shall
be cumulative and concurrent, and the exercise or beginning of the exercise by
the Lessor of any one or more of such rights, powers or remedies shall not
preclude the simultaneous or later exercise by the Lessor of any or all other
such rights, powers or remedies.
36
<PAGE>
22. Quiet Enjoyment
---------------
If the Lessee shall pay the Basic Rent, additional rent and other amounts
payable by the Lessee hereunder as and when the same become due and payable and
shall perform and comply with all of the other terms and conditions hereof, the
Lessor will not interfere with the peaceful and quiet occupation and enjoyment
of the Leased Premises by the Lessee, which occupation and enjoyment shall be
without hindrance, ejection or molestation by the Lessor, subject to the rights
of the Lessor under the section 6 hereof. Any failure by the Lessor to comply
with the foregoing covenant shall not give the Lessee any right to cancel or
terminate this Lease or to abate, reduce or make deduction from or offset
against the rents or any other documents payable under this Lease or to fail to
perform or comply with any other term or condition hereof, but nothing herein
shall prevent the Lessee from obtaining injunctive relief against the Lessor.
23. General Provisions
------------------
(a) The Lessee will deliver to the Lessor, promptly upon request,
(a) a certificate of the President or a Vice President or the Treasurer of the
Lessee stating that no default exists hereunder, or, if any such default exists,
specifying the nature and period of existence thereof and what action the Lessee
is taking or proposes to take with respect thereto, (b) such a certificate
certifying that this Lease is unmodified and in full force and effect, or, if
there have been modifications, specifying the same and certifying that this
Lease, as modified, is in full force and effect, and (c) all such other
information with respect to the Leased Premises as may reasonably be requested.
(b) The Lessee further covenants and agrees to pay and discharge all
reasonable costs and expenses (including attorneys' fees and expenses) that
shall be paid or
37
<PAGE>
incurred by the Lessor in enforcing the covenants and agreements of this Lease,
and the same shall constitute additional rent hereunder.
(c) Any notice that should or may be given hereunder shall be
properly given if sent by certified mail in a properly enclosed, sealed and
postpaid envelope, deposited in any regularly maintained United States Post
Office, addressed, if to the Lessor, c/o Wood, Struthers & Winthrop, 20 Exchange
Place, New York, New York 10005, or if to the Lessee, Honeywell, Inc.,
Electronic Data Processing Division, 60 Walnut Street, Wellesley Hills,
Massachusetts, Attention: Vice President and General Manager, or if to any
assignee of the Lessor, at such address as such assignee shall have furnished in
writing to the Lessee. The persons and places to which notices are to be mailed
may be changed from time to time by the Lessor or by the Lessee upon written
notice to the other or by any such assignee upon written notice to the Lessee.
(d) The failure of the Lessor to insist upon strict performance of
any of the terms, covenants or conditions herein contained shall not be deemed a
waiver of any of the rights or remedies of the Lessor and shall not be deemed a
waiver of any subsequent breach or default in any of such terms, covenants or
conditions.
(e) No surrender to the Lessor of this Lease or of the Leased
Premises or any part thereof or of any interest therein shall be valid or
effective unless agreed to and accepted in writing by the Lessor and any
assignee of the Lessor's interests hereunder.
If any term of this Lease or any application thereof shall be invalid or
unenforceable, the remainder of this Lease and any other application of such
term shall not be affected thereby.
This Lease may be changed, waived, discharged or terminated only by an
instrument in writing signed by the party against which enforcement of the
charge, waiver, discharge or termination is sought. The headings in this Lease
are for purposes of reference only and shall not
38
<PAGE>
limit or define the meaning hereof. This Lease may be executed in several
counterparts, each of which is an original, but all of which shall constitute
one instrument.
The terms Lessor and Lessee when used herein shall be taken to mean either
the singular or the plural, as the case may be, and the provisions of this
instrument shall bind and inure to the benefit of the parties mutually and their
respective heirs, executors, administrators, legal representatives, successors
and assigns.
IN WITNESS WHEREOF, the parties have caused this Lease to be executed and
their respective corporate seals to be hereunder affixed and attested by their
respective officers thereunto duly authorized.
SECOND BROMFIELD PROPERTIES, INC.
Lessor
By ___________________________________
PRESIDENT
[Corporate Seal]
Attest:
__________________________
Secretary
HONEYWELL INC.
Lessee
By ___________________________________
R. W. Laxson, Treasurer
[Corporate Seal]
Attest:
__________________________
Asst. Secretary
39
<PAGE>
SCHEDULE A
----------
Property Description
--------------------
A certain parcel of land with the buildings thereon situated in Newton,
Middlesex County, Commonwealth of Massachusetts, being shown as lot containing
486,128 square feet more or less on plan entitled "Plan of Land in Newton Mass",
dated August 4, 1967, by Edward F. Carney, Registered Surveyor, bounded and
described, as shown on said plan, as follows:
SOUTHEASTERLY by Needham Street, 843.87 feet;
SOUTHWESTERLY by land now or formerly of Dearfoot Farms Co., formerly
National Dairies Co., 701.55 feet;
NORTHWESTERLY by land of N.Y.N.H. & Hartford Railroad, 790.79 feet;
NORTHERLY by land now or formerly of New England Concrete Pipe Co.
176.05 feet; and
NORTHEASTERLY by land now or formerly of said New England Concrete Pipe
Co. 492.74 feet.
40
<PAGE>
SCHEDULE B
BASIC RENT PAYMENTS
1. The installment of Basic Rent payable during the Interim Term is
$14,533.32, payable on September 30, 1967.
2. Each installment of Basic Rent payable during the Primary Term is
$35,437.50, payable on September 30, 1967, and thereafter on the last day of
each September, December, March and June occurring during the Primary Term to
and including June 30, 1987.
3. Each installment of Basic Rent payable during the first Extended Term
is $10,937.50, payable on the last day of each September, December, March and
June occurring during such Extended Term.
4. Each installment of Basic Rent payable during the remaining seven
Extended Terms is $4,375.00, payable on the last day of each September,
December, March and June occurring during such Extended Terms.
41
<PAGE>
SCHEDULE C
Upon the purchase of the Leased Premises pursuant to paragraph 11(b),
12(c), 13 or 16(b) of this Lease, the purchase price payable shall be an amount
equal to the sum of (i) $1,750,000 (herein called the Lessor's Cost) multiplied
by the applicable percentage set opposite the date of purchase below; (ii) if
such date of purchase is not a Basic Rent Payment Date, interest at the rate of
6% per annum on the amount determined as provided in clause (i) above for the
period beginning on the Basic Rent Payment Date immediately preceding such date
of purchase and ending on the including such date of purchase; (iii) if such
purchase is pursuant to such paragraph 13, a premium of $70,000; and (iv) if
such purchase is pursuant to such paragraph 16(b); a premium of $87,500.
<TABLE>
<CAPTION>
DATE OF PURCHASE PERCENT
- ---------------- -------
<S> <C>
From August 10, 1967 to and including September 29, 1967 100.00
From September 30, 1967 to and including December 30, 1967 97.94
From December 31, 1967 to and including March 30, 1968 97.35
From March 31, 1967 to and including March 30, 1968 96.75
From June 30, 1968 to and including September 29, 1968 96.15
From September 30, 1968 to and including December 30, 1968 95.5__
From December 31, 1968 to and including March 30, 1969 94.9__
From March 31, 1969 to and including June 29, 1969 94.2__
From June 30, 1969 to and including September 29, 1969 93.___
From September 30, 1969 to and including December 30, 1969 92.9__
From December 31, 1969 to and including March 30, 1970 92.3__
From March 31, 1970 to and including June 29, 1970 91.___
From June 30, 1970 to and including September 29, 1970 90.___
From September 30, 1970 to and including December 30, 1970 90.2__
From December 31, 1970 to and including March 30, 1971 89.5__
From March 31, 1971 to and including June 29, 1971 88.___
From June 30, 1971 to and including September 29, 1971 88.___
From September 30, 1971 to and including December 30, 1971 87.3__
From December 31, 1971 to and including March 30, 1972 86.___
From March 31, 1972 to and including June 29, 1972 85.___
From June 30, 1972 to and including September 29, 1972 85.___
From September 30, 1972 to and including December 30, 1972 84.___
From December 31, 1972 to and including March 30, 1973 83.___
From March 31, 1973 to and including June 29, 1973 82.___
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
DATE OF PURCHASE PERCENT
- ---------------- -------
<S> <C>
From June 30, 1973 to and including September 29, 1973 81.___
From September 30, 1973 to and including December 30, 1973 81.___
From December 31, 1973 to and including March 30, 1974 80.___
From March 31, 1974 to and including June 29, 1974 79.___
From June 30, 1974 to and including September 29, 1974 7_.___
From September 30, 1974 to and including December 30, 1974 77.___
From December 31, 1974 to and including March 30, 1975 76.76_
From March 31, 1975 to and including June 29, 1975 75.856
From June 30, 1975 to and including September 29, 1975 74.936
From September 30, 1975 to and including December 30, 1975 74.002
From December 31, 197S to and including March 30, 1976 73.055
From March 31, 1976 to and including June 29, 1976 72.093
From June 30, 1976 to and including September 29, 1976 71.117
From September 30, 1976 to and including December 30, 1976 70.126
From December 31, 1976 to and including March 30, 1977 69.121
From March 31, 1977 to and including June 29, 1977 68.100
From June 30, 1977 to and including September 29, 1977 67.064
From September 30, 1977 to and including December 30, 1977 66.013
From December 31, 1977 to and including March 30, 1978 64.945
From March 31, 1978 to and including June 29, 1978 63.662
From June 30, 1978 to and including September 29, 1978 62.762
From September 30, 1978 to and including December 30, 1978 61.646
From December 31, 1978 to and including March 30, 1979 60.514
From March 31, 1979 to and including June 29, 1979 59.364
From June 30, 1979 to and including September 29, 1979 58.197
From September 30, 1979 to and including December 30, 1979 57.012
From December 31, 1979 to and including March 30, 1980 55.810
From March 31, 1980 to and including June 29, 1980 54.590
From June 30, 1900 to and including September 29, 1980 53.351
From September 30, 1980 to and including December 30, 1980 52.094
From December 31, 1980 to and including March 30, 1981 50.818
From March 31, 1981 to and including June 29, 1981 49.522
From June 30, 1981 to and including September 29, 1981 48.208
From September 30, 1981 to and including December 30, 1981. 46.873
From December 31, 1981 to and including March 30, 1982 45.519
From March 31, 1982 to and including June 29, 1982 44.144
From June 30, 1982 to and including September 29, 1982 42.749
From September 30, 1982 to and including December 30, IM 41.333
From December 31, 1982 to and including March 30, 1983 39.895
From March 31, 1983 to and including June 29, 1983 38.436
From June 30, 1983 to and including September 29, 1983 36.955
From September 30, 1983 to and including December 30, 1983 35.452
From December 31, 1983 to and including March 30, 1984 33.926
From March 31, 1984 to and including June 29, 1984 32.377
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
DATE OF PURCHASE PERCENT
- ---------------- -------
<S> <C>
From June 30, 1984 to and including September 29, 1984 30.806
From September 30, 1984 to and including December 30, 1984 29.210
From December 31, 1964 to and including March 30, 1985 27.591
From March 31, 1985 to and including June 29, 1985 25.947
From June 30, 1985 to and including September 29, 1985 24.279
From September 30, 1985 to and including December 30, 1985 22.566
From December 31, 1985 to and including March 30, 1986 20.867
From March 31, 1986 to and including June 29, 1986 19.122
From June 30, 1986 to and including September 29, 1986 17.352
From September 30, 1986 to and including December 30, 1966 15.555
From December 31, 1966 to and including March 30, 1987 13.730
From March 31, 1987 to and including June 29, 1987 11.879
From June 30, 1987 to and including September 30, 1987 10.000
</TABLE>
44
<PAGE>
State of New York )
) ss.:
County of New York )
On this 4th of August, 1967, before me, William M. Booth, a Notary Public
in and for the said County and State, personally in said County and State,
appeared Charles F. MacGill and James P. Cookson to me personally known and
known to me to be the President and Secretary, respectively, of Second Bromfield
Properties, Inc., one of the corporations named in and executing the foregoing
instrument, which instrument includes Schedules A, B and C attached thereto and
made a part thereof, and which instrument was produced to me in said County and
State aforesaid by the said President and Secretary, who are known to me to be
the identical persons who subscribed the name of the maker thereof to the
foregoing instrument as its President and Secretary, respectively, who by me
being duly sworn, did severally depose, say and acknowledge, on their several
oaths, in said County and State aforesaid, that they reside at Lane Gate Road,
Cold Spring, N.Y. 10516 and 76 Oxford Blvd., Garden City, N.Y., respectively,
that they are the President and Secretary, respectively, of said corporation and
that said corporation executed said instrument; that they know the seal of said
corporation; that the seal affixed to said instrument is the corporate seal of
said corporation; that they, being informed of the contents of said instrument,
signed and scaled said instrument and that they executed the same in the name
and on behalf of said corporation by order, authority and resolution of its
Board of Directors and that they signed their names thereto by like order; that
they executed the same as, and said instrument is their free and voluntary act
and deed and the free and voluntary act and deed of said corporation for the
consideration, uses and purposes therein set forth and expressed.
45
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal in the County and State aforesaid on the day and year above written.
/s/ William M.Booth
-------------------
Notary Public
my place of residence is:
My commission expires:
Notarial Seal]
State of Minnesota )
) ss.:
County of Hennepin )
On this 4th of August, 1967, before me, Audrey B. Hagberg, a Notary Public
in and for the said County and State, duly commissioned and sworn, personally in
said County and State appeared R.W. Laxson and Mary F. Riley, to me personally
known and known to be Treasurer and Assistant Secretary, respectively, of
Honeywell, Inc., one of the corporations named in and executing the foregoing
instrument, which instrument includes Schedules A, B and C attached thereto and
made a part thereof, and which instrument was produced to me in said County and
State aforesaid by said R.W> Laxson and Mary F. Riley, who are known to me to be
the identical persons who subscribed the name of the maker thereof to the
foregoing instrument as its Treasurer and Assistant Secretary, respectively, who
by me being duly sworn, did severally depose, say and acknowledge, on their
several oaths in said County and State aforesaid, that they reside at
Minneapolis, Minnesota that they are the Treasurer and Assistant Secretary,
respectively, of said corporation and that said corporation executed said
instrument; that they know the seal of said corporation; that the seal affixed
to said instrument is the corporate seal of
46
<PAGE>
said corporation; that they, being informed of the contents of said instrument,
signed and sealed said instrument and that they executed the same in the name
and on behalf of said corporation by order, authority and resolution of its
Board of Directors and that they signed their names thereto by like order; that
they executed the same as, and said instrument is, their free and voluntary act
and deed and the free and voluntary act and deed of said corporation for the
consideration, uses and purposes therein set forth and expressed.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal in the County and State aforesaid on the day and year first above written.
/s/ Audrey B. Hagberg
--------------------
Notary Public
my place of residence is:
My commission expires:
Notarial Seal]
47
<PAGE>
Honeywell
NOTICE OF EXERCISE OF OPTION TO EXTEND
--------------------------------------
CERTIFIED MAIL
- --------------
RETURN RECEIPT REQUESTED
- ------------------------
March 13, 1987
Wellford Associates
c/o Shawnee Equities, Inc.
110 E. 59th Street
83rd Floor
New York, NY 10022
Re: 141-165 Needham Street
Newton Highlands, MA
--
Gentlemen:
Reference is made to a certain Lease dated as of July 25, 1967 between Wellford
Associates c/o Shawnee Equities, Inc., successor to Second Bromfield Properties,
Inc. and Honeywell Information Systems, Inc., (Honeywell) successor to
Honeywell, Inc. for the office buildings and engineering facility located at
141-165 Needham Street, Newton, Massachusetts.
In accordance with the terms of the Lease on pages 1 and 2 thereof and the Basic
Rent as defined in schedule B of the Lease, this is written notice that
Honeywell as Lessee hereby exercises its right to extend this Lease for the
first of eight consecutive extended terms for a period of five years, commencing
on October 1, 1987 through September 30, 1992.
48
<PAGE>
Please confirm your receipt of this letter by signing the copy of same and
returning it to the undersigned in the envelope provided.
Sincerely,
Honeywell Information Systems, Inc.
By: /s/ Philip A. Perry Acknowledge Receipt
------------------- Wellford Associates
Its Manager of Real Estate c/o Shawnee Equities, Inc.
cc: Mr. James R. McMahon, Officer
Corporate Trust Division
Mellon Bank N.A. By:
One Mellon Bank Center -------------------------
Pittsburgh, PA 15258-0001
Title:
----------------------
49
<PAGE>
EXHIBIT 21.1
LIFEF/X, INC.
SUBSIDIARIES
The following is a list of the parent and its subsidiary, reflecting ownership
and the state of incorporation:
<TABLE>
<CAPTION>
% of Voting
Securities
Parent Subsidiaries Owned
- ------ ------------ -----------
<S> <C> <C>
Lifef/x, Inc. Lifef/x Networks, Inc. 100%
(Nevada) (Delaware)
</TABLE>
All subsidiaries are included in the consolidated financial statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,778,040
<SECURITIES> 0
<RECEIVABLES> 9,068,249
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,021,289
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,472,990
<CURRENT-LIABILITIES> 10,462,495
<BONDS> 0
0
0
<COMMON> 18,992
<OTHER-SE> 10,634,253
<TOTAL-LIABILITY-AND-EQUITY> 21,472,990
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,995,316
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,453
<INCOME-PRETAX> (14,063,769)
<INCOME-TAX> 800
<INCOME-CONTINUING> (14,064,569)
<DISCONTINUED> (18,552,206)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,616,775)
<EPS-BASIC> (25.69)
<EPS-DILUTED> (25.69)
</TABLE>
<PAGE>
EXHIBIT 99.1
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 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,
----------------------------------
Assets (note 3) 1998 1999
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- 7,778,040
Restricted cash from stock subscriptions - (note 5) -- 9,051,000
Interest receivable -- 17,249
Prepaid expenses -- 175,000
------------- -----------
Total current assets -- 17,021,289
Net assets of discontinued operation - long-term (note 3) 8,143,697 4,451,701
------------- -----------
$ 8,143,697 21,472,990
============= ===========
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
Net liabilities of discontinued operation - current (note 3) 2,586,648 9,598,372
------------- -----------
Total current liabilities 4,570,771 10,462,495
Other long-term liabilities -- 357,250
Long-term notes payable to related party (note 9) 2,100,000 --
------------- -----------
6,670,771 10,819,745
------------- -----------
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) -- 18,992
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
Common stock subscribed (note 5) -- (579,000)
Deferred compensation related to stock options (note 6) -- (2,272,148)
Accumulated deficit accumulated during development stage (6,533,074) (39,149,849)
------------- -----------
Total shareholders' equity 1,472,926 10,653,245
------------- -----------
$ 8,143,697 21,472,990
============= ===========
</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
June 1, 1997 June 1, 1997
(inception) (inception)
through Years ended December 31, through
December 31, ---------------------------------- December 31,
1997 1998 1999 1999
---------------- ---------------- --------------- ---------------
Revenue (notes 1 and 3) $ -- -- -- --
---------------- ---------------- ---------------------------------
<S> <C> <C> <C> <C>
Operating costs and expenses:
General and administrative 18,705 181,942 1,493,590 1,694,237
Research and development 624,900 1,202,762 1,754,253 3,581,915
----------- ----------- ----------- ----------
Total operating costs and expenses 643,605 1,384,704 3,247,843 5,276,152
----------- ----------- ----------- ----------
Loss from operations (643,605) (1,384,704) (3,247,843) (5,276,152)
Interest expense on borrowings 13,677 58,850 68,453 140,980
Interest expense - warrants issued in
connection with debt conversion (note 5) -- -- 9,302,339 9,302,339
Interest expense - warrants issued in
connection with loans - (note 9) -- -- 1,462,383 1,462,383
Interest income -- -- (17,249) (17,249)
----------- ----------- ----------- ----------
Loss from continuing operations
before income tax expense (657,282) (1,443,554) (14,063,769) (16,164,605)
Income tax expense (note 8) 800 800 800 2,400
----------- ----------- ----------- --------------
Loss from continuing operations (658,082) (1,444,354) (14,064,569) (16,167,005)
Discontinued operation (note 3):
Loss on discontinued operation (369,658) (4,060,980) (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)
----------- ----------- ----------- --------------
Net loss $ (1,027,740) (5,505,334) (32,616,775) (39,149,849)
=========== =========== =========== ==============
Net loss per common share on a basic
and diluted basis:
Continuing operations $ (1.88) (4.12) (11.08)
Discontinued operation (1.06) (11.60) (14.61)
----------- ----------- -----------
$ (2.94) (15.72) (25.69)
=========== =========== ===========
Weighted average common shares outstanding 350,107 350,107 1,269,824
=========== =========== ===========
</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 -- $ -- -- $ --
=============== =============== =============== ===============
<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
============== =============== =============== ===============
<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
============== =============== =============== =============== ===========
</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
June 1, 1997 June 1, 1997
(inception) (inception)
through Years ended December 31, through
December 31, ------------------------------- December 31,
1997 1998 1999 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,027,740) (5,505,334) (32,616,775) (39,149,849)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Loss on disposal -- -- 15,549,874 15,549,874
Noncash interest expense - warrants issued in
connection with debt conversion -- -- 9,302,339 9,302,339
Noncash interest expense - warrants issued in
connection with loans -- -- 1,462,383 1,462,383
Noncash compensation expense - stock options -- -- 682,491 682,491
Changes in operating assets and liabilities, net of
effects of acquisition of Pacific Title and Art Studio:
Interest receivable (17,249) (17,249)
Prepaid expenses -- -- (175,000) (175,000)
Accounts payable, accrued expenses and
other long-term liabilities 113,300 170,823 937,250 1,221,373
Net cash provided by (used in) discontinued operation (176,858) 4,783,201 (6,079,122) (1,472,779)
------------- ------------- ------------- -------------
Net cash (used in) operating activities (1,091,298) (551,310) (10,953,809) (12,596,417)
------------- ------------- ------------- -------------
Cash flows from investing activities:
Acquisition of Pacific Title and Art Studio, net of cash
acquired (15,478,659) -- -- (15,478,659)
Purchases of property, plant and equipment (496,710) (2,623,631) (1,187,494) (4,307,835)
------------- ------------- ------------- -------------
Net cash (used in) investing activities (15,975,369) (2,623,631) (1,187,494) (19,786,494)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from note payable to related party 600,000 1,500,000 12,300,000 14,400,000
Borrowings of long-term debt from related party -- 1,700,000 -- 1,700,000
Borrowings on debt 8,766,667 50,000 -- 8,816,667
Proceeds from sale of warrants exercisable into 600,000
shares of common stock -- 6,000 -- 6,000
Proceeds from issuance of Series B Preferred Stock and
common stock 8,000,000 -- -- 8,000,000
Proceeds from sale of stock through private placement, net
of common stock subscribed -- -- 17,421,000 17,421,000
Restricted cash from stock subscriptions -- -- (9,051,000) (9,051,000)
Private placement offering costs -- -- (1,157,956) (1,157,956)
Net cash provided by (used in) financing activities -
discontinued operation (300,000) (81,059) 407,299 26,240
------------- ------------- ------------- -------------
Net cash provided by financing activities 17,066,667 3,174,941 19,919,343 40,160,951
------------- ------------- ------------- -------------
Net increase in cash and cash equivalents -- -- 7,778,040 7,778,040
Cash and cash equivalents at beginning of period -- -- -- --
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ -- -- 7,778,040 7,778,040
============= ============= ============= =============
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
Income taxes -- 800 800 1,600
============= ============= ============= =============
Supplemental disclosure of noncash financing activities:
Common stock warrants $ -- -- 23,389,176 23,389,176
Common stock subscribed -- -- 579,000 579,000
Deferred compensation related to stock options -- -- 2,928,689 2,928,689
============= ============= ============= =============
</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
(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.
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
F-7 (continued)
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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.
(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
F-8 (continued)
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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) 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.
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.
F-9 (continued)
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(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 and 5,529,375 common stock options outstanding at
December 31, 1998 and 1999, respectively, and 27,951,312 warrants to
purchase shares of common stock at December 31, 1999 which were not
included in the computation of diluted loss per share because the
impact would have been antidilutive.
(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.
F-10 (continued)
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(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.
(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.
(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-11 (continued)
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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.
F-12 (continued)
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(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.
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 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>
F-13 (continued)
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
<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>
Subsequent to year end, 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
following year end. 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 will record additional paid-in capital to the extent
liabilities assumed by PTM Productions exceed 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.
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
(Continued)
F-14
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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.
(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. 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.
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>
(Continued)
F-15
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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.
(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
(Continued)
F-16
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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.
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. The costs of the offering amounted to $1,157,956 and were deducted
from additional paid-in capital, offsetting the gross proceeds of the
offering.
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.
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. In addition, the
(Continued)
F-17
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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.
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
=================== ===================
Reserved for future issuance at December 31, 1999 --
===================
</TABLE>
(Continued)
F-18
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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.
(Continued)
F-19
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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>
On March 15, 2000, the Company increased the LifeF/X common stock reserved
for the Plan from 5,529,375 shares to 7,981,850 shares and granted an
additional 219,023 options to employees at an exercise price equal to the
fair value of the Company's common stock at the grant date. 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 approximately $800,000. Such amounts have been included in the
accrued liability for estimated operating losses of the discontinued
operation.
(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
development payments to be made to the licensor. These payments total
approximately $500,000 per year through October 31, 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.
(Continued)
F-20
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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.
(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.
(Continued)
F-21
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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>
F-22
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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.
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. Subsequent to year end, the agreement was cancelled and
Mirage agreed to forgive the accrued management fee of $445,000.
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.
(Continued)
F-23
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(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.
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.
(Continued)
F-24
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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.
(Continued)
F-25
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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.
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.
(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.
F-26
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(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-27
