<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
Commission File Number 333-32934
_________________
LIFEF/X, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
NEVADA 84-1385529
(State of Incorporation) (I.R.S. Employer Identification No.)
153 NEEDHAM STREET, BUILDING ONE, NEWTON, MASSACHUSETTS 02464
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number (617) 964-4200
_________________
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 [ ]
As of July 1, 2000, there were 19,197,830 Common Shares of Lifef/x,
Inc. outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
LIFEF/X, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
Page
----
Part I - Financial Information
------------------------------
Item 1. Consolidated Financial Statements....................... 1
Item 2. Management's Discussion and
Analysis or Plan of Operation............................ 11
Part II - Other Information
---------------------------
Item 1. Legal Proceedings....................................... 20
Item 4. Submission of Matters to
a Vote of Security Holders.............................. 20
Item 6. Exhibits and Reports on Form 8-K........................ 20
Signatures.............................................. 21
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,457,651 7,778,040
Restricted cash from stock subscriptions -- 9,051,000
Other receivables 90,284 17,249
Prepaid expenses 90,840 175,000
------------ ------------
Total current assets 12,638,775 17,021,289
Property, plant and equipment (net) 908,007 --
Other assets 221,410 --
Net assets of discontinued operation - long-term -- 4,451,701
------------ ------------
$ 13,768,192 21,472,990
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,269,758 864,123
Net liabilities of discontinued operation - current -- 9,598,372
------------ ------------
Total current liabilities 1,269,758 10,462,495
Other long-term liabilities 280,363 357,250
------------ ------------
1,550,121 10,819,745
------------ ------------
Shareholders' equity:
Common stock, $.001 par value. Authorized 100,000,000
shares: issued and outstanding 19,197,830 shares (2000)
and 18,999,917 shares (1999) 19,198 18,992
Additional paid-in capital 57,288,120 52,635,250
Common stock subscribed -- (579,000)
Deferred compensation related to stock options (1,686,410) (2,272,148)
Deficit accumulated during development stage (43,402,837) (39,149,849)
------------ ------------
Total shareholders' equity 12,218,071 10,653,245
------------ ------------
$ 13,768,192 $ 21,472,990
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------------------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue $ -- -- $ -- --
------------ ------------ ------------ ------------
Operating costs and expenses:
General and administrative 1,583,890 46,908 2,826,860 100,827
Research and development 1,143,124 407,639 1,820,841 719,587
------------ ------------ ------------ ------------
Total operating costs and expenses 2,727,014 454,547 4,647,701 820,414
------------ ------------ ------------ ------------
Loss from operations (2,727,014) (454,547) (4,647,701) (820,414)
Other income (3,250) -- (3,250) --
Interest expense - other 12,394 7,306 24,668 13,770
Interest expense - warrants issued in
connection with debt conversion -- 246,171 -- 246,243
Interest income (211,334) (420,687) --
------------ ------------ ------------ ------------
Loss from continuing operations
before income tax expense (2,524,824) (708,024) (4,248,432) (1,080,427)
Income tax expense 2,500 -- 4,556 800
------------ ------------ ------------ ------------
Loss from continuing operations (2,527,324) (708,024) (4,252,988) (1,081,227)
Discontinued operation:
Loss on discontinued operation -- -- -- (3,002,332)
Loss on disposal -- -- -- (17,549,874)
------------ ------------ ------------ ------------
Net loss $(2,527,324) (708,024) $(4,252,988) (21,633,433)
============ ============ =========== ============
Net loss per common share on a basic
and diluted basis:
Continuing operations $ (.13) (2.02) $ (.22) (3.09)
Discontinued operation -- -- -- (58.70)
------------ ------------ ------------ ------------
$ (.13) (2.02) $ (.22) (61.79)
=========== ============ ============ ============
Weighted average common shares outstanding 19,168,582 350,107 19,084,355 350,107
=========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Pacific Title / Mirage, Inc. Preferred Stock
---------------------------------------------------------------
Series A Series B
--------------------------- ----------------------------
Shares Amount Shares Amount
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 8,000,000 $ -- 7,680,000 $ 7,996,799
Issuance of stock warrants -- -- -- --
Issuance of stock warrants -- -- -- --
Conversion of PTM Preferred and common
stock into LifeF/X common stock and
warrants upon Merger (8,000,000) -- (7,680,000) (7,996,799)
Deferred compensation - stock options -- -- -- --
Vesting of stock options issued
as compensation -- -- -- --
Issuance of shares - private placement
offering -- -- -- --
Private placement offering costs -- -- -- --
Common stock subscribed -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- ------------
Balance at December 31, 1999 -- -- -- --
Exercise of stock options -- -- -- --
Completion of stock subscriptons -- -- -- --
Vesting of stock options issued
as compensation -- -- -- --
Increase in capital on transfer of
assets and liabilities to PTM
Productions, Inc. -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- ------------
Balance at June 30, 2000 -- $ -- -- $ --
=========== =========== =========== ============
Pacific Title / Mirage, Inc. Lifef/x, Inc.
common stock common stock
--------------------------- ----------------------------
Shares Amount Shares Amount
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 320,100 $ 3,201 -- $ --
Issuance of stock warrants -- -- -- --
Issuance of stock warrants -- -- -- --
Conversion of PTM Preferred and common
stock into LifeF/X common stock and
warrants upon Merger (320,100) (3,201) 12,960,750 12,601
Deferred compensation - stock options -- -- -- --
Vesting of stock options issued
as compensation -- -- -- --
Issuance of shares - private placement
offering -- -- 6,000,000 6,000
Private placement offering costs -- -- 39,167 391
Common stock subscribed -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- ------------
Balance at December 31, 1999 -- -- 18,999,917 18,992
Private placement offering costs -- -- -- --
Exercise of stock options -- -- 197,913 206
Completion of stock subscriptons -- -- -- --
Vesting of stock options issued
as compensation -- -- -- --
Increase in capital on transfer of
assets and liabilities to PTM
Productions, Inc. -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- ------------
Balance at June 30, 2000 -- $ -- 19,197,830 $ 19,198
=========== =========== =========== ============
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Deferred Total
Common compensation shareholders'
Additional stock related to Accumulated equity
paid-in capital subscribed stock options deficit
--------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 6,000 -- -- (6,533,074) 1,472,926
Issuance of stock warrants 1,462,383 -- -- 1,462,383
Issuance of stock warrants 23,389,176 -- -- -- 23,389,176
Conversion of PTM Preferred and common
stock into LifeF/X common stock and
warrants upon Merger 7,987,399 -- -- -- --
Deferred compensation - stock options 2,928,689 -- (2,928,689) -- --
Vesting of stock options issued
as compensation 25,950 -- 656,541 -- 682,491
Issuance of shares - private placement
offering 17,994,000 -- -- -- 18,000,000
Private placement offering costs (1,158,347) -- -- -- (1,157,956)
Common stock subscribed -- (579,000) -- -- (579,000)
Net loss -- -- -- (32,616,775) (32,616,775)
--------------- ----------- ------------- ----------- -------------
Balance at December 31, 1999 52,635,250 (579,000) (2,272,148) (39,149,849) 10,653,245
Private placement offering costs (236,984) -- -- -- (236,984)
Exercise of stock options 186,843 -- -- -- 187,049
Completion of stock subscriptions -- 579,000 -- -- 579,000
Vesting of stock options issued
as compensation 958,144 -- 585,738 -- 1,543,882
Issuance of stock warrants 40,000 40,000
Increase in capital on transfer of
assets and liabilities to PTM
Productions, Inc., net 3,704,867 -- -- -- 3,704,867
Net loss for the period -- -- -- (4,252,988) (4,252,988)
--------------- ----------- ------------- ----------- -------------
Balance at June 30, 2000 57,288,120 -- (1,686,410) (43,402,837) 12,218,071
=============== =========== ============= =========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
----------------------------------------------------------
2000 1999 2000 1999
----------- --------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss (2,527,324) (708,024) (4,252,988) (21,633,433)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation expense 52,815 59,225 --
Loss on disposal -- 17,549,874
Noncash interest expense - warrants issued in
connection with loans -- 246,171 246,243
Noncash compensation expense - stock options 292,869 585,738
Noncash rent expense - stock warrants 40,000 40,000
Changes in operating assets and liabilities:
Other receivables, prepaid expenses
and other assets (8,952) (210,286)
Accounts payable, accrued expenses and
other long-term liabilities (370,067) (49,794) 328,748 (27,291)
----------- --------- ---------- -----------
Net cash (used in) operating activities (2,520,659) (511,647) (3,449,563) (3,864,607)
----------- --------- ---------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (629,656) -- (967,231) --
----------- --------- ---------- -----------
Net cash (used in) investing activities (629,656) -- (967,231) --
----------- --------- ---------- -----------
Cash flows from financing activities:
Proceeds from note payable to related party 3,375,000 7,275,000
Proceeds from sale of stock through private placement
related to common stock subscribed -- -- 579,000 --
Restricted cash from stock subscriptions -- -- 9,051,000 --
Proceeds from exercise of stock options 177,049 -- 187,049 --
Net cash (used in) financing activities -
discontinued operation (2,863,353) (720,644) (3,410,393)
----------- --------- ---------- -----------
Net cash provided by financing activities 177,049 511,647 9,096,405 3,864,607
----------- --------- ---------- -----------
Net increase in cash and cash equivalents (2,973,266) -- 4,679,611 --
Cash and cash equivalents at beginning of period 15,430,917 -- 7,778,040 --
----------- --------- ---------- -----------
Cash and cash equivalents at end of period $12,457,651 -- 12,457,651 --
=========== ========= ========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, including discontinued operation $ 12,394 161,909 201,606 345,364
Income taxes 2,500 -- 4,556 800
=========== ========= ========== ===========
Supplemental disclosure of noncash financing activities:
Transfer of assets and liabilities of discontinued
operation to PTM Productions, Inc., net $ -- -- 3,704,867 --
============= ========= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
For the three months ended June 30, 2000 and 1999
(Unaudited)
Basis of Presentation
The information furnished is unaudited but reflects all adjustments which
are, in the opinion of management, necessary for a fair statement of
results for the interim periods. Results for interim periods are not
necessarily indicative of results to be expected for the entire year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Reference should be made to the
Notes to the Consolidated Financial Statements in the 1999 Form 10-KSB
filed by Lifef/x, Inc. for a further discussion of accounting policies and
other significant matters.
(1) Summary of Significant Accounting Policies
(a) Organization and Description of Business
On December 14, 1999, Fin Sports U.S.A., Inc. (Fin Sports) completed a
transaction (the Merger), whereby Fin Sports acquired all of the
outstanding capital stock of Pacific Title/Mirage, Inc. (Pac Title/Mirage)
through the merger of a wholly owned subsidiary of Fin Sports, with and
into Pac Title/Mirage, with Pac Title/Mirage as the surviving corporation.
In connection with the Merger, Fin Sports changed its name to Lifef/x, Inc.
(LifeF/X or the Company) and Pac Title/Mirage 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, 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 non-LifeF/X operstions were
sold to PTM Productions in March, 2000.
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.
6
<PAGE>
The Company has incurred losses from its inception (June 1, 1997) to date.
During this period, Safeguard Scientifics, Inc. (Safeguard), which owned
approximately 49% of Pac Title/Mirage, loaned the Company 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 the Company's efforts on LifeF/X development, with primary
emphasis on Internet applications and, initiated steps to dispose of the
remaining 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. The LifeF/X technology development is continuing as the primary
business of LifeF/X. 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) 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 5,576,523 and 741,013 common stock options outstanding at
June 30, 2000 and 1999, respectively, and 27,950,365 warrants to
purchase shares of common stock at June 30, 2000 which were not
included in the computation of diluted loss per share because the
impact would have been antidilutive.
(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 Pac Title/Mirage through 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.
7
<PAGE>
Because Pac Title/Mirage was the acquirer for accounting purposes, the
operating results for the period January 1, 1999 through the date of the
transaction, December 14, 1999, reflect those of Pac Title/Mirage, not Fin
Sports. Operating results thereafter reflect the combined operations of Pac
Title/Mirage and Fin Sports.
The operating results reflected in the accompanying consolidated financial
statements do not include Fin Sport's operating activities prior to
December 14, 1999, the date of the Merger. The following summarized pro
forma information assumes the Merger occurred on January 1, 1999.
<TABLE>
<CAPTION>
Three Six
Months ended Months ended
June 30, 1999 June 30, 1999
<S> <C> <C>
Revenue $ -- --
Loss from continuing operations (708,573) (1,083,173)
Loss per share from continuing operations (.05) (.08)
Weighted average shares outstanding 12,999,917 12,999,917
</TABLE>
(3) Discontinued Operation and Spin Off Transaction
On March 20, 2000, the Company sold all of its non-LifeF/X assets and
liabilities (collectively, the "Spin Off Assets and Liabilities") to PTM
Productions, Inc. (PTM Productions), an entity owned by the pre-Merger Pac
Title/Mirage stockholders. The Spin Off Assets and Liabilities consisted
primarily of the assets and liabilities relating to Pac Title/Mirage'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
Pac Title/Mirage during the period between October 1, 1999 and the
consummation of the spin off transaction (the Post September 30 Debt).
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 by $3,704,867 and, as a result, the
Company recorded an increase to additional paid-in capital to reflect that
the liabilities assumed by PTM Productions exceeded the net assets
transferred to PTM Productions.
8
<PAGE>
In connection with the spin off transaction, the Company obtained consents
from a number of third parties, including its bank lender, which held 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 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.
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 operating loss incurred by the discontinued operation during the period
from January 1, 2000 to March 20, 2000 was $1,839,500. This amount was
applied to the "Accrued liability for estimated operating losses of
discontinued operation for remaining disposal period" established in the
year ended December 31, 1999.
(4) Other Long-term Liabilities
Other long-term liabilities of $280,363 represents the long-term portion of
accrued severance payable to a former executive. This is payable quarterly
over three years beginning in March 2000. At June 30, 2000, the current
portion included in accrued liabilities amounted to $160,080.
9
<PAGE>
(5) Stock Options
During the quarter ended March 31, 2000 the Company's Board of Directors
accelerated the vesting of certain stock options held by employees of the
discontinued operation that are no longer LifeF/X employees after the date
of the spin-off. This modification of terms and the increase in the
intrinsic value of these stock options resulted in expense of $812,745. In
addition, the Company extended the exercise period for stock options held
by a former employee of the discontinued operation. This modification of
terms resulted in an expense of $145,399. These items, which totaled
$958,188, were provided for in the "Accrued liability for estimated
operating losses of the discontinued operation" established in the year
ended December 31, 1999 and were included in the loss of the discontinued
operation applied to that account in the quarter ended March 31, 2000, with
an offsetting increase in additional paid-in capital.
10
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------
The following discussion should be read with the consolidated financial
statements and the related notes. Certain statements 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-QSB are
qualified in their entirety by this statement.
Background - Merger Transaction and Sale of Non-LifeF/X Technology Assets
On December 14, 1999, Fin Sports acquired all of the outstanding capital
stock of Pac Title/Mirage as a result of the merger of a newly-formed subsidiary
of Fin Sports into Pac Title/Mirage, which was the surviving corporation. Fin
Sports was formed in 1987 and was involved in the manufacture and marketing of
sports equipment. From September 1993 until the December 14, 1999 merger, Fin
Sports had no active business operations.
Since the shareholders of Pac Title/Mirage received the majority voting
interests in the combined company, Pac Title/Mirage is the acquiring enterprise
for financial reporting purposes. Because Pac Title/Mirage was the acquirer for
accounting purposes, the financial statements presented are 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.
Pac Title/Mirage was formed in 1997 as the combination of the LifeF/X
technology that was contributed by Mirage Technologies LP 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. Because of the combined effects of unfavorable market
conditions in the film entertainment industry and continued operating losses,
the digital effects division was closed in early 1999. The LifeF/X technology
development is continuing as the primary business of LifeF/X.
11
<PAGE>
Pac Title/Mirage incurred losses from its inception. Safeguard
Scientifics, Inc. which owned approximately 49% of Pac Title/Mirage,
loaned Pac Title/Mirage significant amounts to support the operations
of the business and to finance capital expenditures. In March 1999, Pac
Title/Mirage's Board of Directors decided to concentrate Pac Title/Mirage's
efforts on LifeF/X development, with primary emphasis on Internet applications,
and initiated steps to dispose of the remaining non-LifeF/X operations,
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
consolidated financial statements for all periods presented.
In March 2000, LifeF/X sold its remaining non-LifeF/X operations, which
consisted of optical 2D film and restoration and scanning and recording
services, to PTM Productions, Inc. PTM Productions, Inc. is owned by the pre-
merger Pac Title/Mirage shareholders. This sale 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.
Results of Operations
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
Revenue - 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 June 30, 2000, and we do not expect any revenue until 2001.
General and administrative expenses - General and administrative expenses
were $1,583,890 for the quarter ended June 30, 2000 compared to $46,908 for the
quarter ended June 30, 1999, an increase of $1,536,982. This increase is
primarily due to the following items:
(1) In December 1999, LifeF/X recorded deferred stock compensation of
$2,928,689 on stock options issued to an officer. This amount is being
amortized ratably as options vest over the two year vesting period of the
options. The related expense recorded in the quarter ended June 30, 2000
and included in general and administrative expenses was $292,869.
(2) Administrative wages and taxes increased by $320,000 for the quarter
ended June 30, 2000 over the comparable period last year as a result of the
increased number of employees.
(3) Professional services were $346,000 higher than the same period of 1999
due to significant legal and audit expenses relating to the registration of
LifeF/X Common Stock and other filings, general corporate matters relating
to corporate organization and development of administrative infrastructure.
(4) LifeF/X incurred penalties relating to the approval of its common stock
registration. Penalties began on May 13, 2000 and accrued daily through
June 30, 2000. The related expense recorded in the quarter ended June 30,
2000 and included in general and administrative expenses was $146,000.
(5) LifeF/X issued 25,000 stock warrants to a related party, with an
exercise price of $17.55 and a ten year expiration, for consideration of
rent, in the quarter ended June 30, 2000. The fair value of the warrants of
$40,000 is reflected as rent expense.
(6) Other general and administrative expenses increased by $392,000 for the
quarter ended June 30, 2000 over the comparable period last year as a
result of full time administrative operations. This is primarily due to
increases in rent and utilities of $68,000, travel of $48,000, insurance of
$90,000, depreciation of $53,000 and recruitment expense of $55,000.
12
<PAGE>
Research and development expenses - Research and development expenses were
$1,143,124 for the quarter ended June 30, 2000 compared to $407,639 for the
quarter ended June 30, 1999, an increase of $735,485. Research and development
consists of costs related to LifeF/X development activities. Salaries and wages,
related personnel benefits and outside consultants expenses for the LifeF/X
development personnel included in research and development were $868,132 for the
quarter ended June 30, 2000 compared to $275,020 for the quarter ended June 30,
1999, an increase of $593,112. This reflects increased full-time research and
development personnel and consulting staff, primarily at LifeF/X's Boston
office, over the comparable period of last year.
LifeF/X has an exclusive, world-wide, perpetual license and support
agreement from Auckland UniServices Limited for the use of certain continuum
modeling technology in commercial applications, excluding professional medical,
engineering and scientific applications. Recurring license and development fees
paid under the agreement included in research and development costs were
$125,000 for the quarter ended June 30, 1999 and $112,500 for the quarter ended
June 30, 2000.
Results for the quarter ended June 30, 2000 include interest income of
$211,334. This interest income relates to the proceeds from the private
placement offering that are being held in highly liquid short-term investments.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenue - 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 June 30, 2000, and we do not expect any revenue until 2001.
General and administrative expenses - General and administrative expenses
were $2,826,860 for the six months ended June 30, 2000 compared to $100,827 for
the six months ended June 30, 1999, an increase of $2,726,033. This increase is
primarily due to the following items:
(1) In December 1999, LifeF/X recorded deferred stock compensation of
$2,928,689 on stock options issued to an officer. This amount is being
amortized ratably as options vest over the two year vesting period of the
options. The related expense recorded for the six months ended June 30,
2000 and included in general and administrative expenses was $585,738.
(2) Administrative wages and taxes increased by $527,900 for the six months
ended June 30, 2000 over the comparable period last year as a result of the
increased number of employees.
(3) Professional services increased by $870,000 over the same period of
1999 due to significant legal and audit expenses relating to the
registration of LifeF/X Common Stock and other filings, general corporate
matters relating to corporate organization and development of corporate and
administrative infrastructure.
(4) LifeF/X incurred penalties relating to the approval of its common stock
registration. Penalties began on May 13, 2000 and accrued daily through
June 30, 2000. The related expense recorded in the six months ended June
30, 2000 and included in general and administrative expenses was $146,000.
(5) LifeF/X issued 25,000 stock warrants to a related party, with an
exercise price of $17.55 and a ten year expiration, for consideration of
rent. The fair value of the warrants of $40,000 is reflected as rent
expense in the first six months ended June 30, 2000.
(6) Other general and administrative expenses increased by $556,000 for the
six months ended June 30, 2000 over the comparable period last year as a
result of full time administrative operations. This is primarily due to
increases in rent and utilities of $81,000, travel of $57,000, insurance of
$95,000, depreciation of $59,000 and recruitment expense of $57,000.
13
<PAGE>
Research and development expenses - Research and development expenses were
$1,820,841 for the six months ended June 30, 2000 compared to $719,587 for the
six months ended June 30, 1999, an increase of $1,101,254. Research and
development consists of costs related to LifeF/X development activities.
Salaries and wages, related personnel benefits and outside consultants expenses
for the LifeF/X development personnel included in research and development were
$1,347,000 for the six months ended June 30, 2000 compared to $454,000 for the
six months ended June 30, 1999, an increase of $893,000. This reflects increased
full-time research and development personnel and consulting staff, primarily at
LifeF/X's Boston office, over the comparable period of last year.
LifeF/X has an exclusive, world-wide, perpetual license and support
agreement with Auckland UniServices Limited for the use of certain continuum
modeling technology in commercial applications, excluding professional medical,
engineering and scientific applications. Recurring license and development fees
paid under the agreement included in research and development costs were
$250,000 for the six months ended June 30, 1999 and $225,000 for the six months
ended June 30, 2000.
Results for the six months ended June 30, 2000 include interest income of
$420,687. This interest income relates to the proceeds from the private
placement offering that are being held in highly liquid short-term investments.
Discontinued operation - In March 1999, Pac Title/Mirage's Board of
Directors decided to concentrate on LifeF/X development and initiated steps to
dispose of non-LifeF/X operations. Results from the discontinued operation for
the six months ended June 30, 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 $17,549,874 provision for loss on disposal of discontinued operation
for the following: an $11,949,874 reserve for estimated operating losses on
discontinued operation from the measurement date through the estimated remaining
disposal period and an estimated loss on disposal of $5,600,000.
Liquidity and Capital Resources
On March 20, 2000, LifeF/X sold its non-LifeF/X assets, which consisted of
film title and special effects services, to PTM Productions, Inc., an entity
owned by the pre-Merger Pac Title/Mirage shareholders. The sale included a
transfer of all liabilities associated with the discontinued operation,
including all debt. 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 accompanying consolidated financial statements.
Historically, our revenues have been solely related to our discontinued
operation.
We expect the cash balances of $12.5 million at June 30, 2000 will be
adequate to satisfy our cash requirements for our operations in the year 2000
and the first quarter of 2001.
14
<PAGE>
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. 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.
Net cash used in operating activities was $2,521,000 for three months ended
June 30, 2000. This use was primarily due to the net loss for the period,
partially offset by a non-cash expense of $293,000 relating to stock options,
$40,000 relating to stock warrants and a $370,000 decrease in accounts payable
and accrued liabilities. Net cash used in operating activities for the
comparable period of the prior year was $512,000. This was primarily due to the
$708,000 net loss for the period, partially offset by non-cash expense of
$246,000 for warrants issued in connection with loans.
Net cash used in investing activities was $630,000 for the three months
ended June 30, 2000 representing purchases of plant and equipment. No cash was
used in investing activities for the comparable period of the prior year by
LifeF/X.
Net cash provided by financing activities for the three months ended June
30, 2000 was $177,000. This represents the receipt of proceeds received through
the exercise of stock options and warrants. Net cash provided by financing
activities for the comparable period of the prior year were $511,000, primarily
representing proceeds from loans from Safeguard and proceeds used in
discontinued operations.
Net cash used in operating activities was $3,450,000 for six months ended
June 30, 2000. This use was primarily due to the net loss for the period,
partially offset by a non-cash expense of $586,000 relating to stock options,
$40,000 relating to stock warrants, a $329,000 increase in accounts payable and
accrued liabilities and a $210,000 decrease in prepaid and other assets. Net
cash used in operating activities for the comparable period of the prior year
was $3.86 million. This was primarily due to the $21.6 million net loss for the
period, partially offset by non-cash expense of $17.5 million to provide for an
estimated loss on disposal of discontinued business. $3.0 million of net cash
used for the period related to the operating loss of the discontinued operations
for the period.
Net cash used in investing activities was $967,000 for the six months ended
June 30, 2000 representing purchases of plant and equipment. No cash was used in
investing activities for the comparable period of the prior year by LifeF/X.
Net cash provided by financing activities for the six months ended June 30,
2000 was $9.1 million. This primarily represents the receipt of proceeds of $9.1
million from the sale of stock through private placement. Net cash provided by
financing activities for the comparable period of the prior year were $3.9
million, primarily representing proceeds from loans from Safeguard.
15
<PAGE>
Quantitative and Qualitative Disclosures about Market Risk
To date, we have not utilized derivative financial instruments or
derivative commodity instruments. We do not expect to employ these or other
strategies to hedge market risk in the foreseeable future. We invest our cash in
money market accounts and short-term marketable securities. We believe the
market risks associated with these financial instruments are immaterial.
Risk Factors
You should carefully consider the risks described below. The risks and
uncertainties described below are not the only ones facing Lifef/x, and there
may be additional risks that we do not presently know of or that we consider
immaterial. All of these risks may impair our business operations. If any of the
following risks actually occurs, our business, financial condition or results of
operations could be materially adversely affected. In such case, the trading
price of our common stock could decline.
Unless our product development efforts are successful, we will have no products
to sell, and thus no revenues.
----------------------------------------------------------------------------
All products we intend to introduce are currently in planning or research
and development. It may be more difficult or complicated to complete these
products than we now believe, so we may encounter delays or greater costs than
we expect or find that we cannot make any product at a commercially viable
price. Without products to sell, we will have no revenue. Early stage ventures
like Lifef/x have a high failure rate.
Our technical personnel have little experience with text-to-speech technology,
which enables a computer to recognize words in text form and convert them into
sounds that resemble spoken language; we must develop or acquire text-to-speech
technology and integrate it with our Lifef/x technology before we can release
any product.
----------------------------------------------------------------------------
We must develop or acquire text-to-speech software to complete our first
product offerings, and may be unable to do so economically. Our failure to
successfully integrate this technology would cause our products to fail
commercially.
Even if we complete our product development, there may be no market for our
products.
----------------------------------------------------------------------------
In the absence of a market for realistic animations of speaking human
faces, we will be unable to sell our products. We do not know of any Web site
using products similar to those we plan to sell. We have only limited means to
determine the interest our products will generate. We expect this uncertainty to
continue at least to the second half of 2001, when we first expect to receive
revenue from our proposed products.
16
<PAGE>
We believe our products will be unsuccessful unless we establish market
recognition quickly after we introduce our products.
----------------------------------------------------------------------------
We believe it imperative to our success that we obtain significant Internet
market share for our products quickly, before other competitors enter the
market. We believe that, if a market for products like ours develops, an early
entrant that gains significant market share will dominate the market, as
Microsoft has dominated the market for operating systems, significantly reducing
opportunities for competitors. We have very limited experience conducting
marketing campaigns for Internet products, and we may fail to generate
significant interest. We cannot be certain that we will be able to build our
brand and realize commercial acceptance of our products and services.
Our intended market might prefer the products of well-established competitors,
which could result in our revenues falling below expectations and prevent us
from becoming profitable.
----------------------------------------------------------------------------
The principal competitive products in the computer-generated animated
images market that we know of include Microsoft V-Chat 2.0 and Microsoft Agent.
Microsoft has substantially more financial, technical, marketing, distribution
and other resources, greater name recognition and stronger market presence than
we do, which might result in greater market acceptance of Microsoft's products
than ours.
Competing inferior products could impair the market for products like ours,
preventing us from establishing profitable levels of sales of our products, even
if they are technologically superior.
----------------------------------------------------------------------------
If consumers are disappointed with a product similar to ours, even though
inferior, they may be reluctant to try our products. Lifef/x might be required
to spend substantial amounts to differentiate Lifef/x products from those of
competitors.
We only have sufficient funds to operate through early 2001. Without additional
funds, we will cease operating.
----------------------------------------------------------------------------
We cannot be certain of the amount of additional capital we will need. Our
future capital needs depend on many factors, including the success and timing of
our development efforts; market acceptance of our Lifef/x technology; the level
of promotion and advertising required to launch our services; changes in
technology; and unanticipated competition. We cannot be certain that additional
funds will be available when needed on satisfactory terms, if at all. Without
additional funds, we will cease operating.
17
<PAGE>
Our products could be delayed, which may reduce their commercial success and the
revenues they can generate, if we lose any of our key technical personnel or a
key business relationship.
----------------------------------------------------------------------------
Development of the Lifef/x technology is very technical and we depend on
key technical personnel, who combine specialized technical knowledge of highly
realistic computer representations of 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. Each of these key technical
employees is under contract to Lifef/x and incentivized with stock options.
Dr. Ian Hunter is a director of, and technical consultant to, Lifef/x. Dr.
Hunter's brother, Peter Hunter, is one of the Auckland UniServices Limited
technical personnel driving development of the technology Lifef/x licenses from
UniServices. Peter Hunter, as the leader of the UniServices scientific
development team supporting Lifef/x technology development, is also Lifef/x's
key interface at UniServices. Our relationship with UniServices is critical to
our business and prospects. We have an excellent working relationship with Ian
Hunter, Peter Hunter and UniServices. This positive relationship is an asset to
Lifef/x but, conversely, deterioration of the relationship between the brothers
or our relationship with either of them or with UniServices could delay our
product development.
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.
18
<PAGE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which establishes accounting and reporting requirements for derivative
instruments and for hedging activities. SFAS 133 requires companies to recognize
all derivatives as either assets or liabilities in the statement of financial
position at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge of the exposures to changes in fair value of
recognized assets or liabilities or unrecognized firm commitments, a hedge of
the exposure to variable cash flows of a forecasted transaction, or a hedge of
the foreign currency exposure of a net investment in a foreign operation,
unrecognized firm commitments, an available-for-sale security or a foreign-
currency denominated forecasted transaction. The accounting changes in fair
value under SFAS 133 depends on the intended use of the derivative and the
resulting designation. In June 1999, the FASB decided that the effective date
for adopting the requirements of SFAS 133 should be delayed to fiscal years
beginning after June 15, 2000. This delay, published as SFAS 137, applies to
quarterly and annual financial statements. In June 2000, the FASB issued SFAS
138, which addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS 133. The Company is currently
evaluating the effect SFAS 133 will have on the results of its operations and
its financial position.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101"). This bulletin,
as amended, established guidelines for revenue recognition and originally was
effective for periods beginning after March 15, 2000. In June 2000, the SEC
announced that the effective date of SAB 101 was being delayed until no later
than the quarter ending December 31, 2000. The Company does not expect that
the adoption of the guidance required by SAB 101 will have a material impact
on its financial condition or results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation", an interpretation of APB Opinion No.
25, "Accounting for Stock Issued to Employees". This interpretation clarified
the application of Opinion 25, including among other issues: (a) the definition
of an employee for purposes of applying Opinion 25, (b) the criteria for
determining whether a stock ownership plan qualifies as noncompensatory, (c) the
accounting implications of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for the exchange of stock
compensation awards in a business combination. The Interpretation is effective
July 1, 2000 and the effects of applying the Interpretation are recognized on a
prospective basis. The Company does not expect that the adoption will have a
material impact on its financial condition or results of operations.
19
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
--------------------------
The Company was not involved in any material claims or legal proceedings,
nor has it been involved in any such proceedings that have had or may have a
significant effect on its financial position.
Item 4. Submission of Matters to a Vote of Security Holders
-------------------------------------------------------------
No matters were submitted to a vote of security holders through the
solicitation of proxies or otherwise, during the quarter ended June 30, 2000.
Item 6. Exhibits and Reports on Form 8-K
------------------------------------------
(a). Exhibit 21.1 - Subsidiaries
Exhibit 27.1 - Financial Data Schedule
(b). Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 2000.
20
<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
August 14, 2000
/s/ Lucille S. Salhany
-----------------------
Lucille S. Salhany
Co-President and Chief
Executive Officer
August 14, 2000
/s/ Richard A. Guttendorf, Jr.
-------------------------------
Richard A. Guttendorf, Jr.
Chief Financial Officer
and Secretary
August 14, 2000
21
